Fund managers and authorised representatives: key obligations and risks

The authorised representative regime under the Corporations Act is an important framework enabling entities and individuals to provide financial services in Australia without holding their own AFSL. 

The provision of financial services in Australia is regulated by Chapter 7 of the Corporations Act. A person who carries on a financial services business in Australia must hold an AFSL covering the provision of the financial services, unless an exemption applies. 

Relevantly, a person is exempt from the requirement to hold an AFSL if the person provides the service as representative of another person who carries on a financial services business and who holds an AFSL that covers the provision of the service.

A ‘representative’ of an AFSL holder includes a person or entity that is appointed as an ‘authorised representative’ of the AFSL holder in accordance with section 916A or 916B of the Corporations Act. An entity is appointed as an ‘authorised representative’ of an AFSL holder will therefore be exempt from the requirement to hold its own AFSL and may carry on the proposed financial services business under the AFSL holder’s licence as its representative. 

Authorised representatives are commonly appointed either within a corporate group, or between unrelated entities, including where a professional service provider is engaged, in connection with the launch or operation of a fund. A trustee, investment manager and/or promoted or introducer will often be an authorised representative rather than an AFSL holder directly.

To be appointed as an authorised representative, the proposed representative must enter into a corporate authorised representative agreement (CARA) with the AFSL holder, which typically sets out the terms of the appointment, the obligations of each party and where applicable, the fee paid to the AFSL holder as consideration for the appointment. 

Where the AFSL holder is not a related body corporate of the representative, employees of the corporate entity that are to be involved in the provision of financial services are then appointed as sub-authorised representatives. An exemption for such employees needing to be authorised applies where they are employed by an ASFSL holder or its related body corporate.

Once appointed, a corporate authorised representative will be subject to obligations arising under: 

• the Corporations Act and associated regulations; and 

• the contractual arrangements agreed with the AFSL holder in the CARA.

The authorised representative exemption from the requirement to hold an AFSL applies only to the extent the authorising AFSL holder’s AFSL covers the provision of the relevant financial services. AFSL holders also commonly use the CARA to contractually limit the scope of the financial services that authorised representatives and any sub‑authorised entities are permitted to provide. 

If the authorised representative or any sub-authorised representative:

• provided a financial service that the AFSL holder was not itself authorised to provide under its AFSL; or

• provided financial services beyond the scope of the financial services it was contractually authorised to provide under the CARA and any associated notice of authorisation,

the authorised representative may commit an offence of carrying on a financial services business without holding the required AFSL, in circumstances where it could not otherwise rely on an exemption. 

For these reasons, it is important that an authorised representative only provides the particular financial services that it is authorised to provide and does not act beyond that scope. 

Before entering into an authorised representative arrangement, prospective authorised representatives should confirm that the AFSL holder has the necessary authorisations on its AFSL to cover the financial services the representative intends to provide. This can be verified by searching the AFSL holder’s licence details on the ASIC Professional Register.

An authorised representative appointed as the trustee of a fund cannot itself issue interest in the fund, in line with the guidance in ASIC Information Sheet 251. Given this, where a special purpose trustee is appointed as an authorised representative, the AFSL holder also needs to be appointed as that trustee’s intermediary to arrange for the issue of interests on behalf of the trustee. 

Under the Corporations Act, AFSL holders are liable to clients for loss or damage suffered as a result of an authorised representative's conduct. However, the Corporations Act also makes clear that a representative of an AFSL holder is not relieved of any liability they have to a client or the licensee.

Because an AFSL holder remains liable for loss or liability caused by their authorised representatives, the CARA will typically include contractual obligations designed to ensure compliance with these general obligations under the Corporations Act. The authorised representative will therefore be contractually liable to the AFSL holder for any breach of law in its provision of financial services.

A person must not hold themselves out as the holder of an AFSL if that is not the case. 

Relevant business documents, letters, emails and other correspondence and dealings of the authorised representative or any sub-authorised representative, in circumstances where they are providing or referring to the provision of financial services, must make it clear they are acting as an authorised representative of the AFSL holder.

When providing or referring to the provision of financial services, an authorised representative should:

• disclose its authorised representative number, issued by ASIC at the time that the authorised representative appointment is notified to ASIC, in all documents;

• disclose in all documents the authorising licensee’s name and AFSL number; 

• disclose the capacity in which financial services are being provided (ie as representative rather than as principal); and

• for the purposes of the contractual obligations typically included in a CARA, include in any disclaimers approved by the AFSL holder, and act in accordance with the AFSL holder’s policies and procedures.

An authorised representative must not make a person their own authorised representative, or an authorised representative of the AFSL holder, unless:

• the person is an individual who has been given a written notice authorising them to provide financial services on behalf of the licensee; and 

• the licensee has consented in writing given to the authoriser.

As a result, where a corporate entity is appointed as an authorised representative of an AFSL holder, it cannot appoint its own sub-authorised representatives without the consent of the AFSL holder. The process for appointing sub-authorised representatives will be specified in the CARA. 

Sub-authorised representative appointments are typically governed by an agreement that sets out the rights and obligations of each party, including the scope of the services the sub-authorised representative can provide and customary terms regarding liability, indemnity and termination.

A valid sub-authorisation may be revoked at any time by the AFSL holder or the authoriser giving written notice to the individual, and if someone makes such a revocation they must inform the other person who could have revoked the authorisation in writing.

ASIC must be notified of a person’s appointment as an authorised representative within 30 business days of the appointment. The notice must include:

• the name and business address of the authorised representative;

• details of the authorisation, including the date on which it was made and what the authorised representative is authorised to do on behalf of the AFSL holder; and

• details of each other AFSL holder (if any) that has appointed it as an authorised representative.

This will typically be completed by the AFSL holder. The authorised representative’s appointment then becomes publicly available through ASIC’s Professional Registers, including information about the financial services the representative is authorised to provide. 

An authorised representative can only act as the authorised representative of two or more AFSL holders where each AFSL holder has consented to the representative being appointed as the authorised representative of the other AFSL holder. This also applies in respect of sub‑authorised representatives. 

An authorised representative should therefore ensure that both it and its sub-authorised representatives are appointed as the authorised representatives of one AFSL holder only, unless written consent is obtained from all relevant AFSL holders.

Under a CARA, the authorised representative will be contractually responsible for a wide range of obligations to the appointing AFSL holder. These include complying with statutory obligations, acting only within the scope of the authority, accepting supervision and monitoring by the AFSL holder and comply with its directions, establishing procedures and controls to facilitate and enforcing compliance with the arrangement and providing regular reporting and certification of compliance to the AFSL holder.

It is also common for a CARA to include a broad indemnity under which the authorised representative agrees to indemnify the AFSL holder and its related parties for any loss or liability arising in connection with the representative’s appointment, including from any breach of the CARA or acts or omissions of the authorised representative or any sub-authorised representatives. 

The authorised representative regime offers fund managers real commercial flexibility for, but it is not a shortcut around financial services regulation. 

Fund managers need to carefully manage the scope of their authorisation, AFSL holder liability, sub-authorisation requirements, ASIC notifications and the contractual obligations underpinning the appointment.