Following recent changes to the structure and regulation of carbon markets in Australia, the Australian Securities and Investments Commission (ASIC) has provided updated guidance concerning the operation of financial services laws for carbon market participants. Regulatory Guide 236: Do I need an AFS licence to participate in carbon markets? (RG236) has been updated, in particular with regard to carbon abatement project developers and aggregators.

What is an AFS Licence and what is RG236?

A requirement to hold an Australian Financial Services Licence (AFS Licence) arises under the Corporations Act 2001 (Cth) (Corporations Act). A person who carries on a financial services business in Australia must hold an AFS Licence.[1] Whether a person is carrying on a financial services business is in large part dependent on whether the products they deal in, provide advice about or make a market for are ‘financial products’ under theCorporations Act.

ASIC issues Regulatory Guides to help guide market participants  on and how ASIC will exercise specific powers under legislation and to explain how ASIC interprets the law. RG236  provides  guidance for carbon market participants regarding the circumstances in which they will be required to hold an AFS Licence.

RG 236 was updated in May 2015 to take into account [2]:

  • the end of the carbon pricing mechanism in February 2015
  • the establishment of the Emissions Reduction Fund (ERF)
  • anticipated ERF project structures that involve multiple small-scale carbon abatement activities under a single project (i.e. ‘ERF aggregated projects’ carried out by an ‘aggregators’)
  • competitive ERF reverse auctions for carbon abatement contracts
  • the introduction of the emissions reduction safeguard mechanism in July 2016.

When will AFS Licences be needed to participate in Australia’s carbon emissions framework?

In RG236, ASIC explains its expectation that, from 2015, financial services provided in relation to emissions units in Australia will predominantly relate to the activities relating to the ERF.[3]

The ERF is administered by the Clean Energy Regulator (Regulator) and is implemented via auctions for the purchase of emissions reductions at the lowest available cost. Participants submit sealed bids specifying a price per tonne of emissions reductions and the lowest-cost projects are selected.[4] In April 2015, the Regulator held the first ERF auction.[5] The Regulator issues Australian carbon credit units (ACCUs) in return for the carbon abatements achieved by ERF projects.[6]

ACCUs and eligible international emissions units are specifically designated as financial products under theCorporations Act[7] and, thus, participants will be required to hold and AFS Licence in order to provide financial services relating to these units. For those wishing to fully understand the reach of what might be considered a financial product, RG236 is specific in its guidance and provides, for example, that ‘…both Kyoto ACCUs and non-Kyoto ACCUs are financial products’.[8] RG236 also points out that some arrangements in carbon markets might be considered financial products as ‘facilities for making a financial investment’ or as managed investment schemes depending on their particular characteristics.[9]

RG236 also notes that, while certain voluntary (non-regulated) emission units are not considered financial products themselves, derivatives on or schemes involving these units may be considered financial products.[10]

A key recent change is that the Corporations Regulations 2001 now specifically declare that a carbon abatement contract[11] is not a financial product.[12] Thus, an AFS Licence is not generally required to provide advice about a carbon abatement contract.[13]

What does it mean to provide a financial service?

Whether a particular activity is a financial service is not always clear cut. In general, a person provides financial services if he/she[14]:

  • provides financial product advice
  • deals in a financial product
  • makes a market for a financial product
  • operates a registered managed investment scheme
  • provides a custodial or depository service
  • provides traditional trustee company services.

RG236 provides useful examples of each of these concepts in the context of the current carbon emissions framework.[15] For example, RG236 notes that ‘…a person quoting prices at which they are prepared to buy or sell ACCUs… on their own behalf, will mean that the person is making a market.’ [16]

In relation to advice it is useful to note that a person will generally not be providing financial advice if he/she simply provides factual information that does not express an opinion or recommendations.[17]

Similarly, RG236 provides useful guidance on when an interest in a scheme relating to carbon markets will be a financial product and when a scheme might be required to be registered.[18] ASIC has stated that ‘some types of projects under the ERF—generally known as an ‘ERF aggregated project’ carried out by an ‘aggregator’—may be managed investment schemes.’[19]

What does it mean to hold an AFS Licence?

An AFS Licence will cover the range of financial services the licence holder and his/her representatives are authorised to provide. It will also specify the types of clients to whom the licence holder can provide those services.[20] AFS Licences may be issued with particular conditions and there are various ongoing compliance, monitoring and disclosure requirements for licence holders.

AFS Licence holders are required to ensure that financial services are provided efficiently, honestly and fairly and that the services comply with all conditions and laws. In addition licence holders are required to maintain certain minimum standards of training and competence for themselves and their employees.

As ASIC states in its own media release: ‘[g]iven the broad range of financial services that may be provided in carbon markets, we encourage carbon market participants to obtain their own professional advice on how the Corporations Act and other applicable laws apply to their particular circumstances, as it is their responsibility to determine their obligations’[21].