Foreign financial service providers (FFSPs), that provide financial services to wholesale clients in Australia relying on one of the FFSP Class Order exemptions from holding an Australian financial service licence (AFSL), should note the recent enforceable undertakings (EUs) that the Australian Securities & Investments Commission (ASIC) issued to three Barclays FFSPs.
The EUs indicate that, not only must FFSPs comply with the conditions of the FFSP Class Orders, they should have systems in place that enable them to demonstrate compliance if it is called into question. Importantly, before an FFSP provides financial services in Australia, the FFSP must give the client prescribed disclosures (set out below) and it should also be able to demonstrate that such disclosures have been provided. An FFSP should notify ASIC without delay if the FFSP becomes aware that it has not complied with the conditions of the FFSP Class Order (including the condition to notify ASIC of a failure to comply with the conditions of the FFSP Class Order within the prescribed time period).
FFSP Class Orders
The FFSP Class Orders are:
- [CO 03/1099] (UK FCA regulated FFSPs);
- [CO 03/1100] (US SEC regulated FFSPs);
- [CO 03/1101] (US Federal Reserve and OCC regulated FFSPs);
- [CO 03/1102] (Singapore MAS regulated FFSPs);
- [CO 03/1103] (Hong Kong SFC regulated FFSPs);
- [CO 04/829] (US CFTC regulated FFSPs);
- [CO 04/1313] (German BaFin regulated FFSPs); and
- ASIC Corporations (CSSF-Regulated Financial Services Providers) Instrument 2016/1109,
(with (a) – (g) continued in force until 28 September 2018 by ASIC Corporations (Repeal and Transitional) Instrument 2016/396).
An FFSP Class Order exemption is only available to FFSPs with specified types of regulation in their home jurisdiction, and only if the conditions of the FFSP Class Order are met. If the conditions are not satisfied, the exemption does not apply and the FFSP may have been carrying on a financial services business in Australia without an AFSL in breach of the Corporations Act 2001 (Cth of Australia) (Corporations Act). The sanction for doing so is up to 1000 penalty units for companies and, for other FFSPs, up to 200 penalty units, two years imprisonment or both. One penalty unit currently equals A$180. FFSPs that do not have the benefit of the exemption may also have contracts rescinded and have to repay brokerage, commissions and other fees.
Report non-compliance without delay
Even though ASIC does not have the power to waive non-compliance with a condition of an FFSP Class Order, any non-compliance should be reported to ASIC without delay as this might affect ASIC’s action. ASIC’s approach appears to be harsher for FFSPs that are tardy in reporting non-compliance.
The Barclays’ FFSPs became aware of the non-compliance several months before they reported it to ASIC. As part of the EU, the Barclays FFSPs agreed to pay A$500,000 to The Ethics Centre and to have an ASIC approved independent expert review and test their internal compliance framework.
Similarly, in November 2015, three J.P.Morgan FFSPs agreed to an EU for failing to provide clients with the prescribed disclosure before providing financial services to them. When issuing the EU, ASIC referred to the number and duration of the failures, noting that they demonstrated a systemic weakness in the compliance controls implemented by the J.P.Morgan FFSPs. All three FFSPs had reported their non-compliance to ASIC in 2014. Two of the J.P.Morgan FFSPs had reported similar failures to ASIC in 2008 (and one of these two had reported the same failure in 2005).
Different EUs for J.P.Morgan in 2015 and Barclays in 2017
Unlike the Barclays EU, the EU issued two years earlier to the J.P.Morgan FFSPs did not require J.P.Morgan to pay money to The Ethics Center or any other person; it did, however, require them to appoint an independent expert to review their compliance framework and report deficiencies. The payment obligation imposed on the Barclays FFSPs, could reflect differences between the facts of the Barclays and J.P.Morgan cases. A copy of the first report prepared by KPMG, the independent expert reviewing J.P.Morgan’s compliance framework, is available at:
ASIC applying a stricter approach to compliance with the conditions
Even if the difference in facts explains the differences in the EUs, it appears that ASIC is becoming more stringent with non-compliance of the FFSP Class Orders. Previously, ASIC was much more willing to continue FFSP exemptions where non-compliance was reported upon detection, and, in some cases, ASIC did not require FFSPs to reapply for the exemption. This appears to have changed. ASIC Commissioner Cathie Armour noted in the ASIC media release announcing the Barclays EU, “entities that fail to self-report a breach of their obligations to ASIC within the required time frame will be subject to automatic and indefinite exclusion from the licensing exemption provided by [the FFSP Class Orders]”. This is consistent with the drafting of the FFSP Class Orders; that is, the exemption only applies for so long as the conditions are satisfied. If the conditions are not satisfied, the exemption under the FFSP Class Order does not apply.
In contrast to the Barclays and J.P.Morgan cases, other FFSPs that, during the same time period, reported their non-compliance immediately upon it being detected, were simply required to reapply for the exemption or the non-compliance was waived and the exemption continued to apply. This was consistent with ASIC’s approach in 2005 to dealing with FFSPs that reported failures to provide Australian investors with the requisite disclaimers. Admittedly, these reports pertained to far fewer clients than the Barclays and J.P.Morgan instances and appeared to have been made on a timely basis. More details of ASIC’s approach in 2005 is available in the report available at this website address:
Enforcement against Barclays
The EU given by the three Barclays FFSPs was accepted by ASIC on 22 March 2017. It was given by Barclays Capital Inc. (domiciled in the US), Barclays Capital Asia Limited (domiciled in Hong Kong) and Barclays Capital Securities Limited (domiciled in the UK).
Each of the Barclays entities failed to comply with the condition of the FFSP Class Order that required the Barclays entity to disclose to their Australian clients that the Barclays entity was exempt from holding an AFSL and was regulated by the relevant overseas regulatory authority. This non-compliance affected an estimated 827 wholesale Australian investors in relation to Barclays Capital Inc., 46 wholesale Australian investors in relation to Barclays Capital Asia Limited and 80 wholesale Australian investors in relation to Barclays Capital Securities Limited.
Barclays Capital Inc. also failed to notify ASIC of certain offshore investigation and enforcement matters within the timeframe required under the FFSP Class Orders (i.e. 15 business days). This non-compliance occurred across a three-year period.
ASIC considered that:
- the failure to comply with the conditions was significant since it affected a large number of wholesale investors over an extended period of time;
- the non-compliance exposed material and systemic weaknesses in the Barclays entities’ controls to ensure compliance with their regulatory reporting obligations under the relevant FFSP Class Order; and
- the failure by the Barclays entities to notify ASIC within the required timeframe of the non-compliance with the condition to provide the prescribed disclosure excluded the Barclays entities from relying on the relevant FFSP Class Order.
Under the terms of the EU, the Barclays entities agreed to engage an ASIC approved independent expert to perform a range of roles including:
- reviewing and testing the compliance framework implemented by the Barclays entities following the reporting of breaches; and
- reporting any deficiencies and making recommendations on how to rectify those deficiencies to ensure effective and ongoing compliance.
The Barclays entities also agreed to provide the independent expert with any information or documents reasonably required and permit the independent expert to access the Barclays entity’s books, interview present employees, contractors, agents and/or consultants and to consult with ASIC and disclose to ASIC any further information in the course of carrying out its assessment.
ASIC has granted the Barclays entities conditional individual relief in order to maintain the availability of the financial services provided by Barclays to the Australian wholesale sector.
Ongoing compliance obligations
As evidenced by the Barclays case, FFSPs that rely on the FFSP Class Orders should have appropriate systems in place to ensure compliance with their regulatory reporting obligations. Set out below is a summary of these disclosure and reporting requirements.
The FFSP must provide written disclosure to all persons to whom the financial services are provided in this jurisdiction (before the financial services are provided) containing prominent statements to the following effect:
- the FFSP is exempt from the requirement to hold an AFSL under the Corporations Act in respect of the financial services; and
- the FFSP is regulated by the relevant overseas regulatory authority (e.g. the SEC, FCA or other) under the laws of the relevant overseas jurisdiction, which differ from Australian laws.
The FFSP must notify ASIC, as soon as practicable and in any event within 15 business days after the FFSP becomes aware, or should reasonably have become aware, and in such form, if any, as ASIC may from time to time specify in writing, of the details of:
- each significant change to, including the termination of the regulation of the FFSP in its home jurisdiction that is relevant to the financial services that the FFSP provides, or intends to provide, in Australia;
- each significant particular exemption or other relief that the FFSP obtains from the relevant overseas regulatory requirements which impacts on the financial services that the FFSP provides or intends to provide in Australia;
- each significant investigation, enforcement or disciplinary action taken by the FFSP’s home regulatory authority or any other overseas regulatory authority against the FFSP;
- any additional types of financial service authorised by the FFSP’s home regulatory authority;
- any change in the name or address of the FFSP’s agent, or change in the FFSP’s agent, or both;
- any change in the FFSP’s business structure (e.g. from a limited liability company to a limited partnership or other type or structure); and
- cessation of reliance on the exemption.
Reporting failures to comply with the conditions of the FFSP Class Order
If the FFSP becomes aware, or should reasonably have become aware, that it has failed to comply with any condition of the FFSP Class Order, the FFSP must give ASIC full details of the non-compliance within 15 business days after that time.
The FFSP must also:
- have a local Australian agent appointed at all times to receive service of process (unless the FFSP has registered in Australia as a foreign company);
- provide the financial services in Australia in a manner that would comply, so far as is possible, with the relevant overseas regulatory requirements if the financial services were provided in those jurisdictions in like circumstances; and
- comply with any ASIC notice directing the FFSP to lodge with ASIC within the specified time, a written statement containing specified information about any financial services provided by the FFSP in Australia.