ASIC sets out five options in Section B of RG 166 from which AFS Licensees may choose from in respect to satisfying the cash needs requirement, the most common are summarised below:
Option 1 - Reasonable Estimate Projections Plus Cash Reserve
- AFS Licensees must have a minimum of 3 months documented cash flow projections in place at all times, based on documented and reasonable assumptions; and
- AFS Licensees must have enough cash (based on the inflow and outflow projections) to allow them to meet their liabilities over the next 3 months; and
- AFS Licensees must have a cash reserve of 20% of the greater of the following:
- projected outflows for the next 3 months; or
- actual outflows for the last 12 months adjusted to produce a 3 month average.
Option 2 - Contingency Based Projections
- AFS Licensees must have a minimum of 3 months documented cash flow projections in place at all times, based on documented and reasonable assumptions; and
- AFS Licensees must consider and document any commercial contingencies that are likely to adversely affect their financial position and ability to meet the financial requirements.
In all cases, the cash flow projections should clearly demonstrate that there is access to sufficient financial resources to meet liabilities over the projected term, and are expected to be updated if there are material changes to the business or the AFS Licensee has any reason to suspect that any updated projection would show the AFS Licensee was not meeting the cash needs or base level requirements.
Note there are special rules for those AFS Licensees operating through trading trusts.
Additional Requirements
Where an AFS Licensee holds client’s money or property, the Surplus Liquid Funds (SLF) requirement will apply in certain circumstances. If applicable, the AFS Licensee must hold at least $50,000 in SLF unless the value of the property is less than $100,000 (certain rules and circumstances apply).
Where a responsible entity holds scheme property it generally needs to meet the SLF requirement as well as the Net Tangible Asset (NTA) requirements as set out in Section C of RG 166. Licensees who operate a custodial or depository service also must comply with the NTA requirements. Assets used to calculate the SLF requirement can be included in the calculation of NTA.
If Licensees operate Managed Discretionary Accounts (MDA) and do not use a third party custodian, they will need SLF.
The SLF requirement can be met by a commitment from an eligible provider, however must be a written undertaking that is enforceable and unqualified obligation to pay on written demand of the Licensee and that remains operative until ASIC consents in writing to the cancellation of the undertaking.
QNA Consulting Pty Ltd can assist in developing and reviewing an AFS Licensees cash flow projections and provide practical and effective advice to assist your business to comply with these requirements.