INSIGHT

ASIC finalises new regulatory framework for foreign financial services providers

ASIC Financial Services Funds

In brief

The Australian Securities and Investments Commission has unveiled the much-anticipated new regulatory framework for foreign financial services providers that supply financial services to wholesale clients in Australia. It was worth the wait, as ASIC has taken on board many of the submissions that stakeholders made during the consultation process. That said, foreign financial services providers that currently operate in Australia and rely on licensing relief will need to act promptly to determine their options for transitioning to the new regime. The Allens team reports on how the changes will affect you, and the actions you should be taking now.

Key takeaways 

  • On 10 March 2020, the Australian Securities and Investments Commission (ASIC) released the new regulatory framework for foreign financial services providers (FFSPs) supplying financial services to wholesale clients in Australia.
  • As ASIC previously proposed, the current 'Sufficient Equivalence Relief' will be repealed on 31 March 2020, subject to a transitional period until 31 March 2022 for FFSPs relying on the relief on 31 March 2020.
  • In response to stakeholder feedback, the current 'Limited Connection Relief' will now be repealed on 31 March 2022 (rather than on 31 March 2020, with a transitional period until 30 September 2020, as ASIC previously proposed).
  • As ASIC also previously proposed, the new Foreign Australian Financial Services (AFS) licensing regime will begin on 1 April 2020 for eligible FFSPs that are able to satisfy a sufficient equivalence test.
  • The new (and improved) 'Funds Management Relief' will take effect on 1 April 2022 (rather than 1 April 2020, as previously proposed). This will provide a limited form of licensing relief for FFSPs that provide 'funds management financial services' to a subset of professional investors in Australia known as 'eligible Australian users'.

The key dates for transitioning to the new regime are shown below:Key dates for transitioning to the new regime


Background

In our last update, we discussed proposals by ASIC, put forward in Consultation Paper 315 (CP 315) and its forerunner, Consultation Paper 301 (CP 301), to repeal the following two forms of licensing relief currently available to, and widely relied upon by, FFSPs:

  • 'Sufficient Equivalence Relief', which applies where an 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 (at present, the UK, the USA, Singapore, Hong Kong, Germany and Luxembourg); and
  • 'Limited Connection Relief', which applies where an FFSP 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', and provides financial services only to wholesale clients in Australia.

In CP 301 and CP 315, ASIC proposed to replace these two forms of relief with:

  • the introduction of a new Foreign AFS licensing regime (principally for FFSPs that would otherwise have relied on the 'Sufficient Equivalence Relief'); and
  • a new form of relief known as 'Funds Management Financial Services' relief (Funds Management Relief) (principally for certain FFSPs that would otherwise have relied on the 'Limited Connection Relief').

ASIC has now confirmed that it will implement these proposals, and has released a significantly revised Regulatory Guide 176 Foreign financial services providers (RG 176) that reflects these changes.

Repeal of Sufficient Equivalency Relief

Broadly, an FFSP that is able to rely on the Sufficient Equivalence Relief on 31 March 2020 will have the benefit of transitional relief until 31 March 2022. During that transition period, the FFSP will need to determine what steps it needs to take to continue its operations in Australia under the new regime after 31 March 2022.

ASIC is currently updating INFO 157 to provide FFSPs and their advisers with further information about applying to rely on the existing Sufficient Equivalence Relief by 31 March 2020 to have the benefit of the two-year transition period, and the ongoing obligations under the Sufficient Equivalence Relief that will continue to operate during the transition period.

Repeal of Limited Connection Relief

In response to submissions from stakeholders (including Allens) regarding ASIC's previous proposal to repeal the Limited Connection Relief on 31 March 2020 with a transitional period to end on 30 September 2020, ASIC has now confirmed that the Limited Connection Relief will not be repealed until 31 March 2022, and will apply until that date regardless of whether the FFSP had relied on the relief before 31 March 2020. This aligns with the end of the transition period for the Sufficient Equivalence Relief.

There will be no grandfathering or transitional relief beyond 31 March 2022 for FFSPs relying on the Limited Connection Relief.

Between now and 31 March 2022, FFSPs relying on the Limited Connection Relief will need to determine what steps will need to be taken to transition to the new regime.

The new Foreign AFS licensing regime

The Foreign AFS licensing regime will commence on 1 April 2020 and is a modified AFS licensing regime for FFSPs that:

  • hold a relevant authorisation in a sufficiently equivalent overseas regulatory regime to provide financial services to wholesale clients; and
  • wish to provide those financial services to wholesale clients in Australia.

The relief is contained in the ASIC Corporations (Foreign Financial Services Providers—Foreign AFS Licensees) Instrument 2020/198, which sets out, among other things:

  • eligibility requirements; and
  • the obligations and conditions that apply to a Foreign AFS Licensee.

An FFSP will be eligible to apply for a Foreign AFS Licence if it is regulated in one of the overseas jurisdictions currently covered by the Sufficient Equivalence Relief – ie the UK, the USA, Singapore, Hong Kong, Germany and Luxembourg. Importantly, taking into account industry submissions, ASIC has now confirmed that an FFSP regulated in Denmark, Sweden, France, and Ontario, Canada, will also be eligible to apply for a Foreign AFS Licence – which is a welcome development.

If an FFSP is not covered by any of the above jurisdictions, RG 176 sets out how it may apply for individual relief to extend the relief to cover its overseas regulatory regime.

A Foreign AFS Licence will be subject to certain conditions, including the following:

  • the Foreign AFS Licensee must carry on a business in the relevant foreign jurisdiction;
  • the Foreign AFS Licensee must reasonably believe that it would not contravene any laws of its home jurisdiction relating to the provision of financial services if it were to provide the wholesale financial service in its home jurisdiction;
  • the Foreign AFS Licensee must notify ASIC, as soon as practicable and, in any event, within 15 business days after it becomes aware or should reasonably have become aware, and in such form, if any, as ASIC may from time to time specify in writing, of the details of each significant:
    • change to, including the termination of, its relevant registration or authorisation in its home jurisdiction;
    • exemption or other relief that it obtains from the regulatory requirements in its home jurisdiction; and
    • investigation, enforcement or disciplinary action undertaken by any overseas regulatory authority against it in a foreign jurisdiction in relation to financial services provided by it in that jurisdiction.

Other than certain provisions that will be expressly excluded, a Foreign AFS Licensee will be subject to all applicable provisions under the Corporations Act 2001 (Cth), including fundamental conduct obligations to:

  • provide financial services 'efficiently, honestly and fairly' (s912A(1)(a));
  • have in place adequate arrangements for the management of conflicts of interest (s912A(1)(aa)); and
  • have adequate risk management systems (s912A(1)(h)).

The excluded obligations include the following:

  • the obligation to have adequate resources (s912A(1)(d));
  • the obligation to maintain the competence to provide the financial services (s912A(1)(e));
  • the obligation to ensure representatives are appropriately trained (s912A(1)(f)); and
  • obligations about handling client money and client property when sufficiently equivalent protections in the overseas regulatory regime apply.

A Foreign AFS Licensee will also be subject to supervisory and enforcement provisions applicable to standard AFS Licensees, including:

  • ASIC's power to direct a licensee to provide a written statement (see section 912C);
  • breach reporting requirements (see s912D);
  • the requirement to give ASIC reasonable assistance during surveillance checks (see s912E); and
  • the powers available to ASIC in relation to AFS licences, such as to impose or vary conditions on a licence (see s914A) and vary, suspend or cancel a licence (see s915A and 915B).

ASIC has indicated that the application process for a Foreign AFS Licence will be more streamlined than the process for a standard AFS licence, in recognition of an applicant’s existing authorisation to provide the relevant financial services in a sufficiently equivalent overseas regulatory regime.

ASIC is currently updating:

  • Regulatory Guide 1 AFS Licensing Kit: Part 1 – Applying for and varying an AFS licence; and
  • Regulatory Guide 2 AFS Licensing Kit: Part 2—Preparing your AFS licence application,

to reflect the application process for a Foreign AFS Licence.

The new Funds Management Relief

On and from 1 April 2022, an FFSP may be eligible to rely on the Funds Management Relief if it is only taken to be carrying on a financial services business in Australia because it is engaging in ‘inducing conduct’ in relation to the provision of ‘funds management financial services’ to certain types of professional investors in Australia. Subject to satisfying certain conditions, an FFSP does not require an AFS Licence for the provision of 'funds management financial services'.

The Funds Management Relief is intended to be available to some FFSPs who would previously have relied on the Limited Connection Relief. More specifically, it is intended to apply to offshore fund managers who offer interests in their funds to institutional investors in Australia (recognising that Australian institutional investors may otherwise be excluded from global capital raisings undertaken by such fund managers).

In our last update, we highlighted some of the conditions in the original form of the Funds Management Relief that we felt would limit the extent to which it could be relied on. As shown below, ASIC has significantly revised (and simplified) the relief to address many of these matters that were raised during the consultation process:

Issue: 10% Revenue Cap (cap on scale of FFSP's Australian activities), which gave rise to concerns regarding calculation methodology, revenue fluctuations as a result of market movements, etc.

ASIC response: The 10% revenue cap has been removed.


Issue: Definition of 'portfolio management services' previously referred to the management of assets located outside Australia. This would have excluded, among other things, global equities mandates.

ASIC response: The reference to the management of assets located outside Australia has now been removed. 

The broader drafting of this definition has also been improved by using Corporations Act terminology.


Issue: 'Professional investors' (used in the context where the 'offshore fund' limb in the definition of 'funds management financial services' applied) v 'eligible Australian users' (used in the context of 'portfolio management services') – the latter being a much narrower sub-set of 'professional investors'. 

ASIC response: A broader concept of 'eligible Australian users' now applies consistently for both 'funds management financial services' and 'portfolio management services'. The definition now includes responsible entities and trustees of wholesale funds.

However, listed investment companies are still not included.


Issue: Definition of 'funds management financial service' did not include custodial and depository services (which would typically be provided by the operator of an offshore fund).

ASIC response: Custodial and depository services are now included.


Issue: Other onerous conditions, including a tax residency condition for an offshore fund, a requirement that the FFSP may not be registered as a foreign company in Australia, and the requirement that the FFSP must enter into a deed submitting to the non-exclusive jurisdiction of Australian courts in relation to action by ASIC and other Australian government entities.

ASIC response: These conditions have been removed. 

ASIC has also imposed a few additional conditions to ensure that it can adequately monitor the FFSP's activities. However, we do not consider the additional conditions to be particularly onerous.


Importantly, the Funds Management Relief will not apply to an FFSP that is registered as a foreign company in Australia by reason of it carrying on business in Australia. Registration as a foreign company will no longer automatically disqualify an FFSP from relying on the relief – eg if the FFSP elected to become registered as a precautionary measure, but is not in fact carrying on business in Australia, the relief will apply. However, if the FFSP is carrying on business in Australia, it will not qualify. In practice, this means that foreign investment managers who provide investment/portfolio management services to Australian institutional clients under a mandate, and are (in our experience) often registered as a foreign company in Australia on the basis that they are carrying on business here, would not benefit from the relief. Those FFSPs would need to apply for a Foreign AFS Licence, a standard AFS Licence or cease operating in Australia, unless another exemption is available to them. We understand that ASIC does not propose to issue any further guidance on when an FFSP is and is not carrying on business in Australia, as this question is highly dependent on the factual circumstances and needs to be determined on a case-by-case basis.

What are my options?

If you are an FFSP … that is relying on Sufficient Equivalence Relief now (or before 31 March 2020)

You should ... continue relying on Sufficient Equivalence Relief up until 31 March 2022 while you determine whether to:

  • apply for a Foreign AFS Licence;
  • apply for a standard AFS Licence (if, for any reason, you do not qualify for a Foreign AFS Licence);
  • rely on any other licensing exemption under the Corporations Act or associated regulations or other relief (such as the Funds Management Relief from 1 April 2022); or
  • cease to provide financial services in Australia.

If you are an FFSP … that is relying on Limited Connection Relief

You should ... continue relying on Limited Connection Relief up until 31 March 2022 while you determine whether to:

  • rely on the Funds Management Relief (if eligible) from 1 April 2022, or any other licensing exemption under the Corporations Act or associated regulations, or other relief (if applicable);
  • apply for a Foreign AFS Licence (if eligible);
  • apply for a standard AFS Licence; or
  • cease to provide financial services in Australia.

If you are an FFSP … that wishes to provide financial services to wholesale investors in Australia and is not currently relying on either of the above forms of relief

You should ...

  • if there is time, and you are eligible, take steps to rely on the Sufficient Equivalence Relief before 31 March 2020 (in order to obtain the transitional relief until 31 March 2022) (acknowledging that there is only a fortnight left to do this);
  • consider whether you are eligible to rely on Limited Connection Relief (until 31 March 2022), or any other licensing exemption under the Corporations Act or associated regulations, or other relief (if applicable);
  • apply for a Foreign AFS Licence (if eligible); or
  • apply for a standard AFS Licence.

If you are an FFSP … that already holds a standard AFS Licence or has been appointed as an authorised representative of an AFS Licensee

You should ... No action required.

 

If you would like to discuss the issues raised in this Insight, please contact any of the people below.