ASIC has updated the regime for Australian financial services (AFS) licensing relief available to trustees of wholesale equity schemes (Wholesale Trustee Relief). This relief enables wholesale equity schemes to be established and operated, relying only on the AFS licence of the manager, and not the trustee, so long as the manager and trustee are related bodies corporate.

In order for a proposed (or existing) manager of a wholesale equity scheme to take advantage of the Wholesale Trustee Relief however, the manager’s AFS licence must authorise the manager not only to deal in the relevant investment products, but also importantly, to provide custodial or depository services in connection with those investments products.

The legal distinction between “dealing” in investment products, and “holding” investment products on trust for the investors of the scheme (which is a core duty of the trustee), is one that is underappreciated. Too often, managers assume that, simply by having a licence to “deal”, it is automatically authorised to provide all of the wholesale equity financial services (including the custody services) provided by the trustee.

ASIC has now confirmed definitively that the “dealing” authorisation and “custodial” authorisation are mutually exclusive. Unless a trustee has the benefit of an exemption under law from the requirement to be licensed for custody, a manager seeking to take advantage of the Wholesale Trustee Relief will need to have its AFS license endorsed so that it can “operate custodial or depositary services”. In seeking this endorsement, the manager can apply to be an “incidental provider” of custody services, which would attract a reduced financial requirement (being “at least the greater of $150,000 or 10% of average revenue”) rather than the standard financial requirement for custodians of “at least the greater of $10m or 10% of average revenue”.

A trustee that is eligible to rely on the Wholesale Trustee Relief must also comply with a number of continuing conditions. Non-compliance with these conditions must be reported in writing to ASIC, within 10 business days. Failure to report will cause the relief to become unavailable to the relevant scheme.