On 1 June 2018, ASIC released Consultation Paper 301 (CP 301) in connection with the Australian financial services (AFS) licensing exemptions applicable to foreign financial service providers (FFSP) carrying on a financial services business in Australia with wholesale clients. Many foreign fund managers rely on these exemptions.

The key points are as follows:

  • The existing exemption will be extended until 30 September 2019; it was due to expire on 28 September 2018;
  • As anticipated, ASIC is proposing that FFSPs will need to obtain a modified AFS licence in order to continue to carry on a financial services business in Australia with wholesale clients; and
  • If an FFSP must obtain a modified AFS licence following the consultation process, ASIC will allow a further transition period until 30 September 2020 to permit an FFSP to obtain the modified AFS licence.

Background

ASIC has made legislative instruments that grant two types of exemptions to FFSPs providing financial services to wholesale clients in Australia:

  • sufficient equivalence relief – FFSPs are exempt from holding an AFS licence if the overseas regulatory regime is sufficiently equivalent to the AFS licence regime; and
  • limited connection relief – FFSPs are exempt from holding an AFS licence if the FFSP carries on a financial services business only by engaging in conduct that is intended to induce people in Australia to use the financial services it provides.

These exemptions were due to expire on 28 September 2018 after a two year extension period during which ASIC reviewed the regulatory settings behind the FFSP relief. ASIC’s review found there were supervisory and regulatory concerns with the current exemptions and that it “no longer strikes the appropriate balance between cross-border investment facilitation, market integrity and investor protection”.

Proposals

Sufficient equivalence exemption

ASIC is proposing to extend the sufficient equivalence relief on similar terms for a further 12 months until 30 September 2019. FFSPs that currently have the benefit of this exemption need not make any additional filings in order to continue to have the benefit of the extension; they simply need to comply with the existing conditions of the exemption. FFSPs that wish to obtain the benefit of the sufficient equivalence exemption for the first time can file the requisite documents with ASIC during the 12 month extension period.

After 30 September 2019, ASIC proposes to:

  • repeal the sufficient equivalence relief and any individual relief issued on similar terms (with a 12-month transitional period from 1 October 2019 to 30 September 2020); and
  • implement a sufficiently equivalent AFS licensing regime for FFSPs, such that eligible FFSPs can apply for and maintain a modified form of AFS licence (Foreign AFS Licence).

As part of the modified licensing regime, a holder of a Foreign AFS Licence (Foreign AFS Licensee) will be required to:

  • do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly;
  • have in place adequate arrangements for managing conflicts of interest that may arise wholly or partially in relation to activities undertaken by the licensee or a representative of the licensee in the provision of financial services;
  • comply with the conditions on the licence;
  • comply with the financial services law, subject to modifications to the Corporations Act 2001 (Cth) (Corporations Act);
  • take reasonable steps to ensure that representatives comply with the financial services law; and
  • have adequate risk management systems.

Under ASIC's proposal, Foreign AFS Licensees would be subject to a fuller range of ASIC’s supervisory and enforcement powers than is currently imposed on an FFSP under the existing exemption. In particular, ASIC could employ its directions power and impose on an FFSP the remedies and penalties available to ASIC against all AFS licence holders (such as the powers to impose or vary conditions on a licence, or suspend or cancel a licence). An FFSP would also be subject to the Corporations Act breach reporting requirements and would need to give ASIC reasonable assistance during surveillance checks.

Unlike usual AFS licensees, a Foreign AFS Licensee will not be required to:

  • have adequate resources (including financial, technological and human resources) to provide the financial services covered by the licence and to carry out supervisory arrangements;
  • maintain the competence to provide those financial services;
  • ensure that its representatives are adequately trained, and are competent, to provide those financial services; or
  • comply with any other obligations that are prescribed by the regulations for the purposes of s912A(1) of the Corporations Act.

The Foreign AFS Licensee will not be permitted to appoint representatives other than representatives that are:

  • employees or directors of the Foreign AFS Licensee;
  • authorised representatives that are wholly owned bodies corporate of the Foreign AFS Licensee; or
  • employees or directors of wholly owned bodies corporate of the Foreign AFS Licensee.

ASIC also proposes to exempt FFSPs from particular Australian legislative provisions where it considers that the overseas regulatory regime achieves similar outcomes to the Australian regulatory regime.

ASIC’s AFS licensing kit (Regulatory Guides 1-3) sets out a more detailed overview of the application process for an AFS licence. CP 301 proposes that similar documentation will be required for a Foreign AFS Licence. ASIC has indicated that it is currently updating the process for filing applications for AFS licences. This updated process will apply to applications for Foreign AFS Licences.

Limited connection relief

As already noted, ASIC is proposing to roll-over the limited connection relief on similar terms for a further 12 months until 30 September 2019. However, after this date, ASIC proposes to repeal this relief effective at the end of a further 12 month transitional period to 30 September 2020 to allow entities currently relying on this relief to obtain an AFS licence (whether an ordinary AFS licence or a Foreign AFS Licence as contemplated above).

Next steps

Submissions to ASIC on CP 301 are due on 31 July 2018.

If the proposals in CP 301 come to fruition, FFSPs will need to consider their financial services business activities in Australia and decide whether to apply for a Foreign AFS Licence.