All your documents have been checked by ASIC, or your licensee, but the obligations continue to apply on an ongoing basis, and accountants need to take ownership of compliance. For accountants operating under the licensing regime, either as licensees or as authorised representatives, here are a few key risks.
Statements of Advice
SoAs were one of the biggest concerns for accountants entering the licensing regime, and they continue to remain one of the biggest bugbears of the financial advice industry. For both licensed accountants and authorised representatives this will be the single biggest risk. It’s not a question of whether the advice is in the best interests of the client or not—fiduciary duties are not new for accountants—but whether the SoA is compliant and shows the advice to be in the client’s best interests.
SoAs should demonstrate:
- Goals-based advice which is clearly in the best interests of the client;
- That the advice, if followed, will place the client in a better position than if the advice is not followed; and
- Appropriate product replacement consequences when moving a client from traditional superannuation to an SMSF.
Compliance with Financial Requirements
The AFS licence conditions relating to financial obligations are poorly understood by many licensees and their accountants. The key isn’t an understanding of accounting, but a solid grasp of ASIC policy.
The importance of this area cannot be over-emphasised. Many licensees who run afoul of the financial conditions on their licence spiral into regulatory enforcement action by ASIC, ending in loss of licence or substantial enforceable undertakings. ASIC takes a licensee’s financial adequacy very seriously, because a shortage of cash can be seen to motivate a licensee to take action to the detriment of consumers.
Here are some common high-risk areas:
Positive net assets
For licensees with extensive intercompany loans, other debts, or who are part of a group where most assets are held by one entity, negative net assets can be a constant risk. Licensees who cannot meet the positive net assets test can apply the alternative test of ‘adjusted net assets’ by referring to the relevant definitions in ASIC’s Regulatory Guide 166. If this doesn’t assist, licensees should seek legal advice, sooner rather than later, on the alternative options available to them, such as entering into a deed of subordination with ASIC.
The cash buffer calculation
Licensees using Option 1 for the cashflow projections must include the “cash buffer calculation”. This amount is calculated as 20% of the sum of the next three months’ expenses (or the expenses from the same three months last financial year, if that amount is higher). This figure, once determined, must be compared to, and exceed, the adjusted “cash at bank” amount. This is the licensee’s cash at bank balance, adjusted to include other allowable amounts, such as the value of any overdraft that has not been drawn down, and the amount for which current assets can be valued if they were exchanged for cash within 5 business days. ASIC should be able to look at the projections and immediately see if the licensee exceeds that buffer or not.
Contingency-based projections
Option 2 allows cashflow projections to be prepared on a contingency basis without a cash buffer amount. While Option 1 projections are a “reasonable estimate” of what will happen, Option 2 must include every possible contingency unless it is “highly unlikely”. This imposes a more onerous obligation on licensees who use Option 2. Switching from Option 1 to Option 2 is not as simple as deleting the cash buffer calculation and changing the heading—consideration must be given to additional expenses that should be included and any revenue that should be excluded.
Financials are a particular risk as they are lodged with ASIC annually, and breaches of financial conditions almost always require reporting to ASIC.
Breach Reporting
Licensees need to take responsibility for breach management. Any compliance failure should be recorded in the breach register. Breaches which are ‘significant’ must be reported to ASIC within 10 business days. Extensive guidance on what is ‘significant’ is contained in ASIC’s Regulatory Guide 78, and licensed accountants should familiarise themselves with it. Not only is ASIC more suspicious of licensees who try to assure them they’ve never had a breach, but failure to report a significant breach is itself a significant breach.
Professional Indemnity Insurance
Few insurers are offering professional indemnity insurance for licensed accountants that meets ASIC’s requirements. Licensees have had their policies checked by ASIC during the licensing process, but should avoid the temptation at renewal to take out a cheaper policy without confirming compliance with Regulatory Guide 126. Authorised representatives who maintain their own insurance for financial services would be wise to review their policies, as they may not have been scrutinised as closely as necessary.
It’s also worth noting that for authorised representatives, compliance with a licensee’s policies does not give an adviser an excuse if they breach the law—for example, advisers are also responsible for non-compliant SoAs.
Lastly, all accountants should remain vigilant in relation to misleading and deceptive condct in respect of SMSFs, which has been, and continues to be, a main area of focus for ASIC across all accountants, licensed or otherwise.
Jamie Lumsden, solicitor director, The Legal Fold Pty Ltd
