Breaking news: authorised representatives can issue financial products

By Elliott Stumm

A recent Federal Court decision strikes through ASIC’s long-standing position that a person cannot issue a financial product as a representative of another person.

On 3 May 2024, the Federal Court handed down its decision with respect to proceedings commenced by ASIC against BPS Financial (BPS). Some key learnings can be taken from the decision, including when the ‘authorised representative exemption’ and the ‘intermediary authorisation exemption’ in the Corporations Act 2001 (Cth) can be relied on by a person to provide financial services without holding an Australian financial services (AFS) licence.

Key takeaways

  • In a recent decision, the Federal Court said a person did not need to hold an AFS licence to ‘issue’ a financial product during a particular period where it was appropriately authorised to provide the relevant financial services on behalf of an AFS licensee.
  • This strikes through ASIC’s long-standing position that a person cannot issue a financial product as a representative of another person.
  • If your business involves reliance on the ‘authorised representative exemption’ or the ‘intermediary authorisation exemption’, you need to consider what this decision means for you.

Setting the scene

There were two parts to the claims brought by ASIC against BPS: one concerned ‘unlicensed conduct’, and the other concerned the making of false, misleading or deceptive representations. This article focuses on the unlicensed conduct claim, particularly the key aspects of the decision relating to the ‘authorised representative exemption’. We have published a separate article that considers the decision more broadly.

ASIC claimed BPS contravened the financial services laws by carrying on a financial services business without holding an AFS licence in circumstances where one was required. BPS admitted it provided financial product advice and issued a financial product and that it had not held an AFS licence. However, BPS claimed it was exempt from the requirement to hold an AFS licence as it was an authorised representative of an AFS licensee and could provide advice in relation to and issue the non-cash payment product in reliance on the authorised representative exemption. An alternate position that BPS could rely on, the ‘intermediary authorisation exemption’ to issue the product without the need to hold an AFS licence, was also claimed but is not detailed further in this article.

What did the Court say?

The Court ultimately found that BPS had contravened the Corporations Act by carrying on a financial services business when it did not hold an AFS licence but was required to. The decision can be counted as a ‘win’ for ASIC in this respect. However, significantly, the Court said BPS did not need to hold an AFS licence during a particular period where it was appropriately authorised to provide the relevant financial services on behalf of an AFS licensee. This strikes through ASIC’s long-standing position that a person cannot issue a financial product as a representative of another person.

During the particular period, BPS was authorised to provide the following financial services on behalf of an AFS licensee as its authorised representative:

  • provide general financial product advice;
  • deal in a financial product by issuing, varying or disposing of a financial product; and
  • deal in a financial product by applying for, acquiring, varying or disposing of a financial product on behalf of another.

The above authorisations were given in respect of non-cash payment products.

ASIC contended BPS could not rely on the authorised representative exemption to issue a financial product without holding an AFS licence. Ultimately, ASIC submitted that it is ‘impossible for an issuer to issue a financial product as representative of some other person’. ASIC’s position was essentially that the action of issuing a financial product is the action of a principal and it could not therefore be said that a person can issue a financial product as a representative of another person – it would be an ‘impossible contradiction’.

The Court rejected this position. The Court noted ASIC’s submissions were tethered to the underlying premise that, to be a representative, a person must be an agent of the AFS licensee. The Court did not accept that premise. The Court said the phrase ‘on behalf of’ when used in the relevant provisions may apply to a wide variety of relationships which include, but is not confined to, an agency relationship. The Court said the authorised representative exemption applies:

  • to a person who provides a financial service;
  • if that person has been given a written notice by an AFS licensee authorising the person, for the purposes of Chapter 7, to provide the specified financial service on behalf of the licensee; and
  • where the AFS licensee holds an AFS licence that covers the provision of the service.

What should you do next?

The decision will likely lead to some revision by ASIC of Information Statement 251 AFS licensing requirement for trustees of unregistered managed investment schemes, which outlines the scope of the authorised representative exemption and when it can be relied on. However, it is important to note that BPS was not the trustee of an unregistered scheme and was not an issuer of interests in a scheme. BPS was an issuer of a non-cash payment product.

Notwithstanding this, the decision is significant. If your business involves reliance on the ‘authorised representative exemption’ or the ‘intermediary authorisation exemption’, you need to consider what this decision means for you. Get in touch with Elliott Stumm or a member of the HW Funds team to learn more.

Contact

Elliott Stumm

Elliott has deep industry knowledge and specialist expertise in the regulation of fund and investment management businesses.

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