Can ASIC Vary an AFSL Without the Licensee Asking: ASIC-Initiated Variations Explained

Introduction

The Australian Securities and Investments Commission (ASIC) has the power to change the conditions on your Australian Financial Services Licence (AFSL), even if you have not asked for or agreed to the change. This power comes from Section 914A of the Corporations Act 2001 (Cth) (‘Corporations Act’), and ASIC will typically use it when it has concerns about a licensee or how its business is run.

In this article, we explain how this power works, the changes ASIC can make to your licence, your rights during the process, and how a variation differs from a suspension or cancellation.

Interactive Tool: Check Your Rights & Next Steps if ASIC Changes Your Licence

The Statutory Basis for ASIC-Initiated AFSL Variations

What Is an ASIC-Initiated AFSL Variation?

As mentioned above, under Section 914A(1) of the Corporations Act, ASIC may, by written notice, impose conditions or additional conditions on an AFSL, or vary or revoke existing conditions. Section 914A(2)(a) allows ASIC to take this action on its own initiative.

This differs from a licensee-requested variation. Under Section 914A(2)(b) of the Corporations Act, a licensee may lodge an application asking ASIC to impose, vary or revoke licence conditions. An ASIC-initiated variation does not depend on that application.

When Can ASIC Vary an AFSL Without an Application?

Section 914A(1) of the Corporations Act allows ASIC to impose or vary conditions at any time, and does not require any particular ground to exist first. The main statutory limits are the hearing requirement in Section 914A(3) and the limits in Sections 914A(4)–(5) of the Corporations Act.

As a matter of guidance, RG 98 indicates that a variation may be considered where there are concerns about a licensee or the way its business is being conducted.

In addition, RG 98.42 lists examples of misconduct that may lead ASIC to suspend or cancel a licence, and RG 98.41 notes that varying conditions may be used instead in appropriate cases. These examples include: 

• failing to implement and maintain effective compliance measures;
• inadequate resources or risk management arrangements;
• inadequate arrangements to manage conflicts of interest; and
• non-compliance with licence conditions.

A proven breach of the Corporations Act is not required before ASIC varies an AFSL. Separately, RG 98.36 states that ASIC is likely to act where investor or consumer protection is needed, misconduct should be deterred, or the licensee’s conduct may cause detriment, and that the facts of each matter determine whether action is taken. 

What Limits Apply to ASIC-Initiated AFSL Variations?

ASIC cannot vary or revoke the conditions prescribed by Regulation 7.6.04 of the Corporations Regulations 2001 (Cth) (‘Corporations Regulation’). Section 914A(8) of the Corporations Act makes every AFSL subject to those prescribed conditions and expressly prevents ASIC from varying or revoking them. 

Separate limits apply where the licensee, or a related body corporate, is regulated by the Australian Prudential Regulation Authority (APRA). For APRA-regulated bodies other than authorised deposit-taking institutions (ADIs), Section 914A(4)(a) of the Corporations Act generally requires ASIC to consult APRA before imposing, varying or revoking a condition that would prevent the APRA-regulated body from carrying on its usual regulated activities.

Under Section 914A(4)(aa) of the Corporations Act, where the licensee or a related body corporate is APRA-regulated (other than an ADI), ASIC generally cannot impose, vary or revoke a condition that would prevent the licensee from providing a superannuation trustee service.

This restriction does not apply where APRA has agreed in writing, the licensee has applied for the change, or the licensee’s registrable superannuation entity (RSE) licence is no longer in effect and is not treated as continuing in effect under Section 29GB of the Superannuation Industry (Supervision) Act 1993 (Cth).

Under Section 914A(5), where the licensee or a related body corporate is an authorised deposit-taking institution (ADI), the power to impose conditions that would prevent the ADI from carrying on its banking business belongs to the federal Minister responsible for financial services, currently the Assistant Treasurer and Minister for Financial Services, rather than ASIC.

What Changes Can ASIC Make to an Australian Financial Services Licence?

ASIC Can Remove or Restrict Existing AFSL Authorisations

Under Sections 914A(1)(a)–(b) of the Corporations Act, ASIC can restrict the activities covered by an AFSL by imposing or varying licence conditions. Section 914A(6) requires ASIC to ensure that the licence includes a condition specifying the financial services, or classes of financial services, the licensee is authorised to provide.

Also, under Section 914A(7), those services may be specified by reference to particular financial products or classes of financial products.

A condition may therefore prevent a licensee from providing certain financial services or dealing with specified product classes. RG 98.17 and RG 98.34 identify, respectively, removing licence authorisations and precluding the licensee from providing certain types of financial services as possible regulatory responses. 

Imposition of Additional Compliance & Supervisory Conditions

Under Section 914A(1)(a) of the Corporations Act, ASIC may impose additional conditions that require a licensee to improve its compliance arrangements or provide information about its progress. RG 98.34 gives the appointment of an independent external compliance consultant as an example, together with ongoing reports on remedial work addressing identified deficiencies.

RG 98.41 also recognises the following as possible alternatives to suspension or cancellation:

• special compliance consultant review and reporting conditions;
• restrictive conduct conditions; and
• enhanced disclosure conditions.

These measures can allow the business to continue operating while subjecting specified activities to closer oversight.

Must ASIC Give AFSL Holders an Opportunity to Respond?

The Right to a Private Hearing & Submissions

As indicated in Section 914A(3) of the Corporations Act, ASIC may impose conditions or vary conditions on an AFSL only after giving the licensee an opportunity to:

• appear or be represented at a private hearing before ASIC; and
• make submissions about the proposed action.

Section 914A(3) of the Corporations Act itself provides that the hearing requirement does not apply when conditions are imposed at the time the licence is granted, or when ASIC imposes or varies conditions in accordance with the licensee’s own application under Section 914A(2)(b).

RG 98.33 confirms that ASIC must offer the hearing before imposing conditions after the licence has been granted, or before varying conditions. 

When Does the Hearing Requirement Not Apply?

The hearing requirement in Section 914A(3) of the Corporations Act does not expressly refer to ASIC revoking conditions. The provision should not be treated as creating a hearing entitlement for every type of action ASIC may take under Section 914A.

Can an AFSL Holder Challenge an ASIC-Initiated Variation?

An AFSL holder may be able to seek review of ASIC’s decision by applying to the Administrative Review Tribunal (ART). Under Section 1317B(1)(b) of the Corporations Act, ASIC decisions are generally reviewable by the ART, subject to the exclusions in Section 1317C.

Section 1317B(1)(b) of the Corporations Act permits applications to the Tribunal for review of a decision made by ASIC under the Corporations Act, subject to Part 9.4A, including the excluded decisions listed in Section 1317C. 

ART review is separate from the private hearing and submissions process under Section 914A(3) of the Corporations Act. A hearing takes place before ASIC decides whether to vary the licence, giving the licensee a chance to influence that decision. ART review takes place after ASIC has made its decision, when the Tribunal can reconsider that decision on its merits. Affected licensees should:

• examine the written notice;
• identify how the revised conditions affect operations; and
• obtain advice about any available review rights.

What Happens After ASIC Varies an AFSL?

How Do New AFSL Conditions Affect Business Operations?

ASIC gives written notice when it imposes, adds or varies conditions on an AFSL under Section 914A(1) of the Corporations Act. Once the variation takes effect, the licensee must comply with the revised conditions as part of its obligations under Section 912A(1)(b) of the Corporations Act.

The practical effect depends on the new conditions. A licensee may need to:

• limit specified services;
• change internal processes;
• provide information to ASIC; or
• complete additional compliance work.

What Happens if a Licensee Breaches the Revised Conditions?

Continuing to provide financial services outside the revised authorisations may place the licensee in breach of Section 911A(1) of the Corporations Act, which requires a person carrying on a financial services business to hold an AFSL covering those services. 

Moreover, Section 911A(5B) makes this a civil penalty provision, meaning ASIC can seek a financial penalty from a court. Breaching any other revised condition contravenes Section 912A(1)(b) and is a ground for suspension or cancellation under Section 915C(1)(a). However, Section 912A(1)(b) is not one of the obligations made a civil penalty provision by Section 912A(5A). 

How Do ASIC-Initiated Variations Differ From Suspension or Cancellation?

The Impact on Business Operations

An ASIC-initiated variation changes the conditions or scope of an AFSL without necessarily ending the licensee’s business. Under Section 914A of the Corporations Act, ASIC may:

• impose additional conditions;
• restrict certain financial services; or
• require closer compliance oversight, while the licensee continues operating within the revised limits.

Suspension or cancellation has a more severe operational effect. Under Sections 915B and 915C of the Corporations Act, ASIC may suspend or cancel an AFSL, which generally prevents the licensee from carrying on authorised activities during the suspension or after cancellation. 

Nonetheless, under Section 915H, ASIC may specify that the licence continues in effect for limited purposes, such as winding down the business or allowing complaints to be handled by AFCA.  

RG 98 recognises that varying conditions may be preferable where restrictions, compliance reviews or enhanced disclosure can address the concern without suspension or cancellation.

Different Statutory Thresholds for Intervention

The statutory pathways for suspension or cancellation contain specific grounds. Under Section 915C(1)(a) of the Corporations Act, ASIC may suspend or cancel an AFSL where the licensee has not complied with its obligations under Section 912A. 

Under Section 915C(1)(aa), it may do so where ASIC has reason to believe the licensee is likely to contravene those obligations. Other grounds in Section 915C(1) include failing the fit and proper person test in Section 913BA.

Before suspending or cancelling an AFSL under Section 915C(1) of the Corporations Act, ASIC must give the licensee an opportunity for a private hearing and to make submissions, as required by Section 915C(4). Separately, Section 915B permits ASIC to suspend or cancel an AFSL without first offering a hearing where the specific statutory grounds for immediate action apply.

For a company, these include ceasing to carry on the financial services business or becoming a Chapter 5 body corporate, such as entering administration or liquidation. 

A variation under Section 914A of the Corporations Act can address concerns before suspension or cancellation is considered necessary. RG 98 states that the type of administrative action depends on the nature and seriousness of the conduct, that additional licence conditions may be used to address compliance issues, and that varying conditions may sometimes be preferable to suspension or cancellation.

What Should AFSL Holders Do If ASIC Proposes a Variation?

Assessment of Proposed Conditions & Preparation of Evidence

An AFSL holder should first review ASIC’s stated concerns and each proposed condition. RG 98 identifies factors ASIC may consider, including:

• the seriousness of suspected misconduct;
• internal controls;
• the licensee’s compliance history;
• remedial steps; and
• cooperation with ASIC.

The response should be supported by clear evidence addressing those factors, and AFSL compliance services for responding to ASIC concerns can help structure that evidence.

This may include:

• updated policies and procedures;
• records showing how deficiencies were identified;
• details of remedial work; and
• material demonstrating that the business can meet its obligations.

RG 98.38 states that the factors in Table 1 are relevant considerations, but the list is not exhaustive.

Steps to Address Compliance Deficiencies & Seek Legal Advice

Formal submissions should respond directly to ASIC’s concerns and explain the steps taken to correct any compliance deficiencies. RG 98.43 states that ASIC may vary an AFSL even after deficiencies have been corrected, including where action is considered necessary to deter misconduct.

A licensee should consider whether its remedial response has been proactive rather than merely reactive. This may involve:

• changing policies;
• improving supervision;
• addressing systemic weaknesses; and
• providing evidence of ongoing compliance.

Specialised legal advice from AFSL lawyers advising on ASIC intervention and licence conditions can assist with preparing submissions, assessing proposed conditions and protecting the business’s position during ASIC’s process.

Conclusion

Section 914A of the Corporations Act gives ASIC power to impose, add or vary AFSL conditions, subject to safeguards including an opportunity for a private hearing and submissions. ASIC’s response may involve restricted services or added compliance oversight under Section 914A of the Corporations Act or, where the statutory grounds apply, suspension or cancellation under Sections 915B and 915C. Eligible ASIC decisions may also be reviewed by the ART under Section 1317B(1)(b), subject to Section 1317C.

If ASIC proposes regulatory action, contact Click Legal for AFSL compliance services addressing the proposed conditions, supporting evidence and formal submissions. Click Legal provides clear, commercial advice to financial services businesses and can assist with responding to ASIC intervention and addressing compliance concerns, including where ASIC RG 98.43 indicates action may still be taken after deficiencies have been corrected.

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