ASIC is undertaking a further consultation process in its attempts to get the new regime for foreign financial services providers right. The proposed changes are contained in Consultation Paper 315(CP 315) and a draft updated Regulatory Guide 176.
In summary, ASIC seeks feedback on:
- new relief for fund managers which does not rely on approval of overseas regulators – but does impose some conditions which may be challenging to comply with;
- the proposed new foreign Australian financial services (AFS) licensing regime for other foreign financial service providers (FFSPs) regulated under a sufficiently equivalent regime – ASIC has provided some more information about how it will work; and
- its decision not to continue the limited connection exemption – although it is seeking further submissions on whether an extended reverse solicitation exemption should be available.
ASIC will extend the current approved foreign regulators (e.g. US SEC, UK FCA, HK SFC, Singapore MAS, German BaFin) and limited connection FFSP exemptions to 31 March 2020, with the following transition periods:
- 6 months from 1 April 2020 to 30 September 2020 for those relying on the limited connection relief on 31 March 2020, and
- 2 years from 1 April 2020 to 31 March 2022 for those relying on the sufficient equivalence relief on 31 March 2020.
Fund managers potentially better off than other FFSPs
ASIC proposes to provide relief to FFSPs that provide ‘funds management financial services’ to professional investors in Australia (Funds Management Relief). Funds management financial services are defined as:
- dealing in, providing advice on or making a market in securities issued by an offshore fund;
- managing assets located outside Australia for Australian superannuation funds and managed investment schemes with net assets of over $10 million, Australian life insurance companies and Australian government authorities.
It does not, however, include custodial and depository services, on the basis that there is an existing exemption for sub-custodians. Further, the relief is limited to services provided to ‘professional investors’. Although this will cover most clients, in particular regulated financial institutions, it is more restrictive than the current FFSP exemptions which apply to a wider category of ‘wholesale clients’.
Importantly, the Funds Management Relief will be subject to an aggregated revenue cap on the scale of services provided – FFSPs can only rely on the relief if less than 10% of the annual aggregated consolidated gross revenue generated by it and its related companies comes from Australian clients. ASIC states that this approach is similar to that adopted by the Ontario Securities Commission. FFSPs will be required to maintain adequate proof of compliance with revenue cap and if it reasonably believes it will breach the cap then it should not provide the service.
FFSPs seeking to benefit from the Funds Management Relief will be subject to a number of other conditions, such as:
- not carrying on a business in Australia;
- appointing a local agent and submitting to the non-exclusive jurisdiction of the Australian courts;
- notifying ASIC of the types of funds management services intending to be provided; and
- provision of reasonable assistance to ASIC during surveillance checks.
ASIC has released a draft instrument ASIC Corporations (Foreign Financial Services Providers—Funds Management Financial Services) Instrument 2019/XXX to implement the Funds Management Relief.
FFSPs should consider the scope of the proposed Funds Management Relief and whether it will cover all their financial services as it may be appropriate to make submissions (as outlined below) to ASIC to extend the relief to related financial services.
It is also important to consider the impact of the repeal of the 'limited connection' relief to ensure the Funds Management Relief will be sufficient and consider making a submission to ASIC if required.
New foreign AFS licence for FFSPs in sufficiently equivalent jurisdictions
As contemplated in ASIC’s previous round of consultation (see CP 301), ASIC will be implementing a new ‘foreign AFS licence’ regime. Under this regime, FFSPs that are licensed/authorised in an overseas jurisdiction that has been assessed by ASIC as a ‘sufficiently equivalent’ regime will be able to apply for a foreign AFS licence to provide financial services to wholesale clients in Australia. Currently, those regimes assessed as ‘sufficiently equivalent’ are Germany, Hong Kong, Luxemburg (for fund management and investment companies), Singapore, the United Kingdom and the United States. ASIC’s consultation paper does not indicate that it is currently assessing any other jurisdiction for sufficient equivalence.
Foreign AFS licensees will be exempt from a number of obligations applying to full licences on the basis that they are subject to overseas requirements that would achieve similar regulatory outcomes. The main obligations remaining include:
- provide financial services efficiently, honestly and fairly
- adequate arrangements for management of conflicts of interest
- comply with general laws relating to the provision of financial services, e.g. the prohibition on misleading and deceptive conduct
- adequate risk management systems
- report significant breaches to ASIC
- notify ASIC of certain changes, including change of control, and
- comply with ASIC investigation and surveillance requirements.
ASIC proposes a ‘streamlined application process’ for foreign AFS licence applications on the basis that only certain ‘proof’ documentation will need to be submitted and not all of the AFS licence obligations will apply to foreign AFS licensees. The draft updated RG 176 provides guidance on how foreign providers may apply for the foreign AFS licence.
A few key points to note in relation to the foreign AFS licensing regime:
- ASIC will assess applications to extend the sufficient equivalence relief to cover other overseas regulatory regimes.
- ASIC will extend the existing ‘passporting’ sufficient equivalence relief in ASIC Corporations (Repeal and Transitional) Instrument 2016/396 (and various ASIC Class Orders) for a further 6 months to 31 March 2020 (previously 30 September 2019).
- The new licensing regime will commence on 1 April 2020 but FFSPs currently relying on the passporting relief will have a transition period of 24 months until 1 April 2022 to comply (e.g. submitting an application for a foreign AFSL as well as having the application assessed and granted by ASIC by the end date).
There are improvements in the proposed regime. For example, ASIC no longer proposes any restriction on the ability of foreign licensees to appoint representatives.
Repeal of limited connection relief
ASIC intends to repeal the limited connection licensing relief currently contained in ASIC Corporations (Foreign Financial Services Providers—Limited Connection) Instrument 2017/182 (formerly Class Order 03/824) as previously proposed in CP 301. However, the relief will be extended to 31 March 2020 (previously 30 September 2019) while ASIC consults with stakeholders on its repeal as well as on the new Funds Management Relief. The reasons for this include:
- ASIC’s inability to monitor who is relying on the relief;
- a lack of data demonstrating the need for the relief.
The difficulty of course that ASIC fails to recognise is that those that are relying on the relief are entities with only limited engagement with Australia who are not represented by any particular industry body.
ASIC proposes a transition period of six month from 31 March 2020 to 30 September 2020 to enable FFSPs to seek a ‘full’ AFS licence (if applicable) should it proceed with the repeal of the ‘limited connection’ relief. However, as ASIC’s service charter indicates the processing timeframe for a ‘full’ AFS licence application can take between 4-9 months, FFSPs seeking to apply for a ‘full’ AFS licence should apply to ASIC as soon as possible to ensure compliance by the time the limited connection relief is repealed.
Reverse solicitation relief
ASIC is considering the position where an Australian professional client initiates contact with a FFSP (reverse solicitation). Currently, ASIC does not propose to grant relief in this situation because there is an existing exemption similar to that which is being contemplated and due to the lack of information from industry about how it would be used and its concerns about monitoring compliance with its conditions.
The existing exemption applies where a service is provided from outside Australia and the provider does not engage in conduct intended or likely to induce people in Australia to use the service or where the provider receives an application for original financial product without actively soliciting Australians in relation to the financial product.
However, ASIC has invited submissions supported by data about conduct that would benefit from a reverse solicitation exemption similar to the exemption available under the EU Alternative Investment Fund Managers (AIFM) Directive regime or similar.
ASIC seeks public input on the consultation documents by 9 August 2019 and aims to update Regulatory Guide 176 before March 2020.