Australian Financial Services Licences – Does Your Charity Need One, and is your Charity Otherwise Compliant?

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By John Vaughan-Williams, Lawyer

In what is an increasingly commercial environment for charities, many organisations are now engaging in commercial activities in order to fund their charitable purposes. These commercial activities can include social enterprises, ethical investment, and commercial fundraising.

Against this changing background of the sector, charities should consider whether any of their commercial activities are regulated, in particular, whether any provisions of the Corporations Act 2001 (Cth) (Corporations Act) apply.

Financial Products

It may surprise many people that some commercial activities of charities would, on their face, be considered to be “financial products” under the Corporations Act. Generally, an organisation which offers a financial product will need to obtain an Australian Financial Services Licence (AFSL), unless an exemption applies.

In particular, some of the activities conducted by charities are considered to be either “debentures” or “managed investment schemes”, both of which are types of financial products.

Examples of activities run by charities which would be considered to be financial products are:

  1. the solicitation of secured loans, which are paid back with interest (considered to be debentures); and
  2. allowing numerous investors to purchase smaller “loan notes” in a charity, which are paid back with interest (considered to be debentures and possibly a managed investment scheme).

These types of arrangements are most common in organisations which purchase real property for their charitable purposes. These arrangements allow investors to support a charitable cause, while still obtaining a return on their capital.

Debentures and Managed Investment Schemes

Apart from licensing requirements, there are also several provisions of the Corporations Act which apply specifically to the issuing of debentures and the running of managed investment schemes. These requirements are all onerous.

The Corporations Act requires complex disclosure documents to be prepared for these arrangements. In some instances, such managed investment schemes are required to be registered, which then engenders a framework of governance requirements, such as requirements surrounding governing documents and meetings of the scheme.

Australian Financial Services Licences

The process of obtaining an AFSL is not easy, and organisations which obtain an AFSL need to then act in accordance with a complex compliance framework. Not only is the application process difficult, but some charities may not even be able to satisfy the requirements to obtain an AFSL, due to the requirements regarding the experience of responsible persons.

While some organisations may have the infrastructure and resources to obtain and maintain an AFSL, for other charities, it simply may not be achievable.

Charitable Investment Fundraisers

Charities which issue debentures or run managed investment schemes are referred to in the law as “charitable investment fundraisers”. Since the Australian Charities and Not-for-profits Commission (ACNC) was established in 2012, an organisation must be registered with the ACNC to be considered a charitable investment fundraiser.

The impact and extent of charitable investment fundraisers in Australia is clear. In a consultation paper issued by ASIC, it was estimated that charitable investment fundraisers hold investments of over $7 billion. Some individual charitable investment fundraisers were estimated to alone hold hundreds of millions of dollars in investment funds.

Exemptions for Charitable Investment Fundraisers

Perhaps in recognition of the extent of charitable investment fundraisers, as well as the burdensome nature of the regulation of financial products, there have been certain exemptions to the relevant Corporations Act provisions in place for charities for several years.

The now repealed Australian Securities and Investments Commission (ASIC) class order 02/184 – charitable investment schemes fundraising – issued in 2002, included the following exemptions for charitable investment fundraisers, if certain requirements were met:

  1. a) exemptions from the application of the debenture, managed investment scheme and fundraising provisions of the Corporations Act; and
  2. b) exemption from the requirement to hold an AFSL, if the only financial products issued were debentures and/or managed investment schemes.

In order to benefit from these exemptions, the requirements for charities included applying to ASIC, preparing an “identification statement” (a much less onerous disclosure statement than for regulated investment schemes), and making clear to investors that the product is not fully regulated by ASIC.

Changes to the Law

In order to align the Corporations Act regulation of charitable investment fundraisers with other government regulators, such as the Australian Prudential Regulation Authority, the legal framework regarding financial products offered by charities is changing.

These changes are significant for the charitable sector, because they may result in some charities now requiring an AFSL when they did not previously. Some of the changes to the law have already occurred, whereas others are occurring over the next year.

ASIC Corporations (Charitable Investment Fundraising) Instrument 2016/813 (New Instrument) is the instrument which has brought about these changes to the law.
ASIC, in late 2016, issued the updated Regulatory Guide 87 – Charitable schemes and school enrolment deposits – which sets out a summary of the application of this area of law to charities, as well as outlining what changes are occurring in the future.

Retained Exemptions

The New Instrument has retained the exemptions for charitable investment fundraisers from:

  1. registering their managed investment scheme (thereby not needing to follow the provisions of the Corporations Act which apply only to registered schemes); and
  2. following the disclosure provisions of the Corporations Act regarding debentures.


  1. Identification Statements

As previously mentioned, charities are required to lodge with ASIC an “identification statement”, which is approved by ASIC, to benefit from the exemptions to regulation of debentures and managed investment schemes. This requirement is maintained under the New Instrument. However, the New Instrument has increased the amount of information that must be included in the identification statement, for ASIC’s purposes. Charities with pre-existing identification statements have been able to rely on them until 31 March 2017, at which point they were required to lodge new identification statements, compliant with the New Instrument. All charities which are currently relying on exemptions, without having lodged an identification statement which is compliant with the New Instrument, should seek legal advice.

  1. Change regarding Short-term Investments

The first legal change created by the New Instrument is that charitable investment fundraisers are no longer permitted to issue at-call or short-term investments.
A short-term investment is one which must be repaid within 31 days.
This change is already in effect, beginning from 1 January.

  1. Primary Change – AFSL Requirements

Arguably the most important change brought about by the New Instrument relates to the requirement for some charitable investment fundraisers to obtain an AFSL. This change does not come into effect until 1 January 2018.

From 1 January 2018, a charitable investment fundraiser will only be exempt from obtaining an AFSL if it is considered a “wholesale charitable investment fundraiser”.

Wholesale or Retail?

The terms “wholesale” and “retail” are used in the Corporations Act to differentiate between different types of clients, and carry the same meaning within the New Instrument.

The main definition of a wholesale client is one who has:

  1. net assets of at least $2.5 million; and
  2. has had gross income of at least $250,000 over the last two years, and
  3. has provided a certificate from an accountant verifying at least one of these two criteria. A client who does not satisfy the definition of a wholesale client is a retail client.

Wholesale Charitable Investment Fundraiser

A wholesale charitable investment fundraiser is one which does not offer its financial products to non-associated retail clients.

The New Instrument sets out a number of definitions of who is associated with a charitable investment fundraiser, with some examples including:

  • a person or body who constituted or controls the charity;
  • another organisation controlled by the charity, and any employees of it; and
  • another charity with similar charitable purposes.

Impact of New Instrument

This change regarding AFSLs for charitable investment fundraisers could have a significant impact on the sector, for previously exempt organisations. While some charitable investment fundraisers are large, acquiring investments totalling millions of dollars, other charities may be acquiring investments which are much smaller.

These smaller organisations now may require AFSLs in order to run their investment fundraisers. In particular, an AFSL will be required to offer any investment to a non-associated retail client; there does not need to be permanence to the offers.

All charitable investment fundraisers should seriously consider whether they satisfy the AFSL exemption under the New Instrument, particularly if they have been previously relying on the exemption. If charities are uncertain about this, then they should seek professional advice.

To benefit from any of the exemptions for charities regarding debentures, managed investment schemes and AFSLs, charities need to have lodged an identification statement, which is compliant with the New Instrument, with ASIC. Charities should also seek legal advice if they are uncertain how to draft or what to include in an identification statement.

For further information, please do not hesitate to contact us.

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