Implications of missing the boat

Many accountants will miss the regulator’s July 1 licensing deadline for a variety of reasons, but few understand the consequences, Grahame Evans and Greg Holman write.

Every accountant who provides advice on the establishment of SMSFs understands the significance of the date 1 July 2016, but few have given any thought to 1 July 2019, which is an equally important date.

From 1 July 2016, the accountants’ exemption, which has allowed accountants to advise on the establishment and closure of SMSFs without holding or being authorised under an Australian financial services licence (AFSL), will be removed, and on 1 July 2019 the transition framework that allows for a streamlined application process will be repealed.

In short, accountants who secure a limited licence by 1 July 2016 will be able to take advantage of transitional arrangements designed to make life easier for them while those who miss the deadline won’t be able to apply for a limited AFSL under the streamlining provisions. Rather the normal requirements under the Corporations Act will apply.

Under the streamlined transition framework, accountants only need to demonstrate they have the requisite knowledge and competence to provide the financial services covered by their licence and not the more arduous requirement to demonstrate they have the experience required to hold an AFSL. Furthermore, they’ll only be required to lodge an annual compliance certificate rather than undertake a comprehensive annual audit.

The significance of the second deadline is the standard licensing rules, which will apply to everyone after 1 July 2019, require licensees to prove they have three years of relevant experience over the past five years. Therefore, accountants who meet the initial deadline will automatically qualify come 1 July 2019. By missing the deadline, they miss the opportunity to get an important exemption.

The streamlining provisions are specifically for accountants who wish to hold their own AFSL, not those who are, or plan to become, an authorised representative of a licensee.

The transition framework was originally put in place because the Australian Securities and Investments Commission (ASIC) expected a large volume of accountants to apply for a limited or conditional licence, which would’ve placed an enormous strain on the regulator’s resources. The streamlining provisions were designed to speed up the application process by removing the need for ASIC to consider each individual accountant’s experience and capabilities.

Advice paralysis

For accountants who have no desire to apply for their own AFSL, but plan to obtain a limited authority from an existing AFSL, the most obvious repercussion is that they won’t be able to continue providing SMSF advice.If they miss the deadline, for whatever reason, it’s not the end of the world.

They can still enrol in a Regulatory Guide (RG) 146 program and become an authorised representative of an AFSL holder.

However, if they change their mind and decide to apply for a full AFSL down the track, ASIC will closely examine whether they have the necessary skills and experience, including three years of relevant experience over the past five years.

Missing ASIC’s 1 July 2016 deadline is likely to cause significant disruption to accountants who are used to providing SMSF advice.

While they can continue providing traditional tax and accounting advice, they must immediately stop providing SMSF and class-of-product advice until they become appropriately licensed.

The problem is the line between factual information and advice is easily blurred and commonly overstepped. The moment an accountant shares their professional opinion chances are they’ve provided advice by legal definition.
For example, an accountant can inform a client about what their concessional contribution cap is for the 2016 financial year, but if they tell the client to contribute extra to super – which coincidently is universally accepted as a good idea – it may constitute advice.

It’s difficult to see how unlicensed accountants can continue giving their opinion post 1 July 2016 without breaking the law and it’s even harder to imagine they’ll be able to automatically stop.

This is especially scary given ASIC has reportedly already begun a nationwide shadow shopping survey in a bid to catch out accountants who aren’t complying with their new licensing obligations.

An obvious solution for an unlicensed accountant (apart from rushing out and getting licensed) is to enter into a formal referral arrangement with a financial adviser. But even then it’s complicated.

For starters, there’s an important but subtle distinction between referring and arranging, and one carries stiff penalties.

A straight referral to a financial adviser is acceptable provided any referral fees or benefits are disclosed. However, if an accountant receives a fee of any kind, this is typically indicative of arranging.

Accountants need to be careful they’re not deemed to be arranging a highly probable transaction, such as the sale of financial product, because this may constitute financial product advice, which requires them to be licensed.

Ahead of 1 July 2016, accountants should review all formal and informal referral arrangements to ensure they’re not in danger of providing unlicensed financial services advice.

To complicate matters further, referring a client to a financial adviser after 1 July 2016 may also impact on the long-term growth and sustainability of an accounting practice.

Right now accountants can recommend and establish an SMSF without being licensed and then, if requested, choose to refer a client to a financial adviser for more detailed advice around investments and insurance.

But from 1 July 2016, unlicensed accountants will only be able to establish an SMSF on a client’s or licensed adviser’s instruction. If they do that, they should keep a client file note to prove they did not provide any advice. This is a layer of compliance accountants have never had to face before and most suburban practices aren’t equipped to deal with the additional paperwork.

In ASIC’s new regulatory world the once simple task of establishing an SMSF will be considerably more lengthy and complex.

Consider this scenario.

A couple approach their accountant about whether they should set up an SMSF.

The accountant isn’t licensed to provide financial advice so can’t even have a conversation to determine if an SMSF is an appropriate solution.

He refers them to a financial adviser down the road.

The adviser takes the couple through the discovery process to determine if an SMSF is the right structure given their personal circumstances, needs and objectives. The adviser recommends they establish an SMSF.

At this point the client has two options. They can take that recommendation back up the road to their accountant and ask the accountant to set up an SMSF. After the SMSF is established they can go back down the road and ask the adviser to develop and implement an appropriate investment strategy. Alternatively they can ask the adviser to take care of everything.

If that same scenario played out today, the accountant would determine if an SMSF was appropriate and, if so, set one up.

Even if they referred the client to an adviser for investment and insurance advice, they’d still be regarded as a superannuation and tax expert, and they’d still control the client relationship.

But in an increasingly competitive and fast-paced world, it is unlikely busy, time-poor people will opt for the inconvenience of the back-and-forth option knowing there are many capable advisers and accountants who can manage the entire process.

From a business perspective, accountants who miss the deadline also risk losing valuable revenue and potentially the client relationship.

Keep calm, but not too calm

Fortunately, there’s still time for accountants to get RG 146 qualified and find the appropriate licensing solution for them.The streamlining provisions embedded in the government’s new regulatory framework are a strong incentive for accountants who want to gain a limited AFSL to act now.

Having said that, only a fraction of accountants to date have chosen to apply for their own limited licence, suggesting the bulk will seek to partner with a well-resourced and experienced dealer group.

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