INSIGHT

Potential licensing relief for Foreign Financial Service Providers

By Penny Nikoloudis, Marc Kemp, Jo Ottaway
Financial Services Funds

Treasury Consultation Paper (mostly) good news for FFSPs 9 min read

Following on from the 2021-22 Federal Budget announcement in May relating to additional licensing relief for Foreign Financial Service Providers (FFSPs), Treasury recently released a Consultation Paper, 'Relief to Foreign Financial Service providers', which canvasses a range of potential options. This marks the next step in the long and winding FFSPs licensing relief saga.

Key takeaways

  • As expected, the Consultation Paper outlines options for reinstating the former 'Sufficient Equivalence Relief' and 'Limited Connection Relief', and includes some additional options that helpfully go beyond the former relief.
  • It also has options for fast-tracking the application process, including a surprise 'automatic' licensing proposal.
  • All of this is welcome news for FFSPs; although, given we are back at the consultation stage (again), FFSPs must continue to 'watch this space', as these reforms still have a way to go.

Overview of the recent changes to the FFSP regime

Before we turn to look at the options outlined in the Consultation Paper, released on Friday, 9 July 2021, let's quickly recap the changes to the FFSP regime. The key changes to the existing FFSP regime are the repeal of the following two forms of licensing relief that are currently available to 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 US, 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.

These two forms of relief were to have been replaced with:

  • a new Foreign Australian Financial Services (AFS) licensing regime that was introduced on 1 April 2020 (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 to begin on 1 April 2023 (Funds Management Relief) (principally for certain FFSPs that would otherwise have relied on the 'Limited Connection Relief').

This new regime was intended to commence on 1 April 2022; however, in light of the Government's Budget announcements, ASIC has extended the existing transitional arrangements until 1 April 2023. ASIC has also indicated that it is 'pausing' the assessment of Foreign AFS licence applications, 'unless the applicant requests that [ASIC] continue with the assessment of their application'.1

Please see our Less than one year before the new foreign financial services providers regime begins for more detail on those changes.

Summary of the Options outlined in the Consultation Paper

Options in establishing framework for FFSPs

The Consultation Paper seeks comment on the following three options for a FFSP licensing regime:

Option 1(A & B) – Restore the previous relief

Option 1 is identified in the Consultation Paper as the option to 'restore the previous relief'. It is broken up into two sub-options (Options 1A and 1B). Both sub-options would reinstate the previous Sufficient Equivalence Relief (available to FFSPs regulated in the UK, the US, Singapore, Hong Kong, Germany and Luxembourg only). However, only Option 1A would also reinstate the Limited Connection Relief, while Option 1B would continue the new Funds Management Relief (ie instead of the broader Limited Connection Relief). Therefore, on closer inspection, only Option 1A would truly restore the previous relief, with Option 1B more a blend of the old and new relief. As the Funds Management Relief is much narrower than the Limited Connection Relief, we favour Option 1A over Option 1B.

Option 2 – FFSP relief for certain financial services provided to wholesale clients

Under Option 2, licensing relief would be provided to FFSPs wanting to provide certain financial services2 to wholesale clients in Australia, provided they are regulated to provide those services in their home jurisdiction by a relevant authority in one of the following jurisdictions, namely: Denmark, France, Germany, Hong Kong, Luxembourg, Canada, Singapore, Sweden, the UK and the US.

FFSPs seeking to rely on this relief would need to notify ASIC and comply with certain conditions. The conditions are subject to the consultation, but could include:

  • consent to sharing of information between ASIC and the FFSP's home regulator;
  • complying with auditing and reporting requirements;
  • ensuring financial services are provided 'efficiently, honestly and fairly';
  • complying with client money requirements;
  • appointing a local agent in Australia; and
  • providing certain information to ASIC on a periodic basis, including breach reports, as required.

To assist ASIC in policing compliance with these conditions, the Consultation Paper states at paragraph 35 that:

If an FFSP breaches a condition of the relief or does not comply with a request or direction from ASIC, ASIC may determine that further conditions should be imposed or that the FFSP is no longer eligible to rely on the relief. To provide greater flexibility in being able to address breaches of conditions, consideration is being given to providing ASIC with the ability to apply to the court for an injunction and to negotiate an enforceable undertaking with the FFSP. Consideration will also be given to attaching civil penalties to breaches of some or all relief conditions similar to those that apply to breaches of AFSL licensing obligations.

Importantly, Option 2 does not include a proposal to reinstate the Limited Connection Relief, or to continue the Funds Management Relief, which is a real concern, especially for FFSPs with a limited connection to Australia who do not hail from one of the Sufficient Equivalent Jurisdictions, and, therefore, could not rely on the Option 2 relief.

Option 3 – FFSP relief for all financial services provided to wholesale clients

Option 3 is slightly broader than Option 2, in that it would enable FFSPs to provide any financial services to wholesale clients, provided that the FFSP is regulated by a relevant authority in one of the jurisdictions outlined in Option 2 (ie the difference between Options 2 and 3 would appear to be limited to the type of financial services that a FFSP can provide, with a broader list available under Option 3, which is not limited to the provision of financial product advice; dealing in a financial product; making a market for a financial product; or providing a custodial or depository service).

Similarly to Option 2, FFSPs seeking to rely on the Option 3 relief would need to notify ASIC and to comply with certain conditions. One of the conditions being considered is that the FFSP maintain the relevant authorisations in the FFSP's home jurisdiction to provide the financial services they are providing in Australia (see condition (u) in para 34). Therefore, as with Option 2, it seems likely that FFSPs will need to be regulated in their home jurisdiction to provide each of the financial services that they wish to provide in Australia under Option 3.

Option 3 also doesn't include a proposal to reinstate the Limited Connection Relief, or to continue the Funds Management Relief.

The Consultation Paper seeks comment on the three options outlined above, and also calls for comment on whether there are any other options for relief that should be considered. In particular, it asks for comment on whether there is a specific need for the Limited Connection Relief if Options 2 or 3 are adopted. We consider that a form of Limited Connection Relief will still be required for FFSPs seeking to:

  1. raise capital / offer investments in Australia (but not to otherwise carry on a financial services business in Australia); or
  2. take preparatory steps towards operating in this jurisdiction,

especially considering that there are a number of jurisdictions that are not covered by Options 2 and 3: eg Japan.

Accordingly, in terms of the three options for an 'FFSP licensing regime', we are in favour of Option 1A (as it would restore the Limited Connection Relief), unless Option 2 or 3 is combined with the reinstatement of the Limited Connection Relief. In our view, any of these options would represent a good outcome for FFSPs.

Fast-tracking the licensing process for FFSPs

As outlined in the 2021-22 Federal Budget, the Government is considering options to create a more efficient, fast-tracked AFS licensing regime for FFSPs, to encourage global investment in Australia. The Consultation Paper proposes the following three options to achieve this:

Option 1: Amend the fit and proper person test

Option 1 would give ASIC the discretion to exempt an FFSP applicant from meeting the 'fit and proper person' test for each of its 'fit and proper people' (ie each of its officers and controllers). ASIC would also have the discretion to rely on equivalent tests undertaken by a foreign regulator.

The requirement to undertake 'fit and proper person' tests for each of an applicant's fit and proper persons (which is required all the way up the chain to the ultimate holding company) can be quite the hurdle in an AFS licence application, and so formal relief would certainly be helpful. That said, it isn't particularly radical, given that ASIC already provides some relief from this requirement for certain fit and proper persons (eg intermediate controllers).

Option 2: Modified licensing regime for FFSPs dealing with wholesale clients

Option 2 would provide a 'modified licensing regime' for FFSPs that:

  • are regulated by an overseas regulatory authority that is a signatory to the IOSCO multilateral MOU; and
  • provide financial services to wholesale clients in Australia only.

FFSPs licensed under this 'modified regime' would be exempt from some provisions of the Corporations Act 2001 (Cth), to the extent that there was a double-up between the requirements imposed under the FFSP's home jurisdiction and those under the Australian regime. Certain conditions would also be imposed on FFSPs licensed under the modified regime. The conditions being considered include that the FFSP:

  • must carry on business in its home jurisdiction;
  • must appoint a local agent in Australia;
  • must reasonably believe that it would not contravene any laws of its home jurisdiction if it were to provide the financial services to wholesale clients in its home jurisdiction; and
  • must notify ASIC of significant changes to its regulation offshore, including any enforcement activity and regulatory investigations.

Option 2 sounds a lot like the Foreign AFS licensing regime (which is available to FFSPs that would otherwise have relied on the 'Sufficient Equivalence Relief'), but would be available to FFSPs from a significantly expanded number of jurisdictions, given that there are currently 124 member agency signatories to the IOSCO multilateral MOU, including important jurisdictions such as Japan, France, Norway, Ireland and Sweden.

Option 3: Provide automatic licensing relying on an overseas licence held by the FFSP

Under this option, an FFSP that:

  • is regulated by an overseas regulatory authority that is an IOSCO board member;
  • holds a licence from that overseas regulatory authority, which covers the financial services that the FFSP wishes to provide in Australia; and
  • intends to provide financial services to wholesale clients in Australia only,

would be eligible for an automatic AFS licence. FFSPs obtaining an automatic AFS licence would be subject to the same obligations as standard AFS licensees (ie there would be no relief to the extent that there was double-up between the obligations imposed under a FFSP's home regulatory regime and the Australian regime), plus the additional conditions outlined above under Option 2.

There are currently 34 IOSCO board members, including board members from China, France, India, Ireland, Italy, Japan, Russia, Sweden and Switzerland. Accordingly, this would considerably fast-track licensing for FFSPs from these 34 jurisdictions. However, it remains to be seen if there will be the necessary political support to give effect to this proposal.

Treasury has invited submissions on the options outlined in the Consultation Paper – they are due by 30 July 2021. Allens' Funds, Super & Wealth team has experience in drafting submissions to Treasury and can provide assistance to affected FFSPs wishing to make a submission in relation to the proposals.

Submissions should be sent by 30 July 2021 to:

Regulatory Powers and Accountability Unit
Financial System Division
The Treasury
Langton Crescent
PARKES ACT 2600
Email: FFSP@treasury.gov.au

We will continue to monitor and update you in relation to these important reforms.

Footnotes

  1. ASIC Media Release, 21-131MR ASIC extends transitional relief for foreign financial services providers following Federal Budget, 11 June 2021.

  2. The financial services covered by Option 2 are the provision of financial product advice; dealing in a financial product; making a market for a financial product; or providing a custodial or depository service.

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