More than a few times over the past year I have come across the cases where companies thought they were paying for legitimate ASIC licenses whereas in reality that was not the case. There appears to be several light fingered agents operating in the market (particularly, in Asian region) that “sell ASIC licences” at a discount fare.
As we all know, there is no such a thing as free lunch. Combination of words like “discounted and fast-track” license in top jurisdiction should have already raised your eyebrows.
First thing first, how do you confirm if the brokerage is authorized in Australia?
This simple guide will teach you how to check any broker’s license and understand what activities the broker is authorized to perform under it.
Step1: Go to ASIC register search and search for broker’s name or license number (if you know it).
If the search comes back with no results, it might be that the firm does not have an AFSL license on its own and is assigned as authorized representative under someone else. Just in case, search the registry again by selecting from the dropdown:
Step 2: Reading and understanding license permissions.
Once you have the search results you can view them online or save as a PDF. Apart from business registration address, service address, you also have a very important section named License Authorization Conditions.
“Make a Market”
Condition “Make a Market in financial products” is a key one that you should be looking at. This means that license holder is allowed to quote prices for listed financial products and execute clients’ orders. It is confusing as for most of european jurisdictions, market making means principal, or B book model where broker is allowed to take the other side of the client’s order and warehouse the risk on its own books. In many other jurisdictions, there is a license type for STP brokers (known as “matched principal” license under UK FCA) where broker is only allowed to pass through the risk to the counterparties. Under ASIC language, market making is not market making brokerage business model, it is simply to note that licensee is allowed to conduct a brokerage activity (price and execute clients).
“Deal in financial product” permission is often confused to be the permission that allows to execute clients’ trades. But its not the case. A license holder ‘deals’ in a financial product when they apply for or acquire a financial product or issue a financial product. It could be interpreted as: a license holder is permitted to sell and buy financial products.
It is also noted what type of clients could be serviced: retail, wholesale, or both.
Example 1: Wholesale only FX and derivatives broker
Let’s take a look at another example (see Example 2), where the license holder is not authorized to actually execute clients transactions. While the license authorized to “deal” in financial products for retail and wholesale clients, it is limited to financial advice and MDA (managed discretionary accounts, or money management activities). Do not be misled, this is not a brokerage license and could not be used to open trading accounts or pricing and executing client transactions.
Example 2. License Holder authorized to perform financial advice and MDA services for retail and wholesale clients
Step 3: Authorized Representatives.
For some AFSL license holders, there may be some names appearing in Representative section (see example 3).
Example 3. Authorized Representatives
So what is AFS Authorized Representatives under AFSL Licensee?
AFSL License holders may authorize individuals, bodies corporate, partnerships or group of individuals (corporates) that are trustees of a trust to be authorized representatives. Authorized Representatives can provide a specified financial service or services on behalf of the licensee, but their scope of services are limited by licensee’s license. Therefore, if licensee is not authorized to “make markets” (or, as we already learned, price and execute clients’ trades), authorized representative is not able to provides these either.
You will see permissions for an authorized representative in the registry as well (see Example 4)
Example 4. Authorized representative authorized to provide advice for financial products
Contradictory to the popular belief, getting a status of an authorized representative under AFSL licensee doesn’t make you a full fledged brokerage operation in Australia. Brokers need to make sure that they are properly authorized in Australia before they start promoting products to the clients. Regulator has taken numerous actions to prevent unauthorized operators from targeting clients during the recent years.
Here is an example of one of the recent violations:
Example 5. Violation report issued by Australian regulator.
Forewarned is forearmed. Hope this guide helps you navigate the complex world of licensed FX brokers in Australia. If you wish to learn more information about ASIC license, please DOWNLOAD a ASIC License Fact Sheet.
http://download.asic.gov.au/media/4028003/rg179-published-29-september-2016.pdf
