From 1 July 2012, various emissions units recognised under the Clean Energy Act 2011 and related legislation became financial products under the Corporations Act 2001 (Corporations Act). Any entity that provides financial advice or services in regulated emissions units will require an Australian Financial Services Licence (AFSL) to carry on a financial services business, unless an exemption applies. For entities that already hold an AFSL, a variation may be required.
Transitional registration and licensing of financial services in emissions units
ASIC has been accepting applications for registrations from entities who intend to provide financial services in relation to regulated emissions units. Under transitional arrangements entities had until 30 June 2012 to register their intention to apply for or vary an existing AFSL in relation to regulated emissions units. Registration was an interim step before obtaining an AFSL or a variation to an existing AFSL which would allow an entity to provide financial services in emissions units from 1 July 2012 to 31 October 2012, without holding an appropriate licence.
An entity that relied on registration to provide financial services from 1 July 2012 is still required to comply with various financial services laws that would otherwise apply.
Entities wishing to provide financial services in regulated emissions units after 31 October 2012, must apply for a new AFSL or a variation to an existing licence by 31 October.
From 1 January 2013 it will be an offence to provide financial services in regulated emissions units without an AFSL, unless an exemption applies.
Which emissions units are financial products?
The following emissions units, recognised under the clean energy legislative package, are financial products under the Corporations Act:
- Carbon units issued by the Clean Energy Regulator under Pt 4.2 of the Clean Energy Act 2011
- Australian carbon credit units issued by the Clean Energy Regulator under the Carbon Credits (Carbon Farming Initiative) Act 2011
- Eligible international emissions units (EIEUs) issued and traded in international carbon markets that are recognised under the clean energy legislative package.
Activities requiring a licence
Generally an entity that provides financial services for these types of emissions units, or an entity planning to commence such activity will require an AFSL or a variation to an existing AFSL. For example, an entity will be providing a financial service with respect to these emission units, if they:
- provide financial product advice in relation to the emission units
- deal in the emission units
- make a market for the emission units.
Does an exemption apply?
An entity will not be required to hold an AFSL if an exemption applies. While there are a number of general exemptions under the finance services laws, the exemptions that could be relevant to carbon markets include:
- dealing in regulated emissions units on one’s own behalf
- dealing in derivatives over regulated emissions units and foreign exchange contracts in certain specified circumstances
- foreign financial services providers.
Retail client obligations
If an entity intends to provide financial services in relation to regulated emissions units to retail clients, there will be additional obligations in relation to compensation and dispute resolution.
From 1 July 2012 compensation arrangements, consisting of ‘adequate’ professional indemnity (PI) insurance, or an alternative arrangement that is specifically approved by ASIC must be in place. In addition, it must be ensured that the terms of the PI insurance policy provide cover for all of the financial services provided, including those involving emissions units.
Further, from 1 July 2012, dispute resolution arrangements must consist of an internal dispute resolution (IDR) procedure and membership of an external dispute resolution (EDR) scheme that will accept complaints in relation to emission units.
Representatives of AFSL holders
ASIC has confirmed that financial services representatives will be able to provide financial services in regulated emissions units from 1 July 2012 until 31 December 2012 without the need for an AFSL, provided they act for either:
- an entity registered with ASIC to provide those financial services, who applies no later than 31 October 2012 for a AFSL or variation to an existing licence, or
- an AFSL holder authorised to provide financial services with an appropriate authorisation for regulated emissions units.