ASIC RG 166 — ASIC Regulatory Guide – RG 166 AFS licensing: Financial requirements

Page 1 REGULATORY GUIDE 166 AFS licensing: Financial requirements September 2023 About this guide This guide sets out the financial requirements you must meet as the holder of an AFS licence. The requirements vary depending on the financial products and services you offer. If you are a body regulated by the Australian Prudential Regulation Authority (APRA), as defined in s3(2) of the Australian Prudential Regulation Authority Act 1998, and are not required to comply with s912A(1)(d) of the Corporations Act, this guide does not apply to you. Page 2 REGULATORY GUIDE 166: AFS licensing: Financial requirements © Australian Securities and Investments Commission September 2023 Page 2 About ASIC regulatory documents In administering legislation ASIC issues the following types of regulatory documents. Consultation papers: seek feedback from stakeholders on matters ASIC is considering, such as proposed relief or proposed regulatory guidance. Regulatory guides: give guidance to regulated entities by:  explaining when and how ASIC will exercise specific powers under legislation (primarily the Corporations Act)  explaining how ASIC interprets the law  describing the principles underlying ASIC’s approach  giving practical guidance (e.g. describing the steps of a process such as applying for a licence or giving practical examples of how regulated entities may decide to meet their obligations). Information sheets: provide concise guidance on a specific process or compliance issue or an overview of detailed guidance. Reports: describe ASIC compliance or relief activity or the results of a research project. Document history This guide was issued in September 2023 and is based on legislation and regulations as at the date of issue. In June 2025, we updated references to reflect changes to Regulatory Guide 1 Applying for and varying an AFS licence (RG 1) and related guidance. In March 2026, we made amendments to reflect renamed Regulatory Guide 168 Product Disclosure Statements: Disclosure and other obligations (RG 168), remove out-of-date information and reflect current style and drafting practices. In October 2026, we made minor updates to reflect increases to the net tangible assets requirement for responsible entities, IDPS operators and corporate directors of retail CCIVs that apply from 1 July 2027. Previous versions:  Superseded Regulatory Guide 166, issued December 2009, reissued May 2010, November 2012, June 2013, November 2013, July 2015, September 2017, April 2021 and July 2022  Superseded Regulatory Guide 239 Retail OTC derivative issuers: Financial requirements, issued July 2012, incorporated into Regulatory Guide 166 in November 2012 and withdrawn  Superseded Policy Statement 166, issued 28 November 2001, reissued June 2007, rebadged as a regulatory guide 5 July 2007 Disclaimer This guide does not constitute legal advice. We encourage you to seek your own professional advice to find out how the Corporations Act and other applicable laws apply to you, as it is your responsibility to determine your obligations. Examples in this guide are purely for illustration; they are not exhaustive and are not intended to impose or imply particular rules or requirements. Page 3 REGULATORY GUIDE 166: AFS licensing: Financial requirements © Australian Securities and Investments Commission September 2023 Page 3 Contents A Overview ........................................................................................... 5 Who this guide is for .......................................................................... 5 What are the financial requirements? ................................................ 7 How to comply with the financial requirements ................................. 8 How to apply for relief ........................................................................ 9 How to use this guide ...................................................................... 10 B The base level financial requirements......................................... 14 How to comply ................................................................................. 14 The solvency and positive net assets requirement ......................... 15 The cash needs requirement ........................................................... 15 The audit requirement ...................................................................... 24 C The SLF requirement: Licensees that hold client money or property .......................................................................................... 27 The SLF requirement ....................................................................... 27 D The ASLF requirement: Licensees that transact with clients as principal .......................................................................................... 29 The ASLF requirement .................................................................... 29 When does the ASLF requirement apply?....................................... 30 How is ASLF calculated? ................................................................. 30 What are the reporting triggers? ...................................................... 32 Purpose of the ASLF requirement ................................................... 33 E Definitions for calculating financial requirements ..................... 36 Summary of definitions .................................................................... 36 General definitions for all AFS licensees ......................................... 38 Specific definitions for responsible entities, corporate directors of retail CCIVs, IDPS operators, and licensed custodial or depository service providers .............................................................................. 58 Specific definitions for retail OTC derivative issuers in calculating NTA ................................................................................ 67 Key terms ............................................................................................... 70 Related information ............................................................................... 78 Appendix 1: Market and clearing participants ................................... 81 Financial requirements under market integrity rules ....................... 81 How will we assess the adequacy of a licensed market or CS facility’s financial requirements? ................................................ 82 When will we assess or review adequacy? ..................................... 83 Which markets and CS facilities currently have financial requirements that are an adequate substitute? ............................... 83 How does our policy affect your AFS licence? ................................ 84 What if the requirements cease to be adequate? ............................ 85 Appendix 2: Responsible entities ........................................................ 86 What requirements apply? ............................................................... 86 The tailored cash needs requirement .............................................. 87 The tailored audit requirement ......................................................... 88 The NTA requirement ...................................................................... 89 Appendix 3: Investor directed portfolio services operators ............. 95 What requirements apply? ............................................................... 95 The tailored cash needs requirement .............................................. 96 The tailored audit requirement ......................................................... 97 The NTA requirement ...................................................................... 98 Page 4 REGULATORY GUIDE 166: AFS licensing: Financial requirements © Australian Securities and Investments Commission September 2023 Page 4 Appendix 4: Licensed custodial or depository service providers ... 104 What requirements apply? ............................................................. 104 The tailored cash needs requirement ............................................ 105 The tailored audit requirement ....................................................... 106 The NTA requirement .................................................................... 107 Appendix 5: Trustee companies providing traditional services .... 113 What requirements apply? ............................................................. 113 The NTA requirement .................................................................... 113 Appendix 6: Issuers of margin lending facilities ............................. 115 What requirements apply? ............................................................. 115 The NTA requirement .................................................................... 115 ASLF requirement for non-standard margin lending facilities ....... 116 Appendix 7: Foreign exchange dealers ............................................ 118 What requirements apply? ............................................................. 118 Choosing between the ASLF requirement and the capital requirement .................................................................................... 118 Appendix 8: Retail OTC derivative issuers ....................................... 121 What requirements apply? ............................................................. 121 The tailored cash needs requirement ............................................ 121 The tailored audit requirement ....................................................... 123 The NTA requirement .................................................................... 124 What are the reporting triggers? .................................................... 125 Appendix 9: CSF intermediaries ........................................................ 129 What requirements apply? ............................................................. 129 The tailored cash needs requirement ............................................ 129 The tailored audit requirement ....................................................... 131 Appendix 10: Corporate directors of retail CCIVs ........................... 133 What requirements apply? ............................................................. 133 The tailored cash needs requirement ............................................ 134 The tailored audit requirement ....................................................... 135 The NTA requirement .................................................................... 136 Page 5 REGULATORY GUIDE 166: AFS licensing: Financial requirements © Australian Securities and Investments Commission September 2023 Page 5 A Overview Key points This guide explains the financial requirements that you must meet as the holder of an Australian financial services (AFS) licence. These requirements vary in their application depending on the nature, scale and complexity of your financial services business. The requirements do not apply to you if you are a body regulated by the Australian Prudential Regulation Authority (APRA): see RG 166.4–RG 166.6. If you are prudentially regulated overseas, you can apply to ASIC for relief from the requirements: see RG 166.7–RG 166.10. Who this guide is for RG 166.1 The AFS licensee obligations and our licence conditions apply whether you are a natural person, a partnership, one of several trustees, or a body corporate. For partnerships and trustees, it is sufficient if any of the partners complies under s761F(1)(a) or any of the trustees under s761FA(3)(a) of the Corporations Act 2001 (Corporations Act). Note: In this guide, references to sections (s), chapters (Chs) and parts (Pts) are to the Corporations Act, unless otherwise specified. References to regulations (regs) are to the Corporations Regulations 2001 (Corporations Regulations), unless otherwise specified. RG 166.2 This guide applies to all AFS licensees, except: (a) bodies regulated by APRA that are not subject to s912A(1)(d) (see RG 166.4–RG 166.6); (b) bodies subject to an alternative form of foreign prudential regulation— where we are satisfied that the foreign prudential regulation appropriately addresses the licensee obligations for financial resources and risk management (see RG 166.7–RG 166.10); and (c) market and clearing participants if the financial requirements of the relevant market or clearing and settlement (CS) facility are an adequate substitute (see Appendix 1). Note: The guidance on adequate arrangements to manage risk at RG 166.21 applies to market and clearing participants. RG 166.3 The financial requirements vary in their application depending on the nature, scale and complexity of your financial services business. See Table 2 at the end of this section for an overview of how the financial requirements apply to particular categories of AFS licensee. Page 6 REGULATORY GUIDE 166: AFS licensing: Financial requirements © Australian Securities and Investments Commission September 2023 Page 6 Bodies regulated by APRA RG 166.4 The regulatory regime generally does not subject bodies regulated by APRA to requirements under the Corporations Act for resources and risk management systems: see s912A(1)(d) and 912A(1)(h). RG 166.5 If you are a body regulated by APRA, and are not required to comply with s912A(1)(d), we will not require you to comply with our financial requirements. However, as a condition of your AFS licence, you must remain at all times a body regulated by APRA and your auditor must confirm this to ASIC annually on a positive assurance basis, and at any other time that we request: see Pro Forma 209 Australian financial services licence conditions (PF 209), condition 27. RG 166.6 The AFS licensee obligations and our licence conditions also apply if you are a related body corporate of a body regulated by APRA, but are not yourself a body regulated by APRA. We note that APRA regulation focuses on the capacity of the body it regulates to meet financial commitments to relevant parties and applies requirements to other group members only in so far as relevant for that purpose. The financial capacity of a subsidiary of an Australian authorised deposit-taking institution (Australian ADI) may not, for example, be material to APRA’s purposes in regulating the ADI. Foreign prudentially regulated licensees RG 166.7 We consider that recognition of adequate prudential regulation by APRA might equally be applied to prudential regulation by some foreign regulators. If we can be satisfied that there is an alternative form of foreign prudential regulation that appropriately addresses the AFS licensee obligations for financial resources and risk management, we will seek to avoid regulatory duplication. RG 166.8 If you are prudentially regulated overseas, you can apply to ASIC for relief from the financial requirements. We will give this relief on a case-by-case basis if we are satisfied that you are regulated in a way that is comparable to regulation by APRA for entities of that kind (e.g. a general insurer or deposit-taking institution). If you are a deposit-taking institution, when we consider comparability, we will take into account the extent to which the relevant foreign prudential regulation is consistent with the Basel Committee guidelines for regulating deposit-taking institutions. RG 166.9 If your application does not contain all relevant information, we will generally refuse it. In limited circumstances, we may consider delaying a decision on your application until you provide more information. RG 166.10 If we decide not to impose financial requirements on you, you must still comply with the other AFS licensee obligations. Page 7 REGULATORY GUIDE 166: AFS licensing: Financial requirements © Australian Securities and Investments Commission September 2023 Page 7 What are the financial requirements? RG 166.11 As the holder of an AFS licence, you have certain obligations under the Corporations Act. For example, you must: (a) have available adequate financial resources to provide the financial services covered by your AFS licence and to carry out supervisory arrangements (see s912A(1)(d)); (b) do all things necessary to ensure that the financial services covered by your AFS licence are provided efficiently, honestly and fairly (see s912A(1)(a)); (c) have adequate risk management systems (see s912A(1)(h)); and (d) comply with the conditions on your AFS licence (see s912A(1)(b)), including the prescribed conditions under reg 7.6.04. Note: We ask questions and may also request supporting documents in the licensing process to help us decide if an applicant is likely to meet these obligations: see Regulatory Guide 1 Applying for and varying an AFS licence (RG 1). RG 166.12 This guide explains the financial requirements that we impose on AFS licensees to meet their obligations under the Corporations Act. Table 1 summarises the financial requirements. RG 166.13 We impose these financial requirements to help ensure that: (a) you have sufficient financial resources to conduct your financial services business in compliance with the Corporations Act (including carrying out supervisory arrangements); (b) there is a financial buffer that decreases the risk of a disorderly or non- compliant wind-up if the business fails; and (c) there are incentives for your owners to comply through risk of financial loss. Table 1: Summary of the financial requirements for AFS licensees Financial requirement Who the requirement applies to Base level financial requirements:  the solvency and net assets requirement;  the cash needs requirement; and  the audit requirement. The base level financial requirements apply to all licensees, except those listed in RG 166.2. The base level financial requirements are explained in Section B. Note 1: If you are granted a limited AFS licence, the audit requirement will not apply to you if you are only licensed to provide one or more limited financial services and you do not deal with money to which Div 2 of Pt 7.8 of the Corporations Act applies: see reg 7.8.12A. You will be able to lodge a compliance certificate rather than have to undertake an annual audit: see Limited financial services on the ASIC website for more information. However, you will still need to lodge financial statements (as required by s989B(1) and 989B(2)). Note 2: ‘Tailored’ base level financial requirements apply to some AFS licensees: see Appendices 1–10. Table 2 at the end of this section provides an overview of how the financial requirements apply to particular categories of AFS licensee. Page 8 REGULATORY GUIDE 166: AFS licensing: Financial requirements © Australian Securities and Investments Commission September 2023 Page 8 Financial requirement Who the requirement applies to Additional requirements:  the surplus liquid funds (SLF) requirement; and  the adjusted surplus liquid funds (ASLF) requirement. The SLF requirement applies to licensees that hold client money or property: see Section C. The ASLF requirement applies to licensees that transact with clients as principal: see Section D. Note: Retail over-the-counter (OTC) derivative issuers and foreign exchange dealers that elect to meet a capital requirement generally do not need to meet the ASLF requirement: see Appendices 7–8. RG 166.14 In setting financial requirements, we seek to set minimum standards that are framed as clearly and simply as possible so as to provide certainty. We seek to avoid any: (a) unreasonable burden in maintaining particular levels of assets or in reporting; and (b) unjustifiable barriers to market entry for providing different kinds of financial services. RG 166.15 ASIC is not a prudential regulator. Therefore, our financial requirements do not seek to prevent AFS licensees from: (a) becoming insolvent; or (b) failing because of poor business models or cash flow problems. How to comply with the financial requirements RG 166.16 We generally apply our financial requirements by using ASIC’s statutory power to modify Pt 7.6, or by AFS licence conditions. PF 209 sets out our standard licence conditions, including licence conditions for financial requirements. The financial requirements operate in this way: (a) More than one requirement can apply to you—if so, you have to comply with each of them. (b) If you are required to have assets to meet one requirement, you can also count those assets for another applicable requirement. (c) You must monitor your compliance with each of your obligations and be satisfied that you are continuously complying with all your obligations (including any requirements in Appendices 1–10 that apply to you). (d) If you become aware that a reportable situation may have arisen, or is likely to arise, in relation to a financial requirement, you must notify ASIC on the matter under s912DAA. Note: For further guidance on notifying ASIC of reportable situations, see Regulatory Guide 78 Breach reporting by AFS licensees and credit licensees (RG 78). Page 9 REGULATORY GUIDE 166: AFS licensing: Financial requirements © Australian Securities and Investments Commission September 2023 Page 9 RG 166.17 You must comply with any requirements applying to you via our modification of Pt 7.6 and/or your AFS licence conditions: see s912A(1)(b) and 912A(1)(c). Meeting the financial requirements will help to ensure that you have adequate financial resources as required by s912A(1)(d) and adequate risk management systems as required by s912A(1)(h). RG 166.18 This guide is not designed to ensure that you will be able to compensate clients if you breach the AFS licensee obligations in Ch 7. In developing this guide, we have been mindful that there are separate, specific obligations to have compensation arrangements under s912B. Under s912B, a licensee must have compensation arrangements that comply with requirements in any regulations, or requirements, made by ASIC. RG 166.19 Meeting the financial requirements will also contribute to your continuing capacity to meet financial obligations to clients. However, it is not the focus of this guide to protect clients against credit risk. Note: For a list of key relevant regulatory guides setting out other AFS licensee obligations, see ‘Related information’. Managing financial risk RG 166.20 We set minimum financial requirements to promote appropriate financial risk management, taking into account the nature, scale and complexity of an AFS licensee’s business. While our requirements are not aimed at preventing licensee failure, they are intended to help ensure that cash shortfalls do not put compliance with the licensee obligations at risk. RG 166.21 To satisfy your obligation under s912A(1)(h), we expect your risk management systems to specifically deal with the risk that your financial resources will not be adequate to ensure that you are able to carry on your business in compliance with the AFS licensee obligations, or to wind up your business in an orderly manner. Note: For further guidance about risk management systems, see Regulatory Guide 104 AFS licensing: Meeting the general obligations (RG 104). How to apply for relief RG 166.22 To apply for relief from the financial requirements, please follow these steps: (a) include with your AFS licence application, request for variation of licence, or request for exemption from or modification of a requirement, a submission for ASIC not to impose its standard licence conditions about financial requirements; (b) ensure that your application complies with Regulatory Guide 51 Applications for relief (RG 51); and Page 10 REGULATORY GUIDE 166: AFS licensing: Financial requirements © Australian Securities and Investments Commission September 2023 Page 10 (c) accurately set out all information that may be relevant to your application, including details, if relevant, about foreign regulatory arrangements. Note: For more information about applying for relief, see How to apply for relief on the ASIC website. How to use this guide RG 166.23 As an AFS licensee, you must meet the financial requirements explained in Sections B–D of this guide (except for licensees listed in RG 166.2)—that is, the base level financial requirements, as well as the SLF and ASLF requirements (if applicable). RG 166.24 In addition, certain categories of AFS licensee must meet ‘tailored’ and/or additional financial requirements that reflect the particular financial products and services offered: see Appendices 1–10. Different financial services activities mean that different financial requirements apply. The categories of licensee for which tailored or additional financial requirements apply are: (a) market and clearing participants (see Appendix 1); (b) responsible entities (see Appendix 2); (c) investor directed portfolio services (IDPS) operators (see Appendix 3); (d) licensed custodial or depository service providers (see Appendix 4); (e) trustee companies providing traditional services (see Appendix 5); (f) issuers of margin lending facilities (see Appendix 6); (g) foreign exchange dealers (see Appendix 7); (h) retail OTC derivative issuers (see Appendix 8); (i) crowd-sourced funding (CSF) intermediaries (see Appendix 9); and (j) corporate directors of retail corporate collective investment vehicles (CCIVs) (see Appendix 10). Note: AFS licensees authorised to operate the business and conduct the affairs of a wholesale CCIV must still meet the base level financial requirements in Section B. RG 166.25 If your AFS licence authorises you for any one of the types of financial products or services covered by Appendices 1–10, you must meet a combination of the standard financial requirements in Sections B–D, as well as the tailored and additional requirement(s) explained in the relevant appendix. The appendices explain, for particular categories of licensee, which ‘standard’ financial requirements apply and which ‘tailored’, or additional, financial requirements apply. Page 11 REGULATORY GUIDE 166: AFS licensing: Financial requirements © Australian Securities and Investments Commission September 2023 Page 11 RG 166.26 Depending on the types of financial products and services you offer, more than one set of financial requirements may apply to you. If this is the case, you need to meet all applicable requirements. There is no need to hold separate assets to meet each requirement and you can count the same assets to meet multiple requirements, except where provided otherwise. RG 166.27 Table 2 summarises the structure of this guide and how the requirements might apply to you. The additional requirements for each category of AFS licensee are set out in Sections C–D and the relevant appendix. You must meet the requirements in Table 2 at all times while you hold an authorisation for the relevant financial products and services, even during periods where you are not actively offering that product or service. Revisions in this update of RG 166 RG 166.28 This update of RG 166 includes minor changes to reflect increases to the net tangible assets (NTA) requirement for responsible entities, IDPS operators and corporate directors of retail CCIVs that apply from 1 July 2027. Page 12 REGULATORY GUIDE 166: AFS licensing: Financial requirements © Australian Securities and Investments Commission September 2023 Page 12 Table 2: What base level and additional requirements apply? Category of AFS licensee Base level: Solvency and positive net assets requirement Base level: Cash needs requirement Base level: Audit requirement Additional: NTA requirement Additional: SLF requirement Additional: ASLF requirement All AFS licensees except bodies regulated by APRA and others listed in RG 166.2: see Sections B–D Yes Yes Yes1 Yes, if required in one of Appendices 1–8 or 10 Yes, if holding client money or property valued at $100,000 or more Yes, if transacting with clients as principal2 Market and clearing participants: see Appendix 1 The financial requirements do not apply if the financial requirements of the relevant market or CS facility are an adequate substitute. Responsible entities: see Appendix 2 Yes Yes, tailored Yes, tailored Yes Yes, if holding client money or property valued at $100,000 or more Yes, if transacting with clients as principal IDPS operators: see Appendix 3 Yes Yes, tailored Yes, tailored Yes Yes, if holding client money or property valued at $100,000 or more Yes, if transacting with clients as principal Licensed custodial or depository service providers: see Appendix 4 Yes Yes, tailored Yes, tailored Yes, depending on the nature of your business Yes, if holding client money or property valued at $100,000 or more Yes, if transacting with clients as principal Trustee companies providing traditional services: see Appendix 5 Yes Yes Yes Yes Yes, if holding client money or property valued at $100,000 or more Yes, if transacting with clients as principal Page 13 REGULATORY GUIDE 166: AFS licensing: Financial requirements © Australian Securities and Investments Commission September 2023 Page 13 Category of AFS licensee Base level: Solvency and positive net assets requirement Base level: Cash needs requirement Base level: Audit requirement Additional: NTA requirement Additional: SLF requirement Additional: ASLF requirement Issuers of margin lending facilities: see Appendix 6 Yes Yes Yes Yes Yes, if holding client money or property valued at $100,000 or more Yes, if title to the security provided for the loan passes away from the client, or otherwise transacting with clients as principal Foreign exchange dealers: see Appendix 7 Yes Yes Yes No Yes, if holding client money or property valued at $100,000 or more Yes, you can choose to comply with the ASLF requirement or a capital requirement Retail OTC derivative issuers: see Appendix 8 Yes Yes, tailored Yes, tailored Yes, this replaces the ASLF requirement Yes, if holding client money or property valued at $100,000 or more No CSF intermediaries: see Appendix 9 Yes Yes, tailored Yes, tailored No, but an NTA requirement may apply if you hold other licence authorisations Yes, if holding client money or property valued at $100,000 or more Yes, if transacting with clients as principal Corporate directors of retail CCIVs: see Appendix 10 Yes Yes, tailored Yes, tailored Yes Yes, if holding client money or property valued at $100,000 or more Yes, if transacting with clients as principal 1 If you are granted a limited AFS licence, the audit requirement will not apply to you if you are only licensed to provide one or more limited financial services and you do not deal with money to which Div 2 of Pt 7.8 of the Corporations Act applies: see reg 7.8.12A. You will be able to lodge a compliance certificate rather than have to undertake an annual audit: see Limited financial services on the ASIC website for more information. However, you will still need to lodge financial statements (as required by s989B(1) and 989B(2)). 2 OTC retail derivative issuers and foreign exchange dealers electing to meet a capital requirement generally do not need to meet the ASLF requirement. Page 14 REGULATORY GUIDE 166: AFS licensing: Financial requirements © Australian Securities and Investments Commission September 2023 Page 14 B The base level financial requirements Key points The base level financial requirements apply to all AFS licensees except bodies regulated by APRA and others listed in RG 166.2. As an AFS licensee, you must meet the following base level financial requirements: • the solvency and positive net assets requirement (see RG 166.32– RG 166.34); • the cash needs requirement (see RG 166.35–RG 166.61); and • the audit requirement (see RG 166.62–RG 166.68). Some AFS licensees may have to comply with additional requirements that reflect specific business risks: see Table 2 in Section A. We expect that most small business licensees that do not hold client money or property over $100,000 will only need to comply with the base level financial requirements to meet their AFS licence conditions. How to comply RG 166.29 You can only comply with your obligations as an AFS licensee if you have the resources, including financial resources, to do so. The financial resources you have must be enough to cover any risks your business faces that may affect your cash position and that it is reasonable for you to plan to manage. RG 166.30 As an AFS licensee, you must meet the following base level financial requirements: (a) The solvency and positive net assets requirement—At all times you must be solvent (i.e. be able to pay all your debts as and when they become due and payable) and have total assets that exceed total liabilities (as shown in your most recent annual balance sheet lodged with ASIC), and at all times have no reason to suspect that total assets would no longer exceed total liabilities on a current balance sheet. Note: If you have more liabilities than assets, you can apply an alternative test. You can calculate on the basis of adjusted assets and adjusted liabilities as defined in Section E. For example, this may apply to you if you rely on an undertaking from an eligible provider such as an Australian ADI. (b) The cash needs requirement—You must have sufficient resources to meet your anticipated cash flow expenses. (c) The audit requirement—You must include information about your compliance with the financial requirements in your audit report under s989B(3). Note: If you are granted a limited AFS licence, the audit requirement will not apply to you if you are only licensed to provide one or more limited financial services and you Page 15 REGULATORY GUIDE 166: AFS licensing: Financial requirements © Australian Securities and Investments Commission September 2023 Page 15 do not deal with money to which Div 2 of Pt 7.8 of the Corporations Act applies: see reg 7.8.12A. You will be able to lodge a compliance certificate rather than have to undertake an annual audit. See Limited financial services on the ASIC website for more information. However, you will still need to lodge financial statements (as required by s989B(1) and 989B(2)). RG 166.31 Tailored base level financial requirements that reflect specific business risks apply to certain AFS licensees: see Table 2 in Section A and Appendices 1– 10 at the end of this guide. The solvency and positive net assets requirement Who the solvency and positive net assets requirement applies to The solvency and positive net assets requirement applies to all AFS licensees (except those listed in RG 166.2). RG 166.32 The Corporations Act requires directors of a company to prevent insolvent trading by the company: see Div 3 of Pt 5.7B. It is not appropriate for any AFS licensee, including a natural person, to carry on a financial services business while insolvent. RG 166.33 It is also not appropriate that you carry on a financial services business with liabilities exceeding your assets. AFS licensees that trade when insolvent or while having negative net assets are unlikely to have the resources to carry on the financial services business in compliance with the licensee obligations under Ch 7. RG 166.34 You should continuously monitor your solvency, but we do not require you to continuously monitor your net assets position. However, you must review it if you have some reason to doubt you have adequate net assets. The cash needs requirement Who the cash needs requirement applies to The cash needs requirement applies to all AFS licensees (except those listed in RG 166.2). A tailored cash needs requirement applies to: • responsible entities (see Appendix 2); • IDPS operators (see Appendix 3); • licensed custodial or depository service providers (see Appendix 4); • retail OTC derivative issuers (see Appendix 8); • CSF intermediaries (see Appendix 9); and • corporate directors of retail CCIVs (see Appendix 10). Page 16 REGULATORY GUIDE 166: AFS licensing: Financial requirements © Australian Securities and Investments Commission September 2023 Page 16 RG 166.35 As a condition of your AFS licence, you must have sufficient resources to meet your anticipated cash flow expenses (cash needs requirement). Because of the large range of sizes and types of AFS licensee, there are several options that can be used to satisfy the cash needs requirement. RG 166.36 Unless a tailored cash needs requirement applies to you, you can meet the cash needs requirement by choosing one of five options: (a) Options 1 or 2 are ‘basic’ options and we expect that most small business AFS licensees will only need to consider complying with Options 1 or 2, and will generally prefer Option 2. (b) Options 3, 4 or 5 do not require you to prepare projections and may be more suitable for your business if you: (i) are part of a corporate group; or (ii) have general financial support from an Australian ADI or, in some cases, have financial support from foreign deposit-taking institutions; and (iii) can comply with the requirements for the relevant option. Note: You must meet all the requirements of the option you select. RG 166.37 Table 3 gives an overview of the five options available for meeting the cash needs requirement. For the definitions for calculating cash needs, including ‘cash’, ‘cash flow’, ‘eligible provider’ and ‘relevant trust’, see Section E. Table 3: The five options available to AFS licensees for meeting the cash needs requirement Option Description 1 Reasonable estimate projection plus cash buffer See RG 166.40–RG 166.44 Option 1 is designed for licensees that maintain a certain level of cash or other liquid financial resources at all times (e.g. by way of commitments by a parent company). We expect this option will be relevant for some small business licensees. 2 Contingency-based projection See RG 166.45–RG 166.47 Option 2 is suitable for all kinds of licensees, including small business licensees that do not always maintain cash or commitments of support from others. We expect this option will be most relevant for small business licensees. 3 Financial commitment by an Australian ADI or comparable foreign institution See RG 166.50 Option 3 is relevant to licensees that can draw on financial backing from an Australian ADI or a relevantly recognised foreign regulated deposit- taking institution. We expect this option will not be relevant for small business licensees: see Table 6 and Information release (IR 03-26) Alternative means to satisfy cash needs requirement under PS 166. 4 Expectation of support from an Australian ADI or comparable foreign institution See RG 166.51 Option 4 is relevant to subsidiaries of certain prudentially regulated bodies. We expect this option will not be relevant for small business licensees: see Table 6 and IR 03-26. Page 17 REGULATORY GUIDE 166: AFS licensing: Financial requirements © Australian Securities and Investments Commission September 2023 Page 17 Option Description 5 Parent entity prepares cash flow projections on a consolidated basis See RG 166.52 Option 5 is relevant to licensees in corporate groups that plan cash flows on a group basis. We expect this option will not be relevant for small business licensees: see Table 6 and Information release (IR 03-44) ASIC provides further options to meet cash needs requirements. There are alternatives under Option 5: Option 5A (suitable for a licensee with a commitment from a parent) and Option 5B (suitable for a licensee without a commitment from a related body corporate). Basic options (Options 1 and 2) RG 166.38 Options 1 and 2 are different ways for you to show how you will manage the effect of risks on your cash position through your own projections. Neither option requires you to have at any one time all the cash you might need to meet all your liabilities over the next 3 months. RG 166.39 Compliance with either Option 1 or 2 will meet the cash needs requirement under our AFS licence conditions and help to ensure you adequately manage financial risks. However, ultimately you must determine what additional measures are appropriate in your circumstances to satisfy your obligation under s912A(1)(h) to have adequate risk management systems. Option 1: Reasonable estimate projection plus cash buffer RG 166.40 We expect that Option 1 would be more suitable for larger businesses or those that have external sources of financial support. Option 1 allows you to rely on a simpler calculation based on having in effect 18 days outgoings (i.e. 20% of 3 months) available to you in liquid form. Such a cash buffer will help you manage commercial contingencies. RG 166.41 Where you have this buffer, we will not require you to document a projection based on the commercial contingencies that may adversely affect your cash position, as is required under Option 2. If you rely on Option 1, you need only prepare a projection based on what you reasonably estimate is most likely. This projection will help you to measure how much cash you might have to hold as a cash buffer to satisfy Option 1. RG 166.42 To provide a yardstick, you must also calculate how much cash you might have to hold as a cash buffer based on the previous financial year’s cash outflow (if you have done a profit and loss statement for a previous financial year). RG 166.43 In the end, the cash you have to hold as a cash buffer will be either an amount based on last year’s results or an amount based on your cash flow projection, whichever is the greater. RG 166.44 Table 4 summarises the requirements you must meet if you choose Option 1: see Section E for key definitions relevant to this option, including a definition of ‘cash’ for the purposes of item 5. Page 18 REGULATORY GUIDE 166: AFS licensing: Financial requirements © Australian Securities and Investments Commission September 2023 Page 18 Table 4: Option 1: Reasonable estimate projection plus cash buffer Requirement You must meet all these requirements Projection 1 Prepare a projection of cash inflow and outflow (cash flows) over at least the next 3 months based on your reasonable estimate of what is likely to happen over this term. Note: You can take into account, for example, the following factors in preparing your projection if you reasonably believe they are likely to be available: assets you hold at the time the projection starts that can be used to pay your liabilities; and inflow you may receive, including income from your business, amounts that you may borrow (e.g. under an overdraft), and amounts that you may receive from your owners or associates as financial support. 2 Document your calculations and assumptions, and describe in writing why they are the appropriate assumptions. Note: We expect that a description in writing of your calculations and assumptions will vary according to the nature, scale and complexity of your business. 3 Update the projection of cash flows when it ceases to cover the next 3 months, or if you have reason to suspect that an updated projection would show you were not meeting your AFS licence conditions. Financial resources 4 Show, based on your projection of cash flows, that you will have access as needed to enough financial resources to meet your liabilities over the projected term of at least the next 3 months, including any additional liabilities you project you will incur during that term. 5 Have in cash an amount equal to 20% of the greater of: (a) the cash outflow for the projected period of at least the next 3 months (if the projection covers a period longer than 3 months, the cash outflow may be adjusted to produce a 3-month average); or (b) your actual cash outflow for the most recent financial year for which you have prepared a profit and loss statement, adjusted to produce a 3-month average. Option 2: Contingency-based projection RG 166.45 Option 2 is potentially suitable for all AFS licensees, especially small businesses that do not always maintain cash or commitments of support from others. Option 2 allows you to demonstrate that the risk that you will not have access to adequate cash is sufficiently small by calculating a projection that takes into account a range of commercial contingencies that could impact on your cash position. RG 166.46 Your projection should demonstrate the effect of the combination of eventualities that makes it most difficult for you to show you will have sufficient cash. However, you can disregard highly unlikely contingencies or combinations of contingency. For example, when calculating what cash you will have available, you can take into account income you expect to receive. However, you also have to take into account the risk that you could have a shortfall in cash inflow. This might arise, for instance, because of bad debts, or increased prices from your suppliers. You would need to take into account these eventualities unless you reasonably believe they are highly unlikely to materially impact on you if the other contingencies you are planning for occur. Similarly, you can take into account the financial support you expect Page 19 REGULATORY GUIDE 166: AFS licensing: Financial requirements © Australian Securities and Investments Commission September 2023 Page 19 a parent company or other entity would provide if needed, but only to the extent that the risk that the support would not be provided is highly unlikely. Note: If you have sufficient financial support from a parent or related entity, you may be able to use Option 3, 4 or 5 instead. RG 166.47 Table 5 summarises the requirements you must meet if you choose Option 2: see Section E for key definitions relevant to this option (the definition of ‘cash’ will not be relevant to licensees using Option 2). Table 5: Option 2: Contingency-based projection Requirement You must meet all these requirements Projection 1 Prepare a projection of cash inflow and outflow (cash flows) over at least the next 3 months that shows your estimate of what would happen if your ability to meet your liabilities over the projected term was adversely affected by commercial contingencies. This includes any liabilities you might incur during the term of the projection. You have to take into account all contingencies that are sufficiently likely for a reasonable licensee to plan how they might manage them. Note: We would normally expect you to take into account assets you hold at the start of the projection term that can be used to pay your liabilities and inflow you may receive, including: income from your business or sale of your business; amounts that you may borrow (e.g. under an overdraft); and amounts that you may receive from your owners or associates as financial support. However, you may have to reduce the amount of assets and inflow you take into account as part of planning to meet commercial contingencies (e.g. if you lose a key client, or someone who pays you income has a systems failure that delays payments). You will not have to take into account these occurrences if it is highly unlikely that they would materially affect your cash position. 2 Document your calculations and assumptions, and describe in writing why they are the appropriate assumptions. Note: We expect that a description in writing of your calculations and assumptions will vary according to the nature, scale and complexity of your business. 3 Update the projection of cash flows when it ceases to cover the next 3 months, or if you have reason to suspect that an updated projection would show you were not meeting your licence conditions. Financial resources 4 Show, based on the projection of cash flows, that you will have access as needed to enough financial resources to meet your liabilities over the projected term of at least the next 3 months, including any additional liabilities you might incur during that term. Options that do not require projections (Options 3–5) RG 166.48 In addition to Options 1 and 2, we have provided three further options for AFS licensees that are able to meet their cash needs requirement in a manner that does not involve providing individual cash flow projections: see Table 6. This may be either because they have alternative means of demonstrating that they are likely to have sufficient cash, or because they are part of a large corporate group that manages cash as an economic entity and will prepare appropriate projections. Page 20 REGULATORY GUIDE 166: AFS licensing: Financial requirements © Australian Securities and Investments Commission September 2023 Page 20 RG 166.49 These options are generally only available to AFS licensees within corporate groups or that have general financial support from an Australian ADI or in some cases a relevantly recognised foreign deposit-taking institution. They are not likely to be relevant to most small business licensees. For these licensees, Options 1 and 2 are most relevant and we expect most small business licensees will prefer Option 2. Option 3: Financial commitment by an Australian ADI or comparable foreign institution RG 166.50 This option is suitable for AFS licensees able to meet the cash needs requirement in a manner that does not involve providing cash flow projections. In this case, an Australian ADI (or a foreign deposit-taking institution we agree is subject to comparable regulation) has given the licensee (generally, its subsidiary) an enforceable and unqualified commitment to meet the licensee’s financial obligations. This option is necessarily restricted to licensees with a high assurance of adequate cash flow and adequate liquidity risk management overseen by a prudential regulator. Note: For more information, see condition 13(c)(iii) of PF 209. Option 4: Expectation of support from an Australian ADI or comparable foreign institution RG 166.51 This option is suitable for AFS licensees that are subsidiaries of an Australian ADI or a foreign deposit-taking institution we agree is subject to comparable regulation for the purposes of this policy. It allows the licensee to rely on an expectation of support, even if there is no enforceable commitment from the parent company. The support can be in the form of a commitment to the licensee or a guarantee for the benefit of creditors generally. The expectation of support must apply in all contingencies that a licensee should reasonably plan for. This is similar to the requirement that the licensee would need to meet if it were using Option 2 for cash inflow from the parent company to be recognised. This means that if the licensee were to prepare projections under Option 2, the projected inflow from the parent company would always offset any cash outflows projected. Note: For more information, see condition 13(c)(iv) of PF 209. Option 5: Parent entity prepares cash flow projections on a consolidated basis RG 166.52 This option is suitable for AFS licensees within a corporate group that manages cash flows on a consolidated basis. Under this option, the parent entity prepares cash flow projections that comply with Option 1 or 2. Where there are group- wide cash flow projections, the licensee can then either rely on: (a) the parent giving an enforceable and unqualified commitment, which is similar to that provided by an eligible provider under Option 3; or Page 21 REGULATORY GUIDE 166: AFS licensing: Financial requirements © Australian Securities and Investments Commission September 2023 Page 21 (b) the availability of group resources, based on the reasonable expectation of its responsible officer that it can meet the cash needs requirement in all commercial contingencies for which it should reasonably plan in a way similar to Option 4. Note: For more information, see condition 13(c)(v) of PF 209. Table 6: Options 3–5: No projections required Option You must meet all these requirements Option 3: Financial commitment by an Australian ADI or comparable foreign institution 1 Have an enforceable and unqualified commitment from an Australian ADI or another entity (such as a foreign deposit-taking institution) approved for this purpose in writing by ASIC. Note: For the purposes of this policy, we may recognise a foreign deposit-taking institution that is regulated in accordance with the Basel Committee guidelines for regulating deposit-taking institutions, which are comparable to the regulation of ADIs. 2 Ensure that the provider of the commitment pays an unlimited amount on demand from time to time: (a) to you; or (b) to the extent of the liability, to: (i) your creditors; or (ii) a trustee for your creditors. 3 Reasonably expect, based on documented assumptions, that the commitment will remain effective for at least the next 3 months. These assumptions should take into account all commercial contingencies you should reasonably plan for. Note: The definition of ‘cash’ will not be relevant to licensees using Option 3. This term is not used under this option. Option 4: Expectation of support from an Australian ADI or comparable foreign institution 1 Be a subsidiary of an Australian ADI or an entity approved for this purpose in writing by ASIC. Note: We may approve a foreign deposit-taking institution that is regulated in accordance with the Basel Committee guidelines for regulating deposit-taking institutions, which are comparable to the regulation of ADIs. 2 Reasonably expect (based on access to funds from related bodies corporate) that you will have adequate resources (when needed) to meet your liabilities (including any additional liabilities that you might incur during that period) for at least the next 3 months. You must take into account all commercial contingencies for which you should reasonably plan. 3 Ensure that a responsible officer has documented that they have the reasonable expectation in item 2 for at least the following 3-month period, together with their reasons for forming the expectation, the contingencies for which you consider it is reasonable to plan, the assumptions made concerning the contingencies and the basis for selecting those assumptions. 4 Keep the document in item 3 for at least 5 years after the end of the last financial year that includes a part of the period to which the document relates, and give it to ASIC if we request it. Note: The definition of ‘cash’ will not be relevant to licensees using Option 4. This term is not used under this option. Page 22 REGULATORY GUIDE 166: AFS licensing: Financial requirements © Australian Securities and Investments Commission September 2023 Page 22 Option You must meet all these requirements Option 5: Parent entity prepares cash flow projections on a consolidated basis 1 Your cash flows and the cash flows of each of your related bodies corporate (the licensee group) are managed on a consolidated basis. 2 There is a body corporate within the licensee group of which all members of the licensee group are subsidiaries (the parent entity). 3 The parent entity complies with Option 1 or 2, as if: (a) it were the licensee; (b) cash flows of any member of the licensee group were cash flows of the licensee; and (c) any cash held by a member of the licensee group (other than as trustee of a trust) were held by the licensee. 4 The parent entity’s registered company auditor gives us a report, together with your annual audit report, as required under your licence, for each of your financial years (and for any other period that we request it, by a date that we request it) about your parent entity’s compliance with Option 1 or 2, consistent with item 3. This report is similar to the report that would be required from your auditor if you were complying with Option 1 or 2 for that period. Note 1: If you are granted a limited AFS licence, the audit requirement will not apply to you if you are only licensed to provide one or more limited financial services and you do not deal with money to which Div 2 of Pt 7.8 of the Corporations Act applies: see reg 7.8.12A. You will be able to lodge a compliance certificate rather than have to undertake an annual audit: see Limited financial services on the ASIC website for more information. However, you will still need to lodge financial statements (as required by s989B(1) and 989B(2)). Note 2: For the terms of the report about compliance with our financial requirements, see PF 209, condition 28. 5 Either of the following applies: (a) Alternative A: The parent entity has provided an enforceable and unqualified commitment to pay you on demand from time to time an unlimited amount or to meet your liabilities (including any additional liabilities that you might incur while the commitment applies), which you reasonably expect will apply for at least the next 3 months, taking into account all commercial contingencies for which you should reasonably plan. (b) Alternative B: You: (i) reasonably expect (based on access to cash from members of the licensee group) that you will have adequate resources to meet your liabilities (including any additional liabilities that you might incur) for at least the next 3 months, taking into account all commercial contingencies for which you should reasonably plan; (ii) ensure that a responsible officer documents that they have this reasonable expectation for at least the following 3-month period, together with the reasons for forming the expectation, the contingencies for which you consider it is reasonable to plan, the assumptions made concerning the contingencies and the basis for selecting those assumptions; and (iii) keep this document for at least 5 years after the end of the last financial year that includes a part of the period to which the document relates, and give it to ASIC if we request it by a date we request. 6 You have no reason to believe that the parent entity has not complied with item 3 or has failed to comply, in a material respect, with its obligations under Ch 2M or, if the parent entity is not a company, under any other laws (whether law in Australia or not) relating to financial reporting that apply to it. Page 23 REGULATORY GUIDE 166: AFS licensing: Financial requirements © Australian Securities and Investments Commission September 2023 Page 23 Projections, budgeting and risk management RG 166.53 If an AFS licensee does not have enough cash to meet its liabilities, particularly over a short timeframe like 3 months, there is a greater risk that the licensee may not provide financial services in compliance with the licensee obligations under Ch 7. If cash outflow is planned for and covered, it is less likely that a licensee will feel pressured to cut costs on its compliance arrangements or engage in non-complying conduct. RG 166.54 Budgeting to meet current and future liabilities and to take into account risks facing the business is good business practice. Planning and monitoring will help an AFS licensee to put in place and maintain appropriate arrangements (including compliance measures) to ensure adequate financial resources are available when required. This is particularly relevant in periods of higher risk for the business (e.g. when a business is growing rapidly or when a new business is in its early stages). RG 166.55 As part of meeting your obligation to have adequate risk management systems under s912A(1)(h), you need to take into account the risks your business faces and the impact of failing to meet your liabilities. We believe that this is an appropriate part of business and risk management for both small and large AFS licensees. RG 166.56 Taking into account commercial contingencies, AFS licensees should have sufficient, or access to sufficient, financial resources to cover their liabilities when needed. We recognise that planning on a 12-month basis may be appropriate for many businesses. However, we require as a minimum that planning cover at least the next 3-month period. Note: The required access to financial resources also needs to cover any additional liabilities that might be incurred over the next 3-month period. RG 166.57 We are concerned to ensure that AFS licensees monitor their anticipated cash inflow and outflow with enough forward thinking to be able to determine whether there is a real ris