Wholesale and overseas exemptions under review
ASIC has proposed two significant changes for overseas fund managers and other foreign financial service providers (FFSPs):
- The current exemption for foreign entities regulated by approved regulators is under review and has been extended for just two more years at this stage. This relates to the class orders providing relief for UK, US, Singapore, HK and German regulated financial service providers: CO 03/1099, CO 03/1100, CO 03/1101, CO 03/1102, CO 03/1103, CO 04/829 and CO 04/1313.
- ASIC is proposing to repeal the licensing exemption which allows wholesale providers to service Australian clients provided they do not carry on business in Australia: CO 03/824.
Foreign financial service provider (FFSP) class orders
These class orders exempt FFSPs from the requirement to hold an Australian financial services (AFS) licence when providing certain financial services in Australia where:
- the financial services are provided to wholesale clients only;
- the financial services are regulated by one of the approved overseas regulators; and
- the FFSP meets the (relatively simple) relevant conditions of relief.
All ASIC class orders are repealed automatically, or ‘sunset’, after 10 years, unless ASIC remakes them. ASIC has therefore been undertaking a program to review class orders which are due to expire. (This regime came into place in 2005 and there are transitional provisions for class orders made before that date, such as the FFSP class orders.)
The FFSP class orders are repealed by ASIC Legislative Instrument (LI) 2016/396 which is attached, along with the Explanatory Statement and ASIC Consultation Paper 268 (CP 268). LI 2016/396 continues the effect of the class orders for a transitional period of two years. During this period:
- entities continuing to rely on the FFSP class orders can continue to do so without taking any further action: LI 2016/396, Sch 2.1(1); CP 268.22; and
- appropriately regulated foreign entities can continue to rely on the FFSP class orders by lodging the relevant documents with ASIC: LI 2016/396, Sch 2.1(1).
LI 2016/396 also gives ASIC the power to require all entities relying on the FFSP class orders (existing and new) to provide ASIC with information about financial service business activities undertaken in Australia. This power is equivalent to a power ASIC has in respect of AFS licensees.
The FFSP class orders provide a simple and straightforward regime for foreign licensees to operate in Australia on the basis that their overseas regulatory regime is sufficiently equivalent to the Australian regulatory regime. ASIC has given the relief where it has effective cooperation arrangements with the overseas regulator.
The rationale for extending the class orders for only two years is therefore curious. ASIC has said this is to provide certainty while the Financial System Inquiry (FSI) recommendations relating to financial sector competition are implemented. ASIC expects that these recommendations as well as its proposed new competition mandate may affect its approach to the ongoing regulation of FFSPs. It is unclear why this should be the case. The FFSP class orders enhance competition in Australia by lowering the barriers to entry for overseas regulated institutions. However, ASIC has stated that its review of the FFSP class orders would need to consider:
(a) in light of recent evidence of non-compliance with our relief for FFSPs, the extent to which the current relief settings provide an effective mechanism to:
(i) monitor the conduct of FFSPs in our markets; and
(ii) allow us to take appropriate action against FFSPs in the event of non-compliance; and
(b) the impact of increased regulatory focus on wholesale cross-border markets since the relief was originally granted, including the over-the-counter (OTC) derivative reforms adopted by the Group of Twenty (G20) in 2009. (CP 268.25)
There is therefore a risk that ASIC will take the view that the regime should not continue in its current form. Whether that means that overseas FFSPs will need to obtain a licence, restrictions on the availability of the regime or additional requirements is not clear at this stage.
Wholesale client ‘exemption’
ASIC Class Order 03/824 currently provides a licensing exemption for wholesale FFSPs the effect of which is that FFSPs which provide financial services to Australian wholesale clients do not need to hold an AFS licence if they do not engage in any activities in Australia whether not they induce Australian wholesale clients to use their services.
CP 268 proposes to repeal CO 03/824. ASIC states that this is because other exemptions provide similar relief. However, in saying this, ASIC has acknowledged that the other exemption contemplated is different in two ways:
- CO 03/824 applies to any financial service, while s911A(2E) only applies to dealing, advising or making a market in derivatives and foreign exchange contracts; and
- CO 03/824 applies to any wholesale client, while s911A(2E) only applies to large financial institutions.
ASIC proposes that the repeal would occur in March 2017 subject to the outcome of its consultation process. Submissions for which close on 2 December 2016. If CO 03/824 is repealed, ASIC is proposing that a one-year transitional period will apply to allow sufficient time for entities relying on [CO 03/824] to make alternative arrangements.
We are aware of many institutions who rely on CO 03/824 in circumstances which do not only relate to derivatives and fx contracts. This proposal could therefore have a significant impact for overseas FFSPs with limited connections with Australia.