This article explores the requirement for foreign financial services providers (FFSP) to hold an Australian Financial Services Licence (AFSL) when operating a financial services business in Australia and sets out the various options available to FFSPs including various exemptions from the requirement to hold an AFSL.
The Corporation Act (Act)
Chapter 7 of the Act prohibits the carrying on of a financial services business in Australia without an AFSL, unless an exemption applies.
A financial service includes the provision of financial product advice and dealing in a financial product. Financial product advice is a recommendation or statement of opinion, or a report of either of those things that is intended to influence (or could be reasonably regarded as being intended to influence) a person in making a decision to acquire a financial product, eg interests in a fund, or class of financial product. Dealing in a financial product includes the issuing of interests or the arranging for the issuing of interests in financial products.
Further, for the purposes of Chapter 7 of the Act, a financial service business is taken to be carried on in Australia, if in the course of the person carrying on the business, the person engages in conduct that is:
- intended to induce people in Australia to use the financial services the person provides; or
- likely to have that effect.
Accordingly, the marketing and provision of financial products by financial services providers in Australia is likely to be considered financial product advice and dealing in financial products, notwithstanding that the financial service provider may be based in an overseas jurisdiction and the actual issue of the financial product may occur in a foreign jurisdiction.
Thus, in the absence of any applicable exemptions, the marketing of financial products in Australia and the issue of interests in foreign financial products to investors in Australia would constitute conduct that would require an AFSL.
The Act also contemplates that ASIC may exempt a person regulated by an overseas regulatory from the requirement to hold an AFSL. ASIC has set out its policy in respect of this power in Regulatory Guide 176: Licensing: Discretionary powers—wholesale foreign financial services providers (RG 176).
- RG 176 sets out the circumstances under which ASIC will grant exemptions from the requirement to hold an AFSL to FFSPs where they provide services only to wholesale clients and are regulated by overseas regulatory authorities.
Pursuant to RG 176 ASIC states that it will use its exemption powers so that an FFSP can provide particular financial services in Australia without an AFS licence only if:
- The particular financial services are provided in Australia only to wholesale clients.
ASIC's position is that wholesale clients are in a position to look after their own interests and, therefore, ASIC does not need to determine whether the relevant overseas regulatory authority protects the interests of these clients. As a result, RG 176 does not focus on consumer protection outcomes, or outcomes intended to protect a specific client.
- The particular financial services are regulated by an overseas regulatory authority.
Generally, an FFSP will be regulated by one regulatory authority in its home jurisdiction. Where an FFSP is regulated by more than one overseas regulatory authority, whether within its home jurisdiction or elsewhere, ASIC regards the relevant overseas regulator as the regulator which, in ASIC's view, has the most responsibility for monitoring and enforcing compliance by the FFSP with its regulatory obligations for financial services similar to those for which an exemption is sought under RG 176.
- Regulation by that overseas regulatory authority is sufficiently equivalent to regulation by ASIC.
ASIC has determined that regulation by an overseas regulatory authority is sufficiently equivalent to regulation by ASIC if the regulatory regime under which that authority operates:
- is clear, transparent and certain;
- is consistent with the IOSCO Objectives and Principles of Securities Regulation;
- is adequately enforced; and
- achieves sufficiently equivalent outcomes as the Australian regime achieves for the regulation of wholesale financial services.
- There are effective co-operation arrangements between the overseas regulatory authority and ASIC.
This is a matter for ASIC to decide, in consultation with the relevant overseas regulator. It cannot be dealt with by FFSPs in an application for relief. Effective co-operation arrangements will usually be in the form of a Memorandum of Understanding or some other documented understanding, although they may be established by more informal arrangements. Effective co-operation arrangements will provide for:
- prompt sharing of information by the relevant overseas regulator; and
- effective co-operation on supervision and investigation and enforcement.
- The FFSP meets all the requirements of the relevant exemption.
Exemption under this policy may be either granted on an individual basis or to a class of persons and may be limited to the particular financial services provided by that FFSP in Australia.
ASIC's general exemption power
ASIC also has a general power to exempt a person, or class of person from the requirement to hold an AFSL pursuant to s. 911A(2)(l) of the Act.
FFSP covered by class orders
ASIC has issued various class orders pursuant to its stated policy in RG 176 and pursuant to its power in s.911A(2)(l) of the Act, as set out in the table below. Each exemption set out below is subject to its own terms and conditions which must be met for the exemption to apply.
Limited Australian contact
Section 911D of the Act sets out that a financial services business is taken to be carried on in the Australian jurisdiction if conduct is engaged in that is intended to induce people in Australia to use the financial services it provides, or is likely to have that effect. As set out above, a financial services business can only be carried on in Australia without an AFSL under specific exemptions.
One such exemption, under Class Order 03/824, provides that where a financial service is provided and:
- the financial service is provided only to wholesale clients; and
- were it not for the activity outlined in 911D (inducing people in Australia to use a financial service) the entity would otherwise not be considered carrying on a business in Australia.
Activities such as establishing a local agent or local premises would exclude the business from this class order relief. Under this exemption, foreign financial services providers would not be able to undertake investor relations efforts or carry out any marketing for their products within Australia as such activities are likely to amount to carrying on a financial services business in Australia, outside the ambit of section 911D of the Act.
This Class Order relief would only enable a foreign entity to act from a foreign jurisdiction (for example advertising via the internet) and make contact with people from outside Australia. Any substantive business activities carried out within Australia is likely to exclude this relief.
Mutual Recognition – New Zealand
Chapter 8 of the Act contains the trans-Tasman mutual recognition scheme for offers of securities and is intended to promote investment between Australia and New Zealand. It allows an issuer to offer securities or interests in managed or collective investment schemes in both countries using one disclosure document prepared under the fundraising laws in its home country.
Under the mutual recognition scheme, issuers will not be required to comply with most of the requirements of the other country's fundraising laws. Instead, issuers who wish to operate under the scheme will be able to comply with some minimal entry and ongoing requirements.
ASIC has issued Regulatory Guide 190: Offering securities in New Zealand and Australia under mutual recognition which set out the relevant requirements.
RG 178 Foreign collective investment schemes
Under RG 178, ASIC will generally provide conditional relief from managed investment scheme registration, fundraising requirements, the AFSL requirements for certain financial services, and some of the financial product disclosure requirements to foreign collective investment scheme (FCIS) operators where the following pre-conditions are met:
- The regulatory regime in the jurisdiction from which the FCIS operator originates and in which it is regulated (home jurisdiction) is sufficiently equivalent to the Australian regulatory regime for registered managed investment schemes and financial product disclosure.
- ASIC has effective co-operation arrangements with the regulator of the FCIS in the FCIS's home jurisdiction.
- Adequate rights and remedies are practically available to investors resident in Australia if the FCIS operator breaches the relevant provisions of the regulatory regime in its home jurisdiction.
The Securities and Futures Commission of Hong Kong (SFC) applied to ASIC for relief under RG 178 for the operation of FCIS authorised by the SFC. As a result, ASIC issued Class Order CO 08/506 Hong Kong Collective Investment Schemes which sets out the requirements for relief pursuant to RG 178.
ASIC has also issued CO 04/526 Foreign collective investment schemes which exempts US and New Zealand collective investment schemes that are not principally aimed at Australians.
Advising on Foreign Financial Products
It is also important to note that licensed and authorised financial planners can advise on foreign financial products even though a foreign issuer does not operate in Australia. As the financial planner is the interface with the client, the financial planner will be responsible for advising the client and arranging for the issue of the financial products (which should be covered by the relevant AFSL authorisations). Further, there is also an exemption contained in the Act for FFSPs that issue products to Australian investors through the holder of an AFSL. However, financial planners will need to ensure that they comply with all of their obligations, and particularly the need to properly research foreign financial products, in order to make informed decisions before making recommendations to clients.