On 22 November 2016, the Australian Securities and Investments Commission (ASIC) extended its relief for foreign financial service providers (FFSPs) from the requirement to hold an Australian financial services (AFS) licence when providing financial services to Australian wholesale clients to certain Luxemburg fund managers (LFMs).
The instrument granting the relief, ASIC Corporations (CSSF-Regulated Financial Services Providers) Instrument 2016/1109, is operative until 28 September 2018 and is consistent in timing with the recent extension of relief to FFSPs relying on a number of other ASIC class orders.
Background to the passporting relief
Generally, where an entity carries on a financial services business in Australia, the entity is required to hold an AFS licence, or otherwise rely upon an available exemption.
FFSPs regulated by certain overseas regulators who wish to provide financial services to wholesale clients in Australia can apply to ASIC to rely on certain exemptions. ASIC may grant this relief where it will address the potential duplication of regulatory burden arising from compliance with Australia's regulatory regime where FFSPs are already subjected to sufficiently equivalent regimes to the Australian regime in their home jurisdictions. A further aim of the relief is to attract additional investment and liquidity to Australian markets.
ASIC has previously made seven legislative instruments for certain FFSPs regulated in the UK, US, Singapore, Hong Kong and Germany.
The Instrument of relief
The decision to make the Instrument was in response to an application for relief made on behalf of LFMs who hold a current licence or authorisation granted by the Commission de Surveillance du Secteur Financier (CSSF), the financial services regulator in Luxembourg, authorising them to provide financial services and are either:
- management companies, which can manage undertakings for collective investment in transferable securities (UCITS) established under Part I of the Law dated 17 December 2010 relating to the undertaking for collective investment of Luxembourg (2010 Law) that come under Chapter 15 of the 2010 Law (Chapter 15 Management Companies); or
- investment companies established under Part I of the 2010 Law that have designated themselves as “self-managed” (Self –Managed UCITS).
ASIC decided to issue the Instrument in the form of a legislative instrument similar to ASIC Class Order [03/1099] UK regulated financial service providers (as extended by the Corporations (Repeal and Transitional) Instrument 2016/396) and on the condition that the LFMs hold a current licence or authorisation granted by the CSSF and is a Chapter 15 Management Company or a Self-Managed UCITS.
The Instrument provides conditional exemption from the requirement to hold an AFS licence when providing financial product advice, dealing in a financial product, making a market for a financial product or providing a custodial or depository service in this jurisdiction to wholesale clients.
The relief applies only in respect of the following financial products: eligible deposit products; derivatives; foreign exchange contracts; securities; debentures, stocks or bonds issued by a government; managed investment products; or interests in a managed investment scheme that is not required to be registered under Chapter 5C of the Corporations Act 2001 (Cth). This is broadly consistent with the other FFSPs passporting relief provided.
Applying for relief
LFMs seeking to rely on the Instrument must lodge an application with ASIC.
The relief in the Instrument is available to an LFM that is either a registered foreign company or has appointed a local agent and satisfies a number of upfront conditions requiring the provision to ASIC of:
- evidence that the LFM is a foreign financial services provider;
- a written notice that it will provide financial services in this jurisdiction in reliance on the Instrument;
- written consents to the disclosure by the CSSF to ASIC and ASIC to the CSSF of any information or document that the CSSF or ASIC has that relates to the LFM; and
- an irrevocable deed of the LFM for the benefit of and enforceable by ASIC and certain other persons in relation to potential enforcement action regarding its operations in Australia.
Once the LFM has been notified by ASIC that it may rely on the relief in the Instrument a number of ongoing conditions must be complied with. These require the LFM to:
- provide written disclosure to all persons to whom the financial services are provided that the LFM is exempt from holding an AFS licence and is regulated by the CSSF under their laws which differ from Australian laws;
- the LFM undertakes to provide each of the financial services in a manner which would comply with the CSSF regulatory requirements applicable to LFMs; and
- ·notify ASIC within 15 business days of each significant change to the LFM’s licence or registration, each significant exemption or relief obtained from the CSSF and each significant disciplinary or enforcement action or significant investigation.
The exemption will cease to apply where an LFM fails to comply with a condition set out in subsection (7) of the Instrument where:
- 15 business days have passed since the LFM became aware or should reasonably have become aware of matters giving the LFM reason to believe it had failed to comply with the condition without providing full particulars of the failure to ASIC (to the extent that the LFM knows those particulars or would have known them if it had undertaken reasonable inquiries); or
- 30 business days have passed from ASIC receiving those particulars from the LFM without ASIC notifying the foreign financial services provider that it may continue to rely on this instrument.
Throughout the period of the Instrument, ASIC intends to consider the current relief settings for all FFSPs and whether they should continue on an ongoing basis. The extension of relief to LFMs could indicate that ASIC will consider broadening the passporting relief to a greater number of European jurisdictions as a result of Brexit ‒ however this remains to be seen.
However, in light of ASIC's previous comment that it will only facilitate the cross-border provision of financial services "where it does not undermine [ASIC's] ability to ensure fair and efficient markets", and the foreshadowed broadening of ASIC's mandate to include reference to consideration of competition, it is likely that ASIC's approach to the ongoing regulation of FFSPs will be based on its view into the state of competition in the financial system. A review by the Productivity Commission which is expected to be finalised by the end of 2017 will be instrumental in that regard.
ASIC has not outlined its consultation plans yet, however it intends to engage with stakeholders on any proposals to amend relief for FFSPs before 28 September 2018.
What you need to do about the new passporting relief
If you are a Luxembourg fund manager, consider applying for the relief to enable you to provide financial services to Australian wholesale clients.
If you are not a Luxembourg fund manager, the extension provides an interesting view point on ASIC's current review of the FFSPs passporting relief framework and the factors that will impact ASIC's approach to ongoing regulation of FFSPs.