Fit and Proper – incoming AFSL Director Governance
What should a company board understand about the ‘Fit and Proper’ test and how this test relates to the appointment of a new director to a company holding an Australian Financial Services Licence (‘AFSL’)?
Introduction
A client query has motivated this week’s blog post. The question revolves around the ‘Fit and Proper’ test and how this test relates to the appointment of a new director to a company already holding an existing AFSL.
Background
The fit and proper test is a test that assesses competence, financial soundness, legal compliance and moral character. The Australian Securities and Investments Commission (‘ASIC’) expects that AFSL holders continue to meet the fit and proper person test as an ongoing requirement for maintaining an AFSL.
What is the Test?
When administering the fit and proper test, ASIC has regard to:
whether the person has been convicted of an offence in the last 10 years;
whether the person has had an AFSL or ACL that was suspended or cancelled;
whether a banning order or disqualification order has previously been made against the person under the Corporations Act 2001 (Cth) (‘Corporations Act’) or the National Consumer Credit Protection Act 2009;
whether the person has ever been linked to a refusal or failure to give effect to a determination made by AFCA;
whether the person has ever been involved in an insolvency related event;
whether the person has been disqualified from managing corporations;
whether the person has been banned from engaging in a credit activity under a State or Territory law;
any other relevant information given to ASIC by a State or Territory authority; and
any other matter prescribed by the regulations or that ASIC considers relevant.
Who does the test apply to?
Under the relevant legislation, the fit and proper test applies to a person seeking to apply for an AFSL and to companies already holding an AFSL.
Where the AFSL holder is a body corporate, the requirement to be fit and proper extends to all officers of the body corporate (whether or not that officer performs duties in relation to the AFSL). The term ‘officer’ is defined under legislation, not only including directors, but also any persons:
involved in making decisions that affect the whole or a substantial part of the business;
with the capacity to affect significantly the body corporate’s financial standing; and
in accordance with whose instructions or wishes the directors of the body corporate are accustomed to act.
Consequences for not meeting the test
For existing AFSL holders, ASIC has the power to suspend or cancel the AFSL where the fit and proper test is not satisfied. ASIC can also make a banning order against a person if ASIC has reason to believe that the person or persons are not fit and proper to provide one or more financial services, perform one or more functions as an officer of the licensee entity or control the licensee entity.
Regular governance checks
Good governance practice suggests AFSL holders should carry out periodic checks on their responsible managers (especially key persons named on the licence) and officers to ensure that they remain fit and proper.
From a practical perspective AFSL holders and their compliance teams should therefore consider scheduling fit and proper checks on at least an annual basis. I note that we also have clients that perform this test on a semi-annual basis.
The regular fit and proper checks can involve the following items:
undertaking criminal history checks;
performing bankruptcy checks;
doing a check on ASIC’s banned and disqualified register; and
asking your directors, responsible managers and officers to provide a signed declaration on a periodic basis, declaring any adverse circumstances that may affect whether they remain fit and proper.
AFSL holders should also consider conducting these fit and proper checks when hiring new key personnel for their business.
Conclusion
Boards, Responsible Managers and Compliance Officers of AFSL holders must be aware of the governance, notification and compliance implications that arise when a director change occurs within their organisation. Changes to company directors can have regulatory and licensing consequences.
AFSL boards should proactively review their director change procedures to ensure ongoing compliance with the Corporations Act, the relevant AFSL conditions, and ASIC Regulatory Guides.
Sound governance protocols suggest that AFSL boards should be performing the fit and proper test on all new director appointments within 30 days of the director being appointed to the Board.
If you are a company board holding an AFSL and would like to discuss how I can assist your company with enhancing your governance so that you can better manage your compliance risks and protect your investors, please contact me for an obligation free discussion. I can assist your company with:
Responsible manager;
Compliance committee;
Company director;
Compliance review; and
Governance committee services.
I’d be honoured to assist your company meet its ongoing compliance obligations relating to the AFSL fit and proper test and give your customers and investors the comfort that you are managing your business with institutional grade corporate governance.
Disclaimer
This content of this blog post is not legal advice. The information provided is opinion and for general purposes only and is not a substitute for personalised legal counsel.