Regulated emissions units: Applying for or varying an AFS licence
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This information sheet is for anyone intending to apply for either a new Australian financial services (AFS) licence or a variation to an existing licence to authorise them to provide financial services in regulated emissions units and associated products.
It covers:
- the new requirements for providing financial services in regulated emissions units, and who is required to hold an AFS licence;
- when you must apply for an AFS licence or variation, and the transitional registration arrangements;
- how to apply for an AFS licence or variation; and
- how ASIC will assess your organisational competence in emissions units.
Who is required to hold an AFS licence for regulated emissions units?
You are required to hold an AFS licence if you carry on a financial services business within, into or from Australia that provides financial services in the emissions units that are financial products from 1 July 2012 (regulated emissions units), unless you are exempt. In addition to this information sheet, you should read Regulatory Guide 236 Do I need an AFS licence to participate in carbon markets? (RG 236) to help you determine whether you need to hold an AFS licence for regulated emissions units and associated products.
Your financial services business in the carbon markets may also include financial services in products associated with regulated emissions units (e.g. derivatives over emissions units or managed investments that involve emissions units). In this case, you will need an AFS licence with authorisations covering both regulated emissions units and the associated product. This information sheet also covers applying for or varying an AFS licence with these additional authorisations.
Relevant financial products and services
Regulated emissions units
There are three types of emissions units that are financial products from 1 July 2012:
- carbon units
- Australian carbon credit units (ACCUs)
- eligible international emissions units (EIEUs).
These units include Kyoto ACCUs and non-Kyoto ACCUs (see RG 236.58), and certain types of certified emission reductions (CERs), emission reduction units (ERUs) and removal units (RMUs): see RG 236.63
Financial services
The services that are financial services in regulated emissions units are:
- providing financial product advice on regulated emissions units
- dealing in regulated emissions units
- making a market in regulated emissions units
- providing a custodial or depository service for regulated emissions units.
You may also be providing financial services in a financial product associated with emissions units:
- dealing or making a market in derivatives over emissions units
- operating a registered managed investment scheme that invests in emissions units
Providing financial product advice
Financial product advice is provided with the intention of influencing a person’s decision on a financial product, or could reasonably be regarded as intending to have such an influence. There are two types of financial product advice:
- personal advice, and
- general advice.
Personal advice is where the provider of the advice has considered one or more of the client’s objectives, financial situation and needs (or a reasonable person might expect the provider to have considered one or more of those matters). All other financial product advice is general advice: see RG 236.24.
Dealing in a financial product
The main types of dealing relevant for emissions units that require an AFS licence are:
- dealing on behalf of another person, or
- arranging for a person to deal: see RG 236.28–RG 236.30.
For most types of financial product, another key form of dealing is ‘issuing’ the product—that is, the act by which the product is first generated and made available to another person. However, all regulated emissions units are issued by a particular authority—for example, the Clean Energy Regulator or the Clean Development Mechanism Executive Board—and no other person issues regulated emissions units.
Activities that would otherwise be dealing in regulated emissions units, but are undertaken by a person on their own behalf, are not considered to be dealing in a financial product and do not require an AFS licence. However, when two persons enter into a derivative contract, both are considered to be issuing a financial product, even if acting on their own behalf (unless they contract on a financial market). Therefore, issuing a derivative over regulated emissions units is dealing in a financial product.
Making a market in a financial product
‘Making a market’ is regularly stating the prices at which a person proposes to buy or sell financial products on their own behalf. A person can make a market in regulated emissions units or in derivatives over emissions units, including regulated emissions units: see RG 236.32–RG 236.33.
Providing a custodial or depository service
Providing a custodial or depository service generally involves a person holding financial products or beneficial interests in financial products in trust on behalf of another (usually for a fee). This may include holding regulated emissions units on behalf of another in an account in the Australian National Registry of Emissions Units: see RG 236.39–RG 236.40.
Derivatives over emissions units
A derivative is an arrangement under which the consideration to be provided, or the value of the arrangement, varies by reference to the value or amount of something else (e.g. an asset, rate, index or commodity). In a derivative over emissions units, it is the derivative that is regulated as the financial product and not the underlying emissions units. Therefore, if you are dealing in a derivative over emissions units (either regulated or other types of emissions units), you will be dealing in a derivative, rather than in emissions units.
If you intend to provide financial services in regulated emissions units and derivatives over emissions units, you will need an AFS licence with authorisations covering:
- one or more of carbon units, ACCUs and EIEUs, and
- derivatives.
Operating a registered managed investment scheme
Managed investment schemes hold scheme assets in a wide variety of forms: see RG 236.38. The scheme assets may be financial products (e.g. regulated emissions units or derivatives) or other types of assets (e.g. land or projects participating in the Carbon Farming Initiative).
Wholesale or retail clients
Each of the above financial services may be provided to wholesale clients and/or retail clients: see RG 236.45 for a description of the difference between a wholesale client and a retail client.
What will the scope of my AFS licence cover?
Your AFS licence will cover the range of financial services you intend to provide in the types of financial products that we authorise you to provide. It will also specify the types of clients to whom you can provide these services.
The scope of the authorisations in your AFS licence may include one or more of the following combinations set out in the table below: 'Possible authorisations for your AFS licence'.
Table: Possible authorisations on your AFS licence
| Services | Products | Clients |
Provide financial product advice
- General advice only, or
- Personal and general advice
| One or more of carbon units, ACCUs or EIEU |
|
Provide financial product advice
- General advice only, or
- Personal and general advice
| Derivatives# |
|
Deal in a financial product, or arrange for a person to deal in a financial product
- Apply for, acquire, vary or dispose of financial products on behalf of another
| One or more of carbon units, ACCUs or EIEUs |
|
Deal in a financial product, or arrange for a person to deal in a financial product
- Apply for, acquire, vary or dispose of financial products on behalf of another
| Derivatives# |
|
Deal in a financial product, or arrange for a person to deal in a financial product
- Issue, apply for, acquire, vary or dispose of financial products
| Derivatives# |
|
| Make a market in a financial product | One or more of carbon units, ACCUs or EIEUs |
|
| Make a market in a financial product | Derivatives# |
|
| Provide a custodial or depository service | Applicable to all financial products |
|
| Operate a registered managed investment scheme | Named scheme(s) of asset type(s) including ‘carbon units’* | retail |
| Operate a registered managed investment scheme | Scheme(s) of a particular kind of asset type(s) including ‘carbon units’* | retail |
Notes to Table
# We may place a condition on your licence limiting the financial services you provide in relation to derivatives over one or more types of emissions units if we are not satisfied that you have the organisational competence to provide financial services in a broader range of derivatives.
* An authorisation to operate a ‘named’ registered managed investment scheme is an authorisation for that specific scheme investing in specific kinds of assets. An authorisation to operate a ‘scheme of a particular kind’ is a broader authorisation. If you are granted this broader authorisation, you will not be required to apply to vary your licence every time you want to register a scheme of that kind; however, you will need to demonstrate you have sufficient organisational competence for this authorisation: see Regulatory Guide 105 Licensing: Organisational competence (RG 105) at RG 105.82.
Applying for a new AFS licence
If you do not currently hold an AFS licence, you will need to apply for a new AFS licence with one or more of the authorisations set out in the table 'Possible authorisations on your AFS licence' above.
Applying to vary an existing AFS licence
If you currently hold an AFS licence with authorisations for other services and products other than regulated emissions units, you will need to apply to vary your AFS licence to include the new services and/or the additional products that you wish to add. You should note:
- you will need to add one or more of the financial products of carbon units, ACCUs or EIEUs
- if you already hold an authorisation for derivatives that is not restricted to certain types of derivatives, you do not need to apply to add derivatives over carbon units, ACCUs or EIEUs
- if you already hold an authorisation to provide custodial or depository services, you do not need to apply to add any of the regulated emissions units because this authorisation is already applicable to all types of financial products, and
- if you already hold an authorisation to operate a registered managed investment scheme, you will need to apply to add the new types of assets that the scheme(s) may invest in or for an authorisation to operate an additional named scheme(s).
For a new AFS licence, what information must be submitted in the application?
An application for a new AFS licence consists of the application itself and the accompanying ‘core proofs’—the statements in which you explain to us how you meet particular aspects of the licensing requirements.
Depending on the authorisations that you apply for, additional proofs may also be required. These proofs seek specific additional information for specific financial services and products.
Table: Questions on the application form
| Section of the application | Information you be asked to submit |
| Details about you and your business |
- Your details as the applicant and a basic description of your business
- The selection of the financial services and products you want to be authorised to provide
- Information about your ability to meet your obligations as an AFS licensee through your responsible managers, resources, systems and processes.
Note: If you will be providing services to retail clients, this includes information about your arrangements for internal and external dispute resolution, compensation and insurance.
- Answers to more detailed questions about particular financial services and products that you have selected (e.g. making a market, derivatives, foreign exchange, custodial or depository services, or operating a registered managed investment scheme)
|
| Declarations and certifications |
- Declarations and certifications relevant to your application.
|
Table: Core proofs
| Section of the application | Information you be asked to submit |
| A5 business description | This is a more detailed description of your business, including your:
- financial services and products
- sources of business income and growth expectations
- typical client types and their use of financial products and services
- service delivery models and methods
- organisational chart.
Note: We have specified in 'What you should tell us in your "A5 business description"' the particular information that you should include here that is relevant to regulated emissions units and associated derivatives. This is the key information that is required, and there is no need to provide us with significant material beyond this.
|
| People proofs for each responsible manager | This is a series of documents that provide us with information on the competence and good fame and character of your nominated responsible managers, including:
- a statement of personal information
- copies of qualifications
- copies of a national criminal history check and a bankruptcy check
- copies of two business references.
Note 1: You don’t need to provide a national criminal history check, bankruptcy check or business references if you are a body regulated by APRA.
Note 2: You should be aware that criminal history and bankruptcy checks may take some time to obtain, and you should order them as soon as possible.
|
| B1 organisational competence | This is a document that substantiates the relevant knowledge, experience and skills of your nominated responsible managers who will be directly responsible for significant day-to-day decisions about the ongoing provision of your financial services in regulated emissions units and any associated derivatives or other products. It includes:
- a table of organisational competence: see Appendix 2 of Regulatory Guide 2 AFS Licensing Kit: Part 2—Preparing your AFS licence or variation application (RG 2); and
- submissions on each responsible manager’s competence.
Note: For completing responsible manager submissions, 'What you should tell us in your written submission' specifies information that is relevant to regulated emissions units and associated derivatives
|
| B5 Financial statements and financial resources | These are various financial statements that must be submitted, depending on the financial requirements that apply to your financial services and products:
- for all applicants, except those regulated by APRA—you must submit recent statements of income, cash flows and a balance sheet, and a cash flow projection to meet the cash needs requirement;
- for all applicants, except those regulated by APRA—you must submit a description of your processes for ensuring ongoing compliance with your financial requirements; and
- for applicants who will be engaging in other activities, such as transacting with clients as principal, holding client money, or being a responsible entity—you will need to submit the information required by us for that activity.
|
For a variation to an existing AFS licence, what information must be submitted in the application?
An application to vary an existing AFS licence comprises the variation application itself and two accompanying core proofs: the ‘A5 business description’ and the ‘B1 organisational competence’.
You also need to complete Form FS20 Change of details for an Australian financial services licence if you are either:
- adding one or more responsible managers to cover your new authorisations; or
- amending the financial services responsibilities of an existing responsible manager to cover your new authorisations (e.g. adding an authorisation to make a market in a financial product to an existing authorisation to deal in a financial product).
If you are simply adding a new financial product to your AFS licence and not changing your responsible managers, nor the financial services for which they are responsible, you do not need to resubmit any people proofs for those responsible managers. You will, however, need to demonstrate in ‘B1 organisational competence’ that your current responsible managers have the relevant knowledge, experience and skills to be responsible for your financial services in regulated emissions units and any associated derivatives or other products.
When completing your core proofs, you should focus on the new financial services and products you are applying to add to your licence and how this links to your existing financial services and products. For example, in completing your ‘A5 business description’, you should concentrate on the information we have asked you to provide in 'What you should tell us in your "A5 business description"', rather than describing other areas of the business that are not related to the new authorisations you are applying for.
How to apply for an AFS licence or variation
Before you apply for a new AFS licence or variation to an existing AFS licence, you should make sure you have read ASIC’s detailed guidance and have prepared the documents you will need for your application.
Step 1: Read ASIC’s guidance
Our regulatory guides, pro forma licence conditions and sample online application will help you comply with the new requirements.
To download copies of our regulatory guides, go to www.asic.gov.au/rg.
Preparing your licence application
- Regulatory Guide 1 AFS Licensing Kit: Part 1—Applying for and varying an AFS licence (RG 1)
- Regulatory Guide 2 AFS Licensing Kit: Part 2—Preparing your AFS licence or variation application (RG 2)
- Regulatory Guide 3 AFS Licensing Kit: Part 3—Preparing your additional proofs (RG 3)
- Pro Forma 209 Australian financial services licence conditions (PF 209)
- Sample online application
- Regulatory Guide 236 Do I need an AFS licence to participate in carbon markets? (RG 236)
There are additional licensing regulatory guides about meeting your licensing, conduct and disclosure obligations which can be found on the ASIC website at www.asic.gov.au/rg.
Step 2: Decide on the authorisation(s) you need
You need to select the authorisations that relate to the types of financial services you will be providing in regulated emission units and associated derivatives.
Step 3: Ensure you have responsible managers who can demonstrate the required competencies
You must nominate responsible managers who have the relevant knowledge, experience and skills necessary to be directly responsible for significant day-to-day decisions about the ongoing provision of your financial services in regulated emissions units and any associated derivatives or other products.
See ‘How ASIC will assess your organisational competence in emissions units’ below.
Step 4: Check whether you require compensation and dispute resolution arrangements
If you provide financial services to retail clients, you must ensure that you have in place adequate compensation and dispute resolution arrangements: see Regulatory Guide 104 Licensing: Meeting the general obligations (RG 104). This means:
- holding professional indemnity insurance that meets the requirements of Regulatory Guide 126 Compensation and insurance arrangements for AFS licensees (RG 126), and covers all the financial services in all the financial products that you will provide, unless ASIC approves alternative arrangements; and
- having in place internal and external dispute resolution procedures, including membership of an external dispute resolution scheme that is approved by ASIC for that purpose, and is able to hear complaints relating to the types of financial services you provide.
Step 5: Prepare your application and proofs
Before lodging your application for a new AFS licence or a variation to an existing AFS licence, read Regulatory Guide 2 AFS Licensing Kit: Part 2—Preparing your AFS licence or variation application (RG 2), which explains how to submit your application and accompanying proofs. RG 2 describes the core proofs you must submit with your application and any additional non-core proofs we may request as part of our assessment: see Section E of RG 2.
Preparing your ‘A5 business description’ core proof
The ‘A5 business description’ core proof helps us understand how your business will work and the relevance of the licence authorisations you have selected. RG 2.249–2.254 provides guidance about the matters you should cover in your business description, including details about the financial services and products you will provide, and who your typical client(s) will be. For regulated emissions units and associated derivatives, this means telling us the information described in the table What you should tell us in your 'A5 business description' below.
Table: What you should tell us in your 'A5 business description'
| Section of the A5 business description | Information that is relevant for emissions units |
| Details of the financial services and products you will provide: RG 2.252(a) | You should provide details of the particular products and types of transactions this involves. For example:
- whether products will involve regulated emissions units (i.e. carbon units, ACCUs and/or EIEUs), and the specific sub-types of these units, as applicable (e.g. CERs or non-Kyoto ACCUs)
- whether transactions will only involve emissions units for immediate delivery, or also derivatives over emissions units of whatever kind and the specific types of derivative products involved
- whether transactions will be conducted via financial markets or over-the-counter
|
| Details of who your typical client(s) will be for each type of financial service and product you will provide: RG 2.252(e) | You should describe:
- who your typical client(s) will be for each type of financial service and product you will provide
- whether your clients will typically be retail and/or wholesale clients
- what your clients’ typical financial goal(s) in using your service(s) or product(s) will be (e.g. hedging risks, speculating), and the typical strategies they will use towards achieving those goals
- if your financial services include advising clients, what are the typical strategies or strategy options that you will advise them about
|
| All other items listed in RG 2.252–RG 2.253 | At a minimum, your ‘A5 business description’ should cover all other items listed in RG 2.252–RG2.253, as relevant for your business. |
Step 6: Lodge your application and pay the lodgement fee
From 1 July 2012, you can apply online for an AFS licence with an authorisation to provide financial services in relation to emissions units.
Existing AFS licensees can apply for a variation to their licence to include a relevant authorisation to provide financial services in emissions units by lodging Form FS03 Application to vary the authorisation conditions and other conditions of an Australian financial services licence.
If you are varying your AFS licence and intend to nominate additional responsible managers to meet the competencies of the new authorisation, you will first need to complete Form FS20 Change of details for an Australian financial services licence.
How ASIC will assess your organisational competence in emissions units
If you are an AFS licensee, you must maintain the competence to provide the financial services covered by your AFS licence: s912A(1)(e). We refer to this obligation as the ‘organisational competence obligation’, because it requires you to be competent at the organisational level.
Regulatory Guide 105 Licensing: Organisational competence (RG 105) describes what we look for when we assess your compliance with the organisational competence obligation. We assess your organisational competence by looking at the knowledge and skills of the people who manage your financial services business. We refer to these people as your ‘responsible managers’.
We will apply the policy principles set out in RG 105 when assessing your responsible managers. Key aspects of our policy are that:
- your responsible managers are directly responsible for significant day-to-day decisions about the ongoing provision of your financial services;
- together, your responsible managers should have appropriate knowledge and skills for all of your financial services and products; and
- your responsible managers are of good fame and character.
The context of the Australian carbon markets
A market trading carbon financial products is new to Australia. Some of the regulated emissions units have never previously existed or been traded. Some of the regulated emissions units do exist and have been traded, but essentially only in overseas carbon markets.
However, the carbon pricing mechanism has principal design features that are similar to overseas carbon markets and pre-existing Australian environmental markets. Common features shared by these schemes are that they are created by legislation and impose liabilities on certain entities, which can be met by acquiring and annually surrendering certain types of units. Consequently, we expect that the market activity under the carbon pricing mechanism will be likely to encompass the same types of transactions as are seen in the other pre-existing carbon and environmental markets (e.g. trading units for immediate delivery, or trading in forwards or options involving units).
Similarly, we expect the general nature of market activity in the Australian voluntary carbon markets will continue to be comparable to its recent history, although the scale of trading may increase and there will be new activity involving non-Kyoto ACCUs.
Importantly, however, the carbon pricing mechanism has more specific and detailed rules that directly affect the pricing of units and the dynamics of the market than any other pre-existing overseas carbon market or Australian environmental products market. These are the rules about the pricing and the use of regulated emissions: see the concise descriptions of each type of units published by the Clean Energy Regulator (www.cleanenergyregulator.gov.au (new window)). In addition, the scope and diversity of market participation will be significantly greater than in any of the pre-existing Australian environmental markets.
Direct responsibility for significant day-to-day decisions
Because the Australian carbon markets are new, or not yet operating in any meaningful way, and may not develop in line with the precedents of other markets, we think it is particularly important that your responsible managers will be in a position to be directly responsible for significant day-to-day decisions, and guide the development of new financial services businesses in carbon markets.
In RG 105, we explain that responsible managers need to be:
- organisationally close to the provision of financial services, and
- able to undertake the time commitment to exercise their responsibility.
In practice, your nominated responsible managers are less likely to be able to undertake their role successfully the further removed they are from the point of delivery of financial services, or the more licensees they act for. In some cases, you may need to provide us with more details about how your nominated responsible managers will be in a position to be directly responsible for significant day-to-day decisions.
Demonstrating appropriate knowledge and skills
Responsible managers must have appropriate knowledge and skills for their role in your business. For regulated emissions units, this will include:
- knowledge about the products (including the scheme rules or standards applicable to them),
- experience in overseas carbon markets and pre-existing Australian environmental markets that are at least similar (given the common features shared by these schemes and the carbon pricing mechanism),
- experience in the types of financial services that are to be provided,
- if services will be provided to retail clients, previous experience in working with retail clients, and
- general competence in the responsibilities of a responsible manager (e.g. an understanding of AFS licensee obligations).
We do not expect that each individual responsible manager will necessarily be able to demonstrate that they have appropriate knowledge and skills in all of the areas listed above. It is possible to have more than one responsible manager who collectively satisfy all areas of knowledge and skills relevant to your business, but not necessarily on an individual basis: see RG 105.35–RG 105.36.
If we are satisfied with your organisational competence, but we think you are heavily dependent on the knowledge and skills of one or two responsible managers, we will generally impose a ‘key person condition’ on your AFS licence. The key person condition will name those responsible managers whose competence we think you depend on heavily, and you will need to inform us if any of those key people leave the business: see RG 105.83.
In RG 105, we have provided five options for responsible managers to demonstrate they have appropriate knowledge and skills, generally involving various combinations of experience and qualifications or training (Options 1–4), or a written submission (Option 5) demonstrating that your nominated responsible managers have the appropriate experience and skills.
At this stage, we think that it is unlikely that any applicant will be able to satisfy Options 1–4 in relation to regulated emissions units. This is because the Australian carbon markets are very new and we are currently not aware of any industry standards or courses relevant to the operation of the Australian carbon markets and their financial products that would meet our requirements. While Option 2 allows for an individual assessment, this is intended for those who do not have formal qualifications, but have sufficient experience that the knowledge they have accumulated is equivalent to a relevant industry-specific or product-specific diploma (RG 105.53–RG 105.55). Due to the current absence of relevant diploma-level qualifications covering the operation of the Australian carbon markets and their financial products, we are currently not aware of a benchmark against which to conduct an individual assessment.
In the future, relevant industry standards or courses are likely to develop, and Options 1–4 may be able to be satisfied by nominated responsible managers. However, in this initial stage of licensing, we expect that you will need to rely on Option 5—that is, a written submission outlining your nominated responsible managers’ relevant knowledge and skills.
In RG 105, we have explained the areas that written submissions should cover (RG 105.66). The table 'What you should tell us in your written submission' below provides more details about how to cover these areas in the context of emissions units.
What you should tell us in your written submission
| Element of responsible manager submission (RG 105.66) | Information that is relevant for regulated emissions units |
| Nature of responsible manager’s role |
- Describe the role and responsibilities your nominated responsible manager will have in your financial services business
- Describe how you will ensure that your nominated responsible manager will be directly responsible for significant day-to-day decisions about the ongoing provision of your financial services
|
| Relevant qualifications or courses they have completed |
- Describe tertiary education courses, training courses, seminars or any other training, if any, that your nominated responsible manager has completed and highlight any content related to domestic or international carbon markets, emissions trading or environmental markets.
|
| Relevant experience over the past 10 years (this does not necessarily mean they need 10 years relevant experience) |
- Describe how your nominated responsible manager has acquired their knowledge about emissions units (both regulated and other types of emissions units) and carbon markets (in addition to any education and training courses described above)
- Provide a summary of any experience your nominated responsible manager has in providing relevant activities in other domestic or international carbon or environmental markets
- For your typical client(s) that you have detailed in your ‘A5 business description’, explain the extent to which your nominated responsible manager’s previous client services experience is relevant to their competence to provide the type of financial services in emissions units your business will cover.
|
| Relevant credentials |
- Detail any relevant credentials, including association membership or affiliation, and skills or knowledge recognised by an industry association, a regulatory body such as APRA, or some relevant overseas body.
|
| Appropriate knowledge and skills for the financial services and products their role relates to: | For the financial services that you will provide, explain your responsible manager’s understanding of the nature of the relevant types of regulated emissions units, including:
- by whom and to whom they are issued
- the price regulation, if any, applicable to any units
- the restrictions, if any, applicable to the usability, bankability and transferability of any units.
|
Nominating responsible managers without direct financial services experience
If your nominated responsible managers have knowledge or skills that are relevant to emissions units and carbon markets, but none of them have any direct Australian financial services experience, before we will approve your AFS licence, we may ask them to supplement their knowledge and skills by completing a short industry course specifically designed for those intending to be responsible managers.
| This is Information Sheet 156 (INFO 156). Information sheets provide concise guidance on a specific process or compliance issue or an overview of detailed guidance. |
ASIC Website: Printed 05/22/2013
