Electricity is a commodity, rather than a financial product, but base load or peak swaps are considered dealing in a derivative. This can definitely lead to some confusion when it comes to AFS Licence requirements. Do energy retailers need an AFS Licence? Let’s find out.
Do Energy Retailers Need an AFSL?
The short answer is generally yes —even if you’re only hedging your own exposure to electricity spot prices. This may sound counterintuitive, as AFS Licences are for those providing financial products or services, right?
Let’s break it down.
Are you ‘in the business’ of providing financial services?
Figuring out whether you are in the business of providing financial services from ASIC’s viewpoint normally comes down to whether you are carrying out activities with system, continuity or repetition.
But be mindful that you could also be determined to be ‘in the business’ if you carry out a large one-off transaction, or even if you are in the process of setting up a financial services business.
We suggest reaching out for AFS Licence legal advice if you are in any doubt whether you qualify as ‘in the business’ of providing financial services. AFS Licence requirements are complex, and getting the right guidance is imperative.
Step 2 As an energy retailer, are you providing a financial service?
Most energy retailers hedge their exposure to wholesale electricity spot prices as part of normal business.
An electricity base load swap or a peak swap is considered a derivative (financial product) because it derives its value from the electricity spot price (the underlying commodity), and it doesn’t involve the physical delivery of electricity.
For this reason, ASIC will consider most energy retailers to be ‘in the business’ of hedging their exposure.
But why would an electricity provider need an AFS licence to hedge their own risk?
A few things to remember to help make sense of this:
- A person is determined to provide a financial service if they deal in a financial product or make a market in a financial product, as well as give financial product advice.
- The law deems each party in a derivative contract to be a ‘dealer’ or ‘issuer’.
- An issuer of a financial product doesn’t qualify for the self-dealing exemption.
- Some retailers operate both hedging and trading strategies, whereby the trading strategy aims to make a profit. You could then fall under ‘providing a financial service’ in making a market or possibly providing advice to another market participant.
Generally, energy retailers do need to apply for an AFS Licence. Our AFSL legal team can expertly guide you through the AFS Licence requirements and AFSL application process and help you assess the competency of your proposed AFSL responsible managers.
CNM Legal offers you assured legal advice and the expertise gained from over two decades of specialised AFS Licence experience.