Operating Without an AFSL: Penalties, ASIC Action and How to Fix It

Introduction

Operating a financial services business without the required Australian Financial Services Licence (AFSL) is not a minor compliance gap. If your business provides financial services in Australia without an AFSL covering those services, a valid exemption or an appropriate representative arrangement, it can contravene the Corporations Act 2001 (Cth) (‘Corporations Act‘). The business and individuals involved may be exposed to serious regulatory, financial and commercial consequences.

In this article, we explain the AFSL licensing requirement, the civil and criminal consequences of unlicensed conduct, the Australian Securities and Investment Commission‘s (ASIC) enforcement powers, the impact on client contracts and future licence applications, and the steps businesses should consider if they discover they have already operated without the required authorisation.

Interactive Tool: Check Your Risk of Operating Without an AFSL

AFSL Licensing Requirements

Core Requirement Under Section 911A

Under Section 911A(1) of the Corporations Act, a person carrying on a financial services business in Australia must hold an AFSL that covers the financial services being provided.

This is not limited to businesses with no AFSL at all. A business may also have a licensing problem where it holds an AFSL but provides a financial service outside the authorisations on that licence.

Whether an AFSL is required therefore depends on what the business actually does. Financial services under Section 766A can include providing financial product advice, dealing in financial products, making a market and operating certain managed investment schemes.

Exemptions and Representative Arrangements

Section 911A(2) of the Corporations Act contains several exemptions from the requirement to hold your own AFSL. Under Section 911A(2)(a), one important pathway is providing financial services as a representative of another person whose AFSL covers those services, subject to the representative requirements in Section 911B.

However, describing a business as a consultant, partner or “representative” of an AFSL holder is not enough. The arrangement must satisfy the relevant requirements in Sections 911A, 911B and, where applicable, Division 5 of Part 7.6, including the authorised representative provisions.

The same applies to other AFSL exemptions. The business should identify the precise exemption relied on, including any exemption under Section 911A(2), ASIC relief under Section 926A or regulatory exemption under Section 926B, and confirm that all applicable conditions continue to be satisfied.

Operating While an AFSL Application Is Pending

Lodging an AFSL application does not give a business interim permission to start providing financial services.

Section 913A of the Corporations Act provides the mechanism for applying for an AFSL, but the licensing requirement in Section 911A continues to apply until the licence is granted unless another valid exemption or representative arrangement applies.

A business that starts onboarding clients, advising on financial products or dealing in financial products while its AFSL application is “in progress” may therefore still be operating unlawfully.

Consequences of Operating Without an AFSL

Civil and Criminal Penalties

Contravening Section 911A(1) of the Corporations Act can result in both civil and criminal liability.

Under Section 911A(5B), a contravention of Section 911A(1) is also a civil penalty contravention. Section 1317G permits substantial pecuniary penalties, including maximum fixed amounts of 5,000 penalty units for an individual and 50,000 penalty units for a corporation, subject to the alternative benefit and turnover-based calculations in that section.

Under Section 4AA of the Crimes Act 1914 (Cth) and the Crimes (Amount of a Penalty Unit) Instrument 2026, one Commonwealth penalty unit is $364 for offences committed on or after 1 July 2026. The fixed statutory amounts therefore equate to $1.82 million for an individual and $18.2 million for a corporation, before considering the alternative statutory calculations.

There is also criminal exposure. Section 911A(1) is an offence through Section 1311(1), and Schedule 3 prescribes a maximum penalty of five years’ imprisonment. Under Sections 1311B and 1311C, this can instead or additionally result in a fine of up to 600 penalty units for an individual or 6,000 penalty units for a corporation.

Individuals are not automatically personally liable simply because they are directors, but exposure may arise where they themselves contravene the provision or are involved in the offending conduct.

ASIC Injunctions and Asset Preservation

ASIC does not need to wait until a final penalty proceeding before seeking to stop unlicensed conduct.

Under Section 1324 of the Corporations Act, the Court can grant an injunction restraining conduct that contravenes or would contravene the Act. Where the statutory conditions are satisfied, Section 1323 also allows the Court to make orders restricting dealings with money, financial products or other property.

Depending on the circumstances, these powers can allow ASIC to seek urgent orders stopping the business from continuing the relevant activity and preserving assets while the matter is investigated or litigated.

ASIC may also accept an enforceable undertaking under Section 93AA of the Australian Securities and Investments Commission Act 2001 (Cth) (‘ASIC Act‘). Public ASIC warnings, court proceedings and enforcement announcements can also create reputational consequences that extend beyond the direct penalty.

Contract and Fee Consequences

Unlicensed conduct can also affect the provider’s contractual rights.

Division 11 of Part 7.6 of the Corporations Act contains specific remedies relating to agreements with certain unlicensed financial services providers. Where the statutory requirements are satisfied, Sections 924A and 925A can allow a client to rescind an affected agreement.

Further consequences can include:

• Section 925E: restricting the unlicensed provider from enforcing or relying on the agreement against the client;
• Section 925F: restricting recovery of brokerage, commission or other fees; and
• Section 925H: allowing certain fees already paid to be recovered.

These provisions do not make every contract connected with unlicensed conduct automatically void. Their application depends on the particular agreement and statutory conditions. However, a business that operated without the required AFSL should not assume it can enforce its ordinary contractual rights or retain all fees received.

Banning Orders and Personal Consequences

The consequences can extend beyond the company that provided the unlicensed services.

Under Section 920A of the Corporations Act, ASIC can make a banning order where one of the statutory grounds is satisfied, including where a person has not complied with a financial services law or has been involved in another person’s contravention.

Further, under Section 920B(1) a banning order can prohibit a person from providing financial services, controlling an entity that carries on a financial services business or performing specified functions within one.

For founders, directors and senior managers, public findings of unlicensed conduct can also have broader commercial consequences. They may affect future regulatory dealings, potential representative appointments, investor confidence, fundraising, and relationships with financial institutions and counterparties.

Delayed Licensing and Future AFSL Applications

No Retrospective Authorisation

Obtaining an AFSL later does not retrospectively authorise earlier conduct.

If the business was required to hold an AFSL when the relevant service was provided, a licence granted later may allow it to operate lawfully going forward but does not erase the historical period of unlicensed activity.

The same applies to a later authorised representative appointment. A properly structured appointment can authorise future services within its scope, but it does not retrospectively convert earlier conduct into authorised conduct.

Impact on a Future AFSL Application

Historical unlicensed activity can also complicate the licensing process itself.

Under Section 913B of the Corporations Act, ASIC must be satisfied about several matters before granting an AFSL, including the applicant’s ability to comply with its obligations as a licensee and the fit and proper person test in Section 913BA.

Under Section 913BB, the fit and proper assessment requires ASIC to consider specified matters including previous licence action, banning or disqualification orders, insolvency and relevant criminal history. It can also consider any other matter ASIC considers relevant.

Historical unlicensed conduct can therefore become something the applicant needs to explain. ASIC may want to understand how the issue arose, how long it continued, who was responsible and what remediation and governance changes have since been implemented. This makes advice from AFSL lawyers at Click Legal on historical unlicensed conduct and licensing applications important.

Operating While “Working On” the Licence

Consider a digital investment platform that starts onboarding Australian retail clients while preparing an AFSL application.

The platform operates for 18 months before identifying that its activities are not covered by an exemption. It may then need to stop the affected service, determine how existing clients and fees should be treated, address possible ASIC scrutiny and progress an AFSL application that now also involves historical non-compliance.

The fact that the business always intended to obtain an AFSL does not change whether Section 911A of the Corporations Act applied during that period.

What could have been an orderly licensing process can therefore become an urgent remediation and regulatory problem.

Common AFSL Licensing Mistakes

Businesses often enter unlicensed territory because the licensing analysis is undertaken after the business model has already launched. Common mistakes include:

• assuming an AFSL is only required after reaching a particular revenue or client threshold;
• starting operations because an AFSL application has already been lodged;
• assuming providing services only to wholesale clients removes the AFSL requirement;
• relying on an exemption without checking all of its conditions;
• treating a commercial arrangement with an AFSL holder as an authorised representative appointment;
• holding an AFSL but providing services outside its licence authorisations;
• assuming a crypto, digital asset, software or platform-based business automatically falls outside Chapter 7 of the Corporations Act; and
• continuing to operate after identifying a possible licensing issue because the business intends to correct it later.

The starting point should always be to identify what financial services the business actually provides and the legal basis authorising each service.

For a broader overview of the licensing framework and ongoing obligations, see Click Legal’s free AFSL Compliance Guide – Core Obligations for AFS Licensees.

Responding to Historical Unlicensed Conduct

Confirming the Licensing Position

The first step is to confirm whether the business was actually required to hold an AFSL for the relevant activity.

This requires mapping each product and service against the financial services definitions, identifying the relevant AFSL authorisations and checking any exemption or representative arrangement relied on.

The analysis should focus on what the business actually did, rather than how the service was described internally or to clients.

Identifying the Affected Conduct

Once a licensing gap is confirmed, establish its scope. This should include the period of unlicensed operation, the services provided, clients affected, agreements entered into and fees received.

The business should also identify who knew about or participated in the conduct and whether any client loss or other consumer harm may have resulted.

Stopping or Restricting Ongoing Services

Businesses should not assume they can continue the same activity simply because an AFSL application, licence variation or authorised representative appointment is being arranged. Where ongoing services remain outside the business’s lawful authorisation, the immediate operational position needs to be assessed.

Depending on the circumstances, this may require stopping or restructuring the affected service while the correct licensing pathway is put in place.

Remediation and ASIC Engagement

The business should then assess the regulatory and client consequences of the historical conduct. Relevant issues may include:

• the enforceability of affected agreements;
• fees that may be recoverable by clients;
• client loss or remediation;
• whether ASIC is already aware of the conduct;
• whether regulatory engagement is appropriate; and
• how the issue affects a pending or future AFSL application.

The appropriate response will depend heavily on the nature, duration and seriousness of the conduct.

Putting the Correct Authorisation in Place

The final step is to establish a lawful pathway before the affected financial services resume. Depending on the business model, that may involve obtaining an AFSL, varying an existing AFSL, entering into a compliant authorised representative arrangement or confirming that a specific exemption applies.

Businesses that already hold an AFSL can use Click Legal’s free AFSL Compliance Checklist to review whether their licence authorisations and wider compliance framework still match the services they actually provide.

Conclusion

Operating a financial services business without the required AFSL is not an administrative issue that can safely be fixed later. Section 911A can carry substantial civil and criminal consequences, while unlicensed conduct can also affect ASIC enforcement, client contracts, fees, future licensing and the individuals involved.

If there is uncertainty about whether a service is covered by an AFSL, representative arrangement or exemption, contact Click Legal to arrange AFSL compliance services for licensing and authorisation reviews before the service is provided. Licensing later may address the position going forward, but it does not retrospectively authorise past conduct.

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