Understanding AFSL Licencing for fintech entrepreneurs

In light of the shocking collapse of cryptocurrency exchange FTX and subsequent legal proceedings faced by its director, Sam Bankman-Fried, the crypto and fintech communities have reignited debates on regulation and compliance. These events underscore the pressing need for transparency and accountability in a rapidly evolving sector.

For tech start-up entrepreneurs without a background in finance, navigating through a maze of financial regulation is overwhelming. Hopefully, after reading this article, you’ll be able to better understand the obligations and opportunities for blockchain start-ups entering the fintech space in Australia.

Australia's fintech sector is vibrant, pushing boundaries in areas like banking, payments, credit, lending, insurance, and wealth management. The robustness of the Australian fintech marketplace can be attributed to the prominence of financial services as the nation's top industry.

Additionally, Australia boasts a regulatory environment supportive to fintech innovation. One notable example is ASIC’s Enhanced Regulatory Sandbox, which enables fintech companies to test their offerings for up to 24 months without needing an Australian financial services or credit licence.

Understanding the AFSL Licence

Central to Australia's financial sector is the Australian Financial Services Licence (AFSL). Any business aiming to provide financial services must either secure this licence or partner with a current licensee.

The AFSL is sanctioned by the Australian Securities and Investment Commission (ASIC). This licence empowers entities to provide financial services, while adhering to ASIC’s standards. Such standards emphasise serving the client's best interests, ensuring transparency, and meeting stringent guidelines that safeguard Australian investors.

Pathways for Start-ups to Secure an AFSL

While obtaining an AFSL is the normal route, the process has become extremely expensive and lengthy, sometimes extending beyond a year. For start-ups, there are alternatives:

• Enhanced Regulatory Sandbox (ERS) Regime: Startups might consider the ERS. This initiative lets individuals and businesses trial innovative financial services without an immediate need for an Australian financial services licence. However, there are restrictions, such as a $10,000 individual limit on specific financial services for retail clients, and an overall $5 million exposure limit for all provided services and credit activities.

• Corporate Authorised Representative (CAR) Route: If obtaining an AFSL seems daunting or premature given a start-up's stage, they can consider becoming a CAR of an existing AFSL holder. This partnership allows start-ups to offer financial services under the licence holder's umbrella, providing a compliant, efficient market entry.

How to become a CAR?

• Identifying an AFSL Holder: Start-ups can approach entities like family offices, wealth managers, or financial planners, all of whom are typical AFSL holders.

• Agreement: After pinpointing a compatible AFSL holder, both parties must formalise their partnership through an authorisation agreement detailing the CAR's permissible services and any stipulations.

• Costs: CAR costs can vary, ranging from $20,000 annually to even double that. Typically, costs hover between $40k-$50k per annum.

• Ongoing Compliance: As a CAR, start-ups must consistently meet ASIC's compliance, regulatory, and training standards, with the primary AFSL holder overseeing compliance adherence.

Ultimately, whether a start-up chooses to pursue an AFSL or take the CAR route, abiding by Australia's financial regulations is paramount. Both avenues have their merits: while an AFSL provides more independence, the CAR pathway might be more cost-effective and quicker. Regardless of the chosen path, the ultimate objective is consistent: delivering financial services that prioritise trust, clarity, and the overarching welfare of Australian investors.