AFSL Compliance: What Does ‘Competence’ Actually Mean?

In the AFSL context, “competent” is used in two related but distinct ways—(1) organisational competence (driven by responsible managers), and (2) representative competence (driven by training/supervision of the people who actually provide the services).

These are regulatory obligations applying to AFS Licensees – s912A(1) (e) and (f) Corporations Act.

A financial services licensee must:

maintain the competence to provide the financial services (organisational competence);
ensure that its representatives are adequately trained and are competent to provide the financial services (representative competence).

Representatives are defined in s9 Corporations Act and include a person who is:

an authorised representative of the licensee; or
an employee or director of the licensee; or
an employee or director of a related body corporate of the licensee; or
any other person acting on behalf of the licensee

Related body corporate means a body corporate related to the licensee, where the body corporate is (s50):

a holding company; or
a subsidiary company; or
a subsidiary company of a holding company of another body corporate.

Responsible managers: “competent” at the organisational level

The statutory obligation is that an AFS licensee must “maintain the competence to provide the financial services covered by the licence”.

ASIC’s approach (RG 105) is to assess that organisational competence by looking at the knowledge and skills of the people who manage the financial services business—i.e. the “responsible managers”. RG 105 frames this as ensuring you have enough people with appropriate knowledge and skills so the licensee can provide all its financial services “efficiently, honestly and fairly”.

Key practical content of “competent” for responsible managers under RG 105 includes:

the RM must be directly responsible for significant day-to-day decisions about the ongoing provision of the financial services (or, in some limited automated models, provide sign-off);
the RM must have appropriate knowledge and skills for their role, demonstrated via one of five options (qualifications/training plus experience or a submission under Option 5 Table 1 RG 105);
the RM’s qualifications/training and experience must be “relevant” to the general insurance services/products their role relates to; and
the licensee must ensure the combined knowledge and skills of its RMs cover all general insurance financial services and products it provides.

Recent Federal Court treatment illustrates that “competence” here is not a paper exercise: a licensee may fail s 912 A(1)(e) if it does not have sufficient RMs with the right expertise across its authorised representative network, and with sufficient time and processes to perform the role effectively. (Australian Securities and Investments Commission v Lanterne Fund Services Pty Limited [2024] FCA 353) paragraphs 38-39

To comply with the obligation under s 912A(1)(e) of the Act to maintain competence to provide financial services, a financial services licensee in Lanterne’s position should have sufficient responsible managers with the skills and experience in the financial services offered by its CARs and ARs and across the industries and businesses in which they operate, with sufficient time to conduct their role effectively. A licensee should have documented and implemented processes for assessing its responsible managers and for ensuring they remain appropriately qualified, including taking account of changes to the business over time.

Representatives: “competent” to provide the financial services

Separately, s 912A(1)(f) requires the licensee to ensure its representatives are adequately trained and are competent to provide the financial services covered by the licence.

The Court has indicated that s 912 A(1)(f), particularly when read with related general obligations, suggests an AFSL holder should have a continuing training programcalculated to produce competent representatives or maintain competence.

Also, “competence” can be relevant to the broader “efficiently, honestly and fairly” obligation: the Federal Court has described that obligation as connoting (among other things) competence in providing advice and in complying with statutory obligations, and has used language such as “capable, competent and adequate” when discussing “efficiency” (ibid Lanterne paragraphs 41-43)

To comply with the obligation under s 912A(1)(f) of the Act to ensure its representatives are adequately trained and are competent to provide the financial services, a financial services licensee in Lanterne’s position should establish a training and competency program and process which documents the skills and competencies required by its ARs to provide the authorised financial services, and includes a needs analysis which assesses each AR against the documented required skills and competencies. The licensee should develop and implement training programs, whether in-house or externally, which address the identified skills and competency needs, and which ensure those skills and competencies are maintained and kept up to date. A licensee should maintain a record of training and assess the effectiveness of the training at least annually.

In Lanterne (para 68) the court discussed the effect of the ‘representative competence’ obligation combined with the obligation on licensees to ensure that its representatives comply with financial services laws

It has been said that subsections (1)(ca) and (f), in combination, suggest that the holder of an AFSL should undertake a continuing training program that is calculated to produce competent representatives or maintain their level of competence

General insurance industry Codes and ‘competence’

General Insurance Code of Practice (GI Code)

The GI Code, requires subscribed insurers to:

use Employees, Distributors and Service Suppliers to provide services that match their experience (paragraphs 24 and 38a)
Employees, Distributors and Service Suppliers must receive appropriate education and training to provide the services competently (paragraphs 28 and 38b)

Insurance Brokers Code of Practice (Brokers Code)

The Brokers Code, requires NIBA members to:

ensure staff maintain and improve [our] competency through relevant qualifications, continued education and training. (para 3.1(a)(i))
before agreeing to act for a prospective client clearly state the extent of the services we are able to provide, including any limits on the insurance products we can arrange. For example, there may be limits due to our competency… (para 4.1(a)(iii))
only allow our employees, agents and representatives to provide services that match their expertise, skills, and experience (para 8.2(a)(i))
require all our employees, agents and representatives to receive appropriate education and training (para 8.2(a)(ii))

What do the ‘competence’ requirements mean, practically?

AFS licensed Underwriting Agencies, insurance brokers, delegated claims administrators, insurance claims managers, claimant intermediaries and insurers should:

have sufficient responsible managers with the skills and experience in the financial services offered by the Licensee, [and where relevant] its CARs and ARs, with sufficient time to conduct their role effectively;
have documented and implemented processes for assessing its responsible managers and for ensuring they remain appropriately qualified, including taking account of changes to the business over time;
establish a training and competency program and process which documents the skills and competencies required by its representatives to provide the authorised financial services, and includes a needs analysis which assesses each representative (staff and ARs) against the documented required skills and competencies;
develop and implement training programs, whether in-house or externally, which address the identified skills and competency needs, and which ensure those skills and competencies are maintained and kept up to date;
maintain a record of training and assess the effectiveness of the training at least annually (this is required under reg 7.6.04(1)(d));
have an effective and documented process for background checks and due diligence of representatives of prospective employees, CARs and ARs. The process should include recording all documentation, verifying all claims made (including education, qualifications and memberships of relevant bodies), obtaining police checks and conducting reference checks;
conduct ongoing checks of its appointed ARs, to ensure they remain appropriate while acting as ARs;
provide clear guidance and instructions to its employees, CARs and ARs about their obligations regarding compliance with the financial services laws. Generally this will be in the form of documented compliance measures comprising frameworks, policies, process, procedures, training and IT systems);
design and implement an effective system for monitoring and supervising its employees, CARs and ARs through a program of reviews and audits following a prescribed methodology. The frequency of audits should depend upon the risk assessment of each function, CAR and AR, with higher risk functions, CARs and ARs reviewed and audited more frequently;
have a system for responding to negative audit findings, incidents, complaints and breaches, which should include preparing a rectification plan where necessary. Performance against any rectification plan should be monitored by an independent specialist;
have processes in place to ensure its employees are complying with the financial services laws, including regular reviews, performance reviews and reports to management and the board identifying deficiencies and recommendations for remediation. There should also be an appropriate form of oversight over management and the responsible managers, ideally by the board of directors or an independent party;
in relation to human resources, have systems and processes to ensure it understands its human resource needs, and implement a plan to fulfill those needs, which is regularly reviewed (as part of meeting obligation s 912A(1)(d) of the Act to have available adequate resources to provide the financial services covered by the licence and to carry out supervisory arrangements);
in relation to human resources – have sufficient human resources covering its basic functions of risk and compliance (particularly to supervise and monitor employees and ARs); IT functions; financial management; and human resources. Absent internal capability, a licensee should obtain third-party specialist support. A licensee should have a documented performance management system, a staff training and development program, and a plan to deal with the loss of key persons; and
in relation to technological resources should: (a) document a technology resourcing plan based on an assessment of its hardware and software needs; (b) undertake a security assessment, including cyber security; (c) develop and implement a response to that assessment; (d) develop and implement a disaster recovery plan; (e) acquire and install necessary hardware and software relevant to its business operations and its number of employees; and (f) regularly review its IT requirements to ensure the resources remain adequate and up to date and that systems are appropriately upgraded.

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