What are your SMSF licensing options?

If accountants in Australia want to provide advice on self-managed superannuation funds (SMSFs) to their clients, they have just 17 months to apply for their own limited Australian Financial Services (AFS) licence or become an authorised representative under another AFS licensee.

At the moment accountants who assist clients to set up or wind up an SMSF do so under an exception allowed under the Corporations Act 2001. But that ends on 30 June 2016.
It might seem as if there’s still plenty of time to apply for a limited AFS licence, but CPA Australia estimates it can take from 12 to 18 months to complete all of the requirements, including the required education and training. So if you haven’t already begun on your licensing journey, now is definitely the time to start.

Shirley Schaefer, national lead partner for superannuation at professional services firm BDO, says accountants who want to advise on setting up or winding up an SMSF, making contributions to an SMSF, drawing pensions from an SMSF or any strategic investment advice involving an SMSF will all need to be licensed.

“In most cases, some form of limited licence will be sufficient, but this still involves obtaining the necessary credentials under RG 146,” she explains.

Anyone who sells or provides advice on financial products is required to meet the training requirements set by the Australian Securities and Investments Commission (ASIC) in Regulatory Guide 146 (RG 146).

The options are to obtain a limited AFS licence or a full AFS licence, or become an authorised representative of a third-party AFS licensee.

While accountants who want to offer investment advice to clients will obviously need to be licensed in some capacity, those who provide basic services such as preparing financial accounts, business planning and audit and tax services can continue as before.

There is information on both the ASIC and CPA Australia websites as to what services fall inside and outside the licensing regime. But if you’re still in doubt as to whether you need a licence, it could be worth erring on the side of caution and applying for a limited AFS licence at the very least, according to some practitioners.

Paul Sweeney, a Sydney-based partner at advisory firm McGrathNicol, managed the process when his business attained a licence to broaden its range of transaction advisory services in 2013. “It’s better to be licensed than inadvertently provide services you should have a licence for,” he says.

Yet perhaps that’s not the case for every firm. “It’s not mandatory to get a licence,” advises Andrew White, managing director of private wealth at BDO.

“For some practices – generally those that offer basic services – it will make sense not to get a licence and to instead enter into a joint venture or refer clients to a licensed adviser.”

Getting a full or limited AFS licence means a business incurs higher regulatory costs, which may outweigh the benefits a licence delivers to a practice, especially one that focuses on providing basic accounting services.

Aside from licence fees and expenses involved in documenting compliance and risk management obligations, businesses should also consider the cost in terms of how much time staff spend away from the practice to undertake training.

To gain a licence, businesses must also demonstrate their financial capacity, dispute resolution practices, and ongoing professional development and training. However many of the current Continuing Professional Development requirements for accountants in Australia are the same as those demanded under the AFS regime.

To attain a full AFS licence, an accountant will have to demonstrate he or she has experience in providing the services for which a licence is sought. This could be challenging for smaller practices that want to be licensed, but don’t yet have the necessary runs on the board in previously providing licensed advice.

Despite the increased costs, there are plenty of upsides to getting a licence. Scott Charlton from Fortnum Professional Strategies advises accountants on their licensing options, and sees an AFS licence as a way for practices to expand horizons, both their own and their clients’.

“It’s my hope accountants engage clients in conversations about a broader range of issues – what their financial goals are, what their expectations are in retirement, their attitudes to risk,” he says.

“To engage with clients in this way, accountants will need to widen the scope of client conversations. At first, this will need to be formalised – that is, you will need to put it on the agenda at client meetings – before it becomes more second nature.”

Looked at another way, an AFS licence allows a practice to continue to advise in areas where accountants have traditionally played a role, such as SMSF administration.

“Not being licensed will see a ‘shrinking of the frontier’ regarding areas where accountants can advise without a licence,” Charlton warns.

In his view, accountants who concentrate on traditional tax preparation services will find life progressively more challenging.

“Clients largely see a tax return as a grudge purchase and such services will be under increasing fee pressure. Being licensed allows accountants to speak to clients about a broader range of areas, so there will be more scope to add genuine value.”

Pitcher Partners has had a full AFS licence since 2003, and Brad Twentyman, its director of superannuation, says licensing can resolve a common stalemate that occurs when clients are seeking advice that cuts across tax and financial services.

“The profession reached a situation where in interacting with clients, you were conscious of not letting conversations stray into areas which could be construed as financial advice,” he says, giving BHP Billiton’s share buyback in 2011 as an example.

“In the BHP scenario, clients were arguably not receiving complete advice. Accountants were reluctant to advise as it could be construed as financial advice, and financial planners were reluctant to advise as it could be construed as tax advice.”

Twentyman sees the new licensing regime as a way to resolve such stand-offs. “Licensing allows practitioners to have more meaningful conversations about their clients’ situation,” he says.

But it’s important to understand what’s involved with complying with the AFS regime.

“Accountants already provide written advice, but the advice they give isn’t as regulated as it is when it’s given under an AFS licence,” says Twentyman. “There are numerous disclosure requirements that must be included in each advice document, so advice can become a compliance-driven process,” he says.

“Lots of accountants may underestimate the additional paperwork needed to provide advice and how critical it is to have the right procedures in place to generate efficient advice.

“Some accountants may think all they need to do is just get the licence, but it’s much more involved than that. They may need to change the way they work.”

When licensed accountants provide advice under the regime, they will be required to comply with conduct and disclosure obligations, which may involve an obligation to provide clients with a financial services guide and produce a statement of advice.

“They will also need to be able to show an audit trail of the advice they give.” As Twentyman notes: “This can make it hard for smaller firms to provide advice in a compliant, cost-effective manner.”

One solution is to use technology to streamline part of the advice process and, more generally, to standardise the way a practice gives advice. Given the licensing regime, it’s an opportune time for accountants to consider how new practices and software can make their businesses more efficient and cost-effective.

Independent, always

Where an accountant has become an authorised representative of a third party, rather than holding their own AFS licence, they may need to expalin to their clients that they remain independent, despite oeprating under another entity’s licence.

“It’s inevitable that some clients will be unsure about the ongoing independence of their adviser, but the idea is to talk to them and explain how the licensing regime works, to give them comfort they are still receiving quality advice,” notes Brad Twentyman from Pitcher Partners.

Scott Charlton from Fortnum Professional Strategies also reminds accountants that not all licences are owned and controlled by product providers; some are independently owned.

“But when an accountant decides to align with a licensee owned by a product provider, I’d be emphasising [to clients] that the advice being provided will feature the same degree of integrity and independent thinking that has been a feature of the traditional services that have been provided to the client.

“In all cases, being open and transparent about the firm’s relationship with any aligned third parties will be important in maintaining clients’ trust.”

Your license options

The Option: Limited Australian Financial Services license

What’s good

You can continue as before, advising clients about SMSFs and also giving class-of-product advice (for example, equity funds vs cash funds) that doesn’t involve a specific product recommendation.

What’s not

It takes an average 12 to 18 months to complete the required qualifications. You’ll incur higher regulatory costs.

Qualifications needed

Among other requirements, you need to meet organisational competence (RG105) and financial product advice training requirements (RG146).

The Option: Full Australian Financial Services licence

What’s good

You can speak to clients about a much broader range of financial and investment areas, going beyond SMSFs and class-of-product advice to suggest specific financial products. It allows you to provide more holistic advice to your clients.

What’s not

Higher regulatory costs, including insurance costs. To meet the criteria for a full license, a practice may have to bring in an experienced financial planner as a key person. Training other staff will also take time and resources.

The Option: Authorised representative under another entity’s Australian Financial Services license

What’s good

You can provide financial product advice to clients, including establishing or winding up SMSFs, while the licensee ensures compliance with the licence obligations.

What’s not

Licensees may be affiliated with a particular product provider and that could impact on your independence. It’s the licensee who sets the limits on the type of advice you provide to clients. While you may have to use the licensee’s templates to give financial advice, you may still be held personally accountable to ASIC if there is a breach of the best interests’ duty.

Qualifications needed

You will have to comply with financial product advice training requirements (RG146). Licensees will also need you to complete training about their products and systems.

This article first appeared in In the Black magazine