AFSL v ACL: Which Licence Does Your Business Need?

Introduction

Businesses offering financial advice, dealing in financial products, lending, credit assistance or broking may need an Australian Financial Services Licence (AFSL), an Australian Credit Licence (ACL), or both. The correct choice depends on the particular products and activities, not the label used for the business.

This article covers the activities regulated under each regime, the difference between financial services and credit activities, and alternative authorised representative, credit representative and exemption arrangements. It also explains how start-ups, FinTechs, lenders and brokers can assess the authorisations required before operating.

Interactive Tool: See If Your Business Needs an AFSL, ACL or Both

What Is an Australian Financial Services Licence

Activities That Require an AFSL

Under Section 911A of the Corporations Act 2001 (Cth) (‘Corporations Act‘), a business providing financial services in Australia must hold an AFSL covering the financial services it offers, unless an exemption applies.

Section 766A identifies activities that can constitute financial services, including:

• providing financial product advice;
• dealing in a financial product;
• making a market for a financial product;
• operating a registered scheme; and
• providing a custodial or depository service.

Section 766A(1)(da), (ea), (eb) and (ec) also identifies operating the business and affairs of a corporate collective investment vehicle (CCIV), providing a crowd-funding service, providing a claims handling and settling service, and providing a superannuation trustee service as financial services. Section 766A(1A) separately provides that the provision by a trustee company of a traditional trustee company service constitutes a financial service.

Types of Financial Products

Section 763A of the Corporations Act defines a financial product as a facility through which a person makes a financial investment, manages financial risk or makes non-cash payments. Section 764A(1) of the Corporations Act 2001 (Cth) identifies specific things that are financial products, including:

• shares;
• bonds;
• interests in managed investment schemes;
• derivatives;
• life insurance;
• general insurance;
• superannuation; and
• margin lending facilities.

In practice, the product and the service being provided determine whether an AFSL authorisation is required. Businesses reviewing their licensing position can also refer to our free AFSL Compliance Guide on Core Obligations for AFS Licensees for information about core AFSL obligations.

What Is an Australian Credit Licence

What Is a Credit Activity

Under Section 29 of the National Consumer Credit Protection Act 2009 (Cth) (‘NCCP Act‘), a business engaging in regulated credit activities will generally need an ACL, unless an exemption or alternative authorisation applies.

Sections 6–9 of the NCCP Act define credit activities and credit services. Section 6(1) includes:

• being a credit provider under a credit contract;
• being a lessor under a consumer lease;
• being a mortgagee or beneficiary of a guarantee in the circumstances specified in Section 6(1);
• exercising specified rights or obligations of a credit provider, lessor, mortgagee, or beneficiary of a guarantee; and
• providing a credit service.

Under Section 7, a credit service includes:

• providing credit assistance, as defined in Section 8; or
• acting as an intermediary, as defined in Section 9

Does an ACL Only Apply to Lenders

An ACL is not limited to businesses that provide loans directly. Mortgage brokers, credit brokers and other intermediaries may also need an ACL when they assist consumers to obtain credit or connect them with a credit provider.

Under Sections 7 and 8 of the NCCP Act, credit assistance includes suggesting or helping a consumer obtain a particular credit contract or consumer lease. Referrals may also be regulated credit activities depending on what the business does. Regulation 25 of the National Consumer Credit Protection Regulations 2010 (Cth) (‘NCCP Regulations‘) provides exemptions for certain referrals where the relevant conditions are met.

Understand the Difference Between an AFSL & an ACL

Financial Products V Consumer Credit

An AFSL generally relates to financial products and financial services — the services identified in Section 766A of the Corporations Act, discussed above. An ACL relates to regulated consumer credit activities under the NCCP Act.

The correct licence depends on the particular product and activity, not simply on how the business describes itself.

Different Licence Authorisations & Obligations

An AFSL and an ACL provide different authorisations. An AFSL does not automatically authorise regulated consumer credit activities, while an ACL does not automatically authorise financial product advice, dealing, market making, or other financial services.

The obligations also differ. Section 912A(1) of the Corporations Act sets out the general obligations of an AFS licensee, including requirements relating to efficient, honest and fair conduct, conflicts of interest, compliance, competence and representative training.

Section 47(1) of the NCCP Act imposes similar general obligations on credit licensees. Responsible lending requirements apply separately under Chapter 3 where relevant, including Sections 115–123 for credit assistance and Sections 128–133 for credit providers.

To understand the specific duties that may apply to an AFSL business, download the AFSL Compliance Guide (Free) – Core Obligations for AFS Licensees.

Practical Steps to Determine Which Licence Your Business Needs

Step 1: Identify What Your Business Actually Does

Start by mapping each product, service and customer-facing activity. In particular, record what the business offers, who receives it, and what the business does during each stage of the customer relationship.

The review should cover activities such as:

• providing advice or recommendations;
• dealing in, issuing or arranging financial products;
• providing credit or a consumer lease;
• suggesting or assisting with a particular credit contract; and
• referring or connecting a consumer with a credit provider.

A business label does not decide whether an AFSL or ACL is required. Instead, the actual activities performed determine which licensing obligations may apply.

Step 2: Determine Whether It Is a Financial Service or Credit Activity

Compare each mapped activity with the relevant statutory definitions: the financial services identified in Section 766A of the Corporations Act and the credit activities identified in Section 6 of the NCCP Act, both discussed above. An activity may require an AFSL, an ACL or both, depending on the product and services involved.

Step 3: Check Whether an Exemption or Representative Arrangement Applies

A business should check whether it can operate without holding its own licence. Under Section 911A(2)(a) of the Corporations Act, a person may be exempt from holding an AFSL when providing a financial service as the representative of a person whose AFSL covers that service or who is otherwise exempt from the licensing requirement. Section 911B also applies to representatives.

Credit businesses may operate as credit representatives under Section 64 of the NCCP Act. Separate exemptions may also apply to particular activities. These include certain document and information activities under Regulation 24(6) and (8), and certain referral activities under Regulation 25 of the NCCP Regulations.

Exemptions can have specific conditions, so businesses should confirm the applicable AFSL and ACL requirements with financial services lawyers for AFSL and ACL licensing advice before providing the service. A business relying on one should confirm that every applicable requirement is met before providing the service.

Why a FinTech May Need Both AFSL and ACL

FinTech & Multi-Product Businesses

Providing financial services may require an AFSL under Section 911A(1) of the Corporations Act and regulated consumer lending can be a credit activity under Section 6(1) of the NCCP Act. A FinTech or financial services business may need both an AFSL and an ACL if it provides financial services and engages in regulated credit activities. The assessment depends on the products offered, and the activities performed, rather than the business label.

A business could combine one of the following with consumer lending or credit assistance:

• investment services;
• non-cash payment facilities; or
• financial product advice.

Margin Lending & Other Overlapping Areas

Some products require careful classification because they may relate to both financial services and credit activities. Margin lending is treated as a financial product and regulated under Sections 764A(1)(l) and 761EA of the Corporations Act, separately from the NCCP Act.

A business offering a margin lending facility should therefore assess the financial services it provides and its AFSL authorisations. An ACL may also be relevant if the business separately engages in regulated credit activities under the NCCP Act.

The presence of a lending feature does not, by itself, determine which licensing regime applies.

Consequences of Operating Without the Required Licence

Providing regulated financial services without the required AFSL is a contravention of Section 911A(1) of the Corporations Act and can result in both civil and criminal liability. Section 911A(5B) makes the contravention a civil penalty provision, with pecuniary penalties available under Section 1317G. A contravention of Section 911A(1) is also an offence under Section 1311(1), with Schedule 3 providing for a maximum penalty of five years’ imprisonment.

Providing regulated credit activities without an ACL or valid authorisation under the NCCP Act can also lead to penalties and enforcement action. Section 29(1) prohibits engaging in a credit activity without an ACL authorising that activity and provides for a civil penalty of 5,000 penalty units. Under Section 29(2), a contravention can also be a criminal offence carrying up to two years’ imprisonment. Section 29(3) provides a defence in specified circumstances for employees, directors, and credit representatives acting within an appropriately licensed principal’s authority.

Common AFSL & ACL Licensing Mistakes

Licensing errors often arise when a business assesses its name or main commercial purpose instead of the activities it performs. Common mistakes include:

• assuming an AFSL authorises regulated consumer credit activities;
• assuming an ACL authorises financial product advice or dealing;
• overlooking brokers, intermediaries, and referral activities;
• failing to check the specific authorisations on an AFSL or ACL; and
• relying on an exemption without confirming that all conditions are satisfied.

A business should also check whether its representatives have the correct authority. An exemption or representative arrangement may apply only to specified activities, products, or circumstances.

Conclusion

An AFSL covers financial services involving products such as investments, insurance and superannuation, while an ACL covers regulated consumer credit activities. The correct authorisation depends on the products and activities your business performs, and some businesses may need both licences or may qualify for an authorised representative, credit representative or exemption arrangement.

For advice on your licensing position, contact Click Legal to request legal advice about your business activities and authorisation requirements. Click Legal’s financial services lawyers for AFSL and ACL licensing advice can help assess whether your business needs an AFSL, an ACL, both licences or an alternative arrangement under the Corporations Act and the NCCP Act.

Frequently Asked Questions