How to be a Responsible Manager – Competence & Responsibilities
The Responsible Manager (RM) is one of the most important positions that an Australian Financial Services (AFS) Licensee has to maintain. They are the person (or, more likely, persons) who demonstrates the organisation’s competence, and ultimately, are responsible for the provision of financial services.
However, there is some confusion over what a person needs to demonstrate to become an RM, including, what experience they may need.
What is a Responsible Manager?
Whilst most of the key terms and phrases used in the AFS regime are defined in the Corporations Act, this is not the case for “Responsible Manager.” Rather, the term “Responsible Manager” is a creation of ASIC, and used to demonstrate that a licensee meets the requirements under Section 912A(1)(e) of the Act – that the licensee is able to “maintain competence.”
ASIC’s expectations about maintaining and meeting organisational competence, and what an RM must do are outlined in Regulatory Guide 105: Organisational Competence (RG105). Put simply, RMs are responsible for overseeing the financial services being offered on a day-to-day basis.
ASIC will also expect that licensees have at least two RMs to oversee all the financial services offered by the licensee. Licensees that only have one RM (or only one RM with expertise in a particular area), will likely be imposed with a key person condition on the licence. Essentially, if a key person leaves the licensee, the licensee can be at risk of having their licence suspended (or even cancelled) if they do not find a suitable replacement as soon as possible. Therefore, it’s always our recommendation that licensees have at least two RMs.
How do you become a Responsible Manager?
For an individual to be nominated as an RM, they must be able to prove that they:
- are responsible for significant day-to-day decisions about the provision of your financial services;
- can demonstrate they have the appropriate knowledge and skills; and
- are “fit and proper”
Whilst this may seem straightforward enough, it’s important that the proposed RMs are able to meet all three of these elements.
Generally, we don’t have too many issues with prospective RMs having responsibility for significant day-to-day decisions. A licensee will very rarely put forward someone who is not (or will not be) in a management position.
It is also not too difficult to satisfy the fit and proper elements, especially if the prospective RM is already in a management or senior management position.
ASIC will expect that standard background checks (police check and bankruptcy check) are made for RMs as well as what is known as a “Statement of Personal Information,” which is a series of Yes/No questions which help determine the standing of the prospective RM as a fit and proper person.
When it comes to a prospective RM’s experience though – we can start to run into problems. In the past, we have had clients come forward with prospective RMs thinking they are perfect for the role – they’ve had 10 years’ experience working at a bank, for example, so they should be fine… right? Unfortunately, this is not always the case. Unless that person has been hands on with the provision of financial services, it will not be enough in the eyes of ASIC.
Demonstrating Skills and Knowledge
So, what do you need to show ASIC to demonstrate you have the required skills and knowledge?
To begin, you will need to either meet relevant industry standards (or APRA standards), hold a university degree with a relevant short industry course, or complete a relevant industry specific qualification equivalent to a diploma (such as a Diploma of Financial Services).
Whilst we have clients who may be able to satisfy one of the above requirements (these are Options 1, 3 and 4 listed in RG105), the key here is they must also demonstrate they have 3 years of “relevant experience” in the past 5 years. By “relevant experience”, ASIC is referring to experience that is relevant to the financial services that the licensee is offering – it generally requires both relevant product knowledge and regulatory knowledge.
For example, if someone has worked as a financial adviser specialising in securities advice for the past 4 years, they would have 4 years of experience in providing financial product advice in relation to securities. They would be unlikely, however, to have relevant experience in making a market in relation to derivatives and, therefore, would not be accepted as an RM for that authorisation.
The same could be said if someone only has experience providing financial services to wholesale clients. ASIC would argue that this person would not have “relevant experience” in providing financial services to retail clients, and therefore would not be able to cover that authorisation. Experience gained outside the Australian regulatory system is also not likely to be accepted as relevant experience.
However, if one of your proposed RMs does not have “relevant experience” (or does not meet the qualification requirements), you can also apply under Option 5, which is a written submission that they have the necessary skills and knowledge for the role. When relying on Option 5, RMs will need to provide the experience they have had over the past 10 years, including any relevant experience they may have had during that time.
Finally, there is also the Option 2 submission. This is where the potential RM has at least 5 years of relevant experience in the past 8 years and is then individually assessed by an ASIC approved assessor. The reason we have left this until last is because, in practice, this doesn’t apply anymore. In fact, at a recent Licensing Roundtable hosted by ASIC, ASIC admitted that Option 2 was no longer viable. So, while it may still be listed in RG105 (for the time being), you will need to rely on Options 1, 3, 4 or 5 when demonstrating the skills and knowledge of a prospective RM.
On many occasions, we see clients come to us with a potential RM who has all the skills and on the face of it would be perfect as an RM for their licence. In fact, in most cases, this person is already an RM for another licensee, so they should be approved by ASIC without any problems, right? Unfortunately, this is where further issues may arise.
As noted above, ASIC expects that RMs will be responsible for significant day-to-day decisions of financial services offered by the licensee. This responsibility includes having enough capacity to be able to make day-to-day decisions in an informed manner.
ASIC will generally have more problems approving RMs, where they believe that the RM will not have enough time to focus on the licensee. This will generally occur where the RM is also an RM on another licence, or they are an officer of another company that is not a related body corporate.
Whilst some people are RMs on multiple licences, ASIC is becoming increasingly reluctant to accept RMs on more than two licences for more basic financial services (such as general advice). In relation to more complex products (such as CFDs), they will likely not approve an RM who is already an RM on another licence.
It is therefore important that when selecting your RMs, you are able to confirm they have appropriate capacity.
Conflicts of Interest
As well as capacity issues when an individual is an RM on more than one licence (or is a director for another company/licensee), ASIC will have concerns about whether there are conflicts of interest, and if so, how will these be managed.
For example, if a person is a director of a company that provides financial advice, and then is nominated as an RM for another company that also provide financial advice, ASIC is going to be concerned about how the RM will be acting in the best interests of the licensee. As such, ASIC will likely ask questions about how this conflict will be managed. If ASIC is not satisfied by the response, it won’t accept the nomination.
Therefore, when selecting RMs who have other significant roles (such as a directorship or an RM on another licence), you will need to strongly consider whether these roles are going to impact how they provide financial services on behalf of the licensee.
So, you found the perfect RM who has the right experience, has capacity, is fit and proper, and ASIC has accepted them as an RM. Great! Nothing further to do right? Not exactly.
ASIC expects that a licensee will have measures in place to ensure that it maintains its organisational competence at all times. This includes RMs maintaining their skills and knowledge in relation to the financial products and regulatory environment that is applicable to the licensee. Whilst not explicitly prescribed by ASIC, ways that RMs can do this include reading financial services regulatory updates, obtaining reports from internal legal or compliance teams, attending topical webinars on the financial services you provide, and attending tailored RM training sessions (as are regularly presented by HN Training).
Author: Josh Wigney (Lawyer)