In brief 12 min read
After much anticipation, the Australian Securities and Investments Commission has provided an update on its proposed changes to the licensing relief currently available to foreign financial service providers operating in Australia. Consultation Paper 315 proposes to repeal two forms of licensing relief that have been widely relied upon by foreign financial service providers, and to introduce a new foreign AFS licensing regime. In a welcome development, ASIC is also proposing to introduce a new form of 'funds management' licensing relief for certain funds management services provided from offshore to professional investors in Australia.
In Consultation Paper 315, it is proposed that:
- the current Sufficient Equivalence Relief will be repealed on 31 March 2020, with the transitional period to end on 31 March 2022;
- the current Limited Connection Relief will be repealed on 31 March 2020, with the transitional period to end on 30 September 2020;
- a new 'Funds Management Relief' will be introduced on 1 April 2020, providing a limited form of licensing relief for FFSPs that provide 'funds management financial services' to professional investors in Australia; and
- the new foreign AFS licensing regime will begin on 1 April 2020 for eligible FFSPs that are able to satisfy a sufficient equivalence test in the proposed new ASIC Corporations (Foreign Financial Services Providers – Foreign AFS Licensees) Instrument 2019/ XXX.
Currently, foreign financial service providers (FFSPs) who provide financial services to wholesale clients in Australia may be eligible to rely on the following forms of relief from the requirement to hold an Australian financial services (AFS) licence:
- 'sufficient equivalence relief', which applies where a FFSP provides certain financial services to wholesale clients only and is regulated by an overseas regulatory regime that is sufficiently equivalent to the Australian regulatory regime (Sufficient Equivalence Relief). At present, those jurisdictions are the UK, the USA, Singapore, Hong Kong, Germany and Luxembourg; and
- 'limited connection relief', which provides relief for a FFSP that is not carrying on business in Australia under the ordinary tests, but is deemed to be carrying on a financial services business in Australia only because it 'engages in inducing, or intending to induce, a person in Australia to use its financial services' (Limited Connection Relief).
On 1 June 2018, the Australian Securities and Investments Commission (ASIC) released Consultation Paper 301 – Foreign financial service providers (CP 301), which sought feedback on ASIC's proposal to:
- repeal both the Sufficient Equivalence Relief and the Limited Connection Relief, subject to a 12-month transitional period; and
- implement a modified AFS licensing regime for FFSPs.
Please see our ASIC overhauls AFS licensing relief for foreign financial service providers and ASIC extends by a further year licensing relief for foreign financial service providers, which provide an overview of the proposals in CP 301.
Repeal of Sufficient Equivalence Relief
On 3 July 2019, ASIC released a further paper, Consultation Paper 315 (CP 315), which reaffirmed its earlier proposal to repeal the Sufficient Equivalence Relief, but with a proposal to extend the current relief until 31 March 2020 (previously this was due to expire on 30 September 2019), and also to extend the transitional period from 12 months to two years (until 31 March 2022) for FFSPs already relying on that relief. This is intended to allow sufficient time for such FFSPs to comply with the new foreign AFS licensing regime (Foreign AFS Licensing Regime) (described further below).
Repeal of Limited Connection Relief and introduction of Funds Management Relief
Similarly, ASIC has maintained its proposal to repeal the Limited Connection Relief (on 31 March 2020, rather than 30 September 2019), with a transition period until 30 September 2020 for FFSPs already relying on the relief. ASIC has indicated that it did not receive adequate detailed information or data that supported the continuation of the Limited Connection Relief. However, taking into account industry feedback it received in response to CP 301, in CP 315, ASIC now proposes to introduce a new, more limited form of licensing relief for FFSPs that provide 'funds management financial services' to professional investors in Australia, provided certain conditions are met (Funds Management Relief).
Submissions from industry (including from Allens) had emphasised that the Limited Connection Relief was particularly important and necessary for FFSPs that did not conduct business in Australia, but offered interests or securities in an offshore fund to institutional investors in Australia, or provided portfolio management services to wholesale clients in Australia. This was because no other relief or statutory exemptions were available in those situations. If the Limited Connection Relief were to be repealed entirely, and these offshore funds or portfolio managers would be required to apply for a full AFS licence, they may withdraw from providing financial services to clients in Australia. This would, in turn, limit the offshore investment opportunities available to Australian institutional investors.
ASIC has recognised these policy concerns and proposed a narrower form of the Limited Connection Relief that is intended to address the specific situation of FFSPs who do not carry on business in Australia providing funds management services to institutional investors from offshore.
While this is a welcome development, the proposed relief is subject to a number of important conditions that will potentially limit the extent to which it can be relied upon. These are set out in more detail below.
No Reverse Solicitation Relief
Finally, ASIC has noted that, while it considered the possibility of introducing a form of reverse solicitation relief (ie where a professional investor makes the initial application or inquiry for the services from the FFSP), it ultimately decided not to introduce such relief. In ASIC's view, such relief could be too broadly interpreted or misused by the industry, and it would be too difficult to monitor compliance. However, ASIC has invited submissions on introducing such a relief. In any event, there is already a statutory exemption for a FFSP that does not induce people in Australia to use its services (section 911A(2A) as notionally inserted by reg 7.6.02AG), which may be available in reverse-solicitation situations.
Below is an overview of the proposed Fund Management Relief (as set out in the draft ASIC Corporations (Foreign Financial Services Providers – Funds Management Financial Services) Instrument 2019/XXX attached to CP 315). Under the proposed timetable, it is expected that the Funds Management Relief will be available from 1 April 2020.
What is the Funds Management Relief?
Subject to satisfying certain conditions (see further below), a FFSP does not require an AFS licence for the provision of 'funds management financial services'.
What are 'funds management financial services'?
A person engages in a 'funds management financial service' if they provide:
- any of the following financial services to a professional investor in Australia:
- dealing in interests of Managed Investment Scheme established outside of Australia, or securities of a body that carries on a business of investment that is not incorporated in Australia (body);
- providing financial product advice in relation to interests or securities of the MIS or body; and
- making a market in relation to interests or securities of the MIS or body; or
- portfolio management services.
'Portfolio management services' is defined as the management of assets located outside of Australia on behalf of an 'eligible Australian user'.
To whom can the funds management financial services be provided?
A FFSP relying on the Funds Management Relief can only provide the funds management financial services to clients who meet the definition of 'professional investor', or, in the case of portfolio management services, clients who meet the definition of 'eligible Australian users'.
- Professional investors – Professional investors (as defined in s9 of the Corporations Act 2001 (Cth)) are a sub-set of 'wholesale clients'. Broadly speaking, professional investors are institutional investors, and include AFS Licensees, APRA-regulated entities, listed entities or a related body corporate of a listed entity and trustees of superannuation funds.
- Eligible Australian users – if the FFSP is providing portfolio management services, the Funds Management Relief is only available for the provision of the service to the following specific 'eligible Australian users':
- a person in Australia that is a trustee of:
- a superannuation fund;
- an approved deposit fund;
- a pooled superannuation trust;
- a public sector superannuation scheme;
and the fund, trust or scheme has net assets of at least $10 million;
- a person in Australia that operates a MIS that has net assets of at least $10 million;
- a life company in Australia;
- an exempt public authority.
- a person in Australia that is a trustee of:
Cap on scale of activities
ASIC has proposed that the Funds Management Relief may only be relied upon by a FFSP if no more than 10% of the FFSP's total annual gross revenue, and no more than 10% of the FFSP's total consolidated gross revenue (which includes entities within the FFSP's corporate group), for each of the previous and current financial years, is generated from the provision of the funds management financial services in Australia. This is to be calculated using the accounting practices of the FFSP's home jurisdiction.
The purpose of this cap is to ensure that those services are provided on a limited basis, and do not form a substantial part of the FFSP's business. In practice, this will impose on FFSPs a compliance obligation to ensure that the level of Australian investors does not result in the cap being breached.
Cannot be registered as a foreign company in Australia
The Funds Management Relief is only available to FFSPs that are not carrying on business in Australia and therefore not registered in Australia as a foreign company. While offshore funds that offer securities or other interests to Australian wholesale investors are typically not registered in Australia as foreign companies, FFSPs that enter into investment mandates with Australian clients are, in our experience, often registered in Australia as foreign companies. The test for determining whether a FFSP is 'carrying on business in Australia' is a grey one, and therefore FFSPs that enter into separately managed accounts with Australian wholesale clients often err on the side of caution and register as foreign companies here. Accordingly, those entities would not be able to rely on the Funds Management Relief, even though the relief appears to be intended to operate for their benefit. We intend to raise this limitation of the relief in our submission to ASIC.
Other conditions for relying on the Funds Management Relief
ASIC intends to impose a number of other conditions to the Funds Management Relief to ensure it can adequately supervise the activities of the FFSP. These are as follows:
- (local agent) the FFSP must have appointed a local agent;
- (deed) the FFSP must enter into a deed that is for the benefit of, and enforceable by, ASIC. The deed must specify that:
- the deed is irrevocable except with the prior written consent of ASIC;
- the FFSP will submit to the non-exclusive jurisdiction of the Australian courts in relation to action by ASIC and other Australian government entities;
- the FFSP will comply with any order of an Australian court for any matter relating to the provision of the financial services;
- on the written request of ASIC, the FFSP will give or vary written consent and take all other practicable steps to enable and assist the home regulator to disclose to ASIC any information or document that the home regulator has that relates to the FFSP;
- if ASIC gives the FFSP a written notice directing it to give to ASIC a written statement containing specific information about the financial services provided by the FFSP in Australia, the FFSP will comply with that notice; and
- the FFSP will give such assistance to ASIC as it reasonably requests in relation to whether the FFSP is complying with the financial services laws, and in relation to the performance of ASIC's other functions.
This deed must be lodged with ASIC and will continue to apply even if the FFSP has ceased to rely on the Funds Management Relief;
- (notification to ASIC) the FFSP must notify ASIC of its intention to rely on the Funds Management Relief, and give ASIC a written description of the funds management financial services it intends to provide;
- (reasonable assistance) the FFSP must provide reasonable assistance to ASIC during surveillance checks (similar to s912E);
- (proof of compliance with revenue cap) the FFSP must maintain proof of its compliance with the proposed 10% aggregated revenue cap. The FFSP must document its reasonable estimates of its total gross revenue and the total consolidated gross revenue for the current financial year and the amount of the total gross revenue and consolidated gross revenue that will be derived from the provision of funds management financial services, including calculations and assumptions used in preparing those estimates, together with a description of why the assumptions are appropriate; and
- (compliance with ASIC directions) the FFSP must comply with directions from ASIC to provide a statement (similar to s912C);
- (exclusion from relief) the FFSP cannot rely on the relief if ASIC has notified the FFSP, or its agent, that the FFSP is excluded from relying on the relief, and ASIC has not withdrawn its notice. This may occur eg if the FFSP provides financial services that exceed the 10% aggregate revenue cap or if ASIC considers there may be non-compliance with the conditions of the relief through their monitoring and surveillance work.
If a FFSP is unable to rely on the Funds Management Relief, it will either need to apply for a Foreign AFS licence (see below) or otherwise apply for a standard AFS licence, unless another exemption is available to it.
Under the proposed timetable, it is expected that the Foreign AFS Licensing Regime will commence on 1 April 2020. To be eligible to apply for a Foreign AFS licence, a FFSP must be able to satisfy the sufficient equivalence relief in the proposed new ASIC Corporations (Foreign Financial Services Providers – Foreign AFS Licensees) Instrument 2019/ XXX (Foreign AFS Licensee Instrument) once it has obtained its licence. Despite the name, this relief is different from the Sufficient Equivalence Relief that is currently available. The Foreign AFS Licensee Instrument exempts eligible bodies (being a FFSP that holds a Foreign AFS licence) from certain provisions of the Corporations Act, provided it satisfies the conditions for the relief.
A FFSP will be covered by the new sufficient equivalence relief if the overseas regulatory regime under which it is authorised to provide financial services to wholesale clients and the financial services and/or products it wishes to provide to wholesale clients in Australia are authorised under the Foreign AFS Licensee Instrument. Sufficiently equivalent jurisdictions are Germany, Hong Kong, Luxembourg, UK, Singapore and US. If the FFSP is not covered by any of the above jurisdictions, it may apply for individual relief to extend the sufficient equivalence relief to cover its overseas regulatory regime.
Streamlined application process
In light of the above, ASIC is proposing a 'streamlined application process' for a Foreign AFS licence. Unlike a standard AFS licence application, a Foreign AFS licence application will generally not require the following core proofs:
- B1 Organisational Competence; and
- B5 Financial Statements and Financial Resources.
This is on the basis that these core proofs relate to specific Corporations Act obligations that a Foreign AFS Licensee will be exempted from. This will certainly assist FFSPs in preparing a Foreign AFS licence application; however, the application will still require the preparation of an A5 Business Description Proof and People Proofs for each responsible officer, and, depending on the complexity of the FFSPs business, ASIC may still call for proofs relating to compliance arrangements, risk management, custodial and depository arrangements, making a market, derivatives and foreign exchange products – so preparing the Foreign AFS licence application will still be an involved process.
Certain Corporations Act provisions will not apply to Foreign AFS Licensees
A Foreign AFS Licensee will be exempted from the following Corporations Act obligations under the proposed Foreign AFS Licensee Instrument:
- obligations about notifying ASIC of events that may cause a material adverse change to the financial position and maintaining records of training for representatives (s912A(1)(b), to the extent it requires compliance with reg 7.6.04(1)(a) and (d));
- have adequate resources (s912A(1)(d));
- maintain the competence to provide the financial services (s912A(1)(e));
- ensure representatives are appropriately trained (s912A(1)(f));
- meet minimum standards for custodial or depository service providers (s912AAC);
- have agreements with sub-custodians to hold custodial property (s912AAD);
- obligations about handling client money and client property when sufficiently equivalent protections in the overseas regulatory regime apply to client money paid to, and client property held by, the Foreign AFS Licensee from a wholesale client in Australia relating to the exempt financial service (all the provisions in Subdivs A and B, Div 2 of Pt 7.8, Div 3 of Pt 7.8);
- obligations of licensees in relation to dealings with non-licensees (to the extent the financial product transaction is entered into or arranged outside of Australia) (s991E); and
- dealings involving employees of licensees, if the Foreign AFS Licensee is only carrying on a financial services business in Australia because it carries on the business of providing eligible financial services under the instrument in Australia (s991F).
Again, this is helpful and will seek to reduce regulatory duplication, as a FFSP from a sufficiently equivalent jurisdiction will be subject to similar obligations in their home jurisdiction. That said, Foreign AFS Licensees will still be subject to all other provisions of the Corporations Act applicable to the provision of wholesale financial services, including the requirements to:
- provide financial services 'efficiently, honestly and fairly' (s912A(1)(a));
- have in place adequate arrangements for management of conflicts of interest (s912A(1)(aa));
- comply with the conditions on its licence (s912A(1)(b));
- comply with applicable financial services laws (s912A(1)(c));
- take reasonable steps to ensure that representatives comply with applicable financial services laws (s912A(1)(ca)); and
- have adequate risk management systems (s912A(1)(h)).
As such, the new regime will be much more onerous for FFSPs than relying on the current Sufficient Equivalence Relief. In addition, a Foreign AFS Licensee will be subject to the same supervisory and enforcement provisions that apply to standard AFS licensees, including the breach reporting requirements in s912D. Accordingly, prospective Foreign AFS Licensees will need to ensure that they have the necessary systems and processes in place to comply with these legislative requirements.
On the assumption that the proposals in CP 315 are implemented, ASIC has set out the following key dates for the rollout of the new regime:
Submissions to CP 315 close on 8 August 2019. Allens will participate in the consultation process and we welcome any comments from our clients.