Transitional relief extended, but permanent options remain unclear 8 min read
ASIC has extended the transitional Australian financial services (AFS) licensing relief for foreign financial service providers (FFSPs) by another year to 31 March 2024. While this will provide certainty to FFSPs relying on the existing licensing relief for at least another year, FFSPs will wonder what the future holds once the transitional relief expires.
The extension follows the lapsing of the Treasury Laws Amendment (Streamlining and Improving Economic Outcomes for Australians) Bill 2022 (Cth) (the Bill), which was introduced into Parliament in February 2022. The Bill sought to establish permanent licensing relief for FFSPs once the transitional relief expired, but lapsed following the dissolution of Parliament due to the federal election.
In this Insight, we cover:
- what the extension of the existing licensing relief means for FFSPs;
- what the Bill (and its lapsing) means for FFSPs; and
- what options are available to FFSPs moving forward.
- The sufficient equivalence relief and limited connection relief available to FFSPs was scheduled to expire on 31 March 2023. ASIC has extended the transitional licensing relief by an extra year meaning that FFSPs currently relying on either form of relief can continue doing so until 31 March 2024.
- The extension follows the lapsing of the Bill which sought to introduce permanent licensing relief from 1 April 2023 onwards.
- After the extended transitional relief period expires on 1 April 2024, it is unclear at this stage what permanent licensing relief options will be available for FFSPs.
Let's quickly recap the changes to the FFSP regime. The key change to the existing regime was the repeal of the following two forms of licensing relief available to FFSPs:
- sufficient equivalence relief: which applies where an FFSP provides certain financial services to only wholesale clients, and is regulated by an overseas regulatory regime that is sufficiently equivalent to the Australian regime (at present, the UK, the USA, Singapore, Hong Kong, Germany and Luxembourg); and
- limited connection relief: which applies where an FFSP 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 forms of relief were subject to transitional arrangements under which FFSPs that were able to rely on the relief could continue doing so until 31 March 2022. Following the expiration of that transitional period, ASIC proposed that the two forms of relief would be replaced with:
- a new foreign AFS licensing regime (principally for FFSPs relying on the sufficient equivalence relief); and
- a new 'funds management' relief (principally for FFSPs relying on the limited connection relief).
However, following the Federal Government's announcement in the 2021-22 Federal Budget to consult on restoring the existing licensing relief for FFSPs (rather than maintain ASIC's proposed forms of relief), the transitional periods for the sufficient equivalence and limited connection relief were extended by a year (to 31 March 2023) (see our previous Insights here and here).
Following the lapsing of the Bill (which proposed to provide permanent licensing relief after the additional transitional relief period expired), ASIC has extended the transitional relief for an additional year (to 31 March 2024).
This means that any FFSPs currently relying on either the sufficient equivalence or limited connection relief can continue to do so until at least 31 March 2024.
Following the expiry of this transitional relief, it is unclear what permanent options will be available going forward—this will likely depend on whether the Bill is reintroduced into Parliament, and the final form of the licensing relief it contains.
It is also worth noting that ASIC has delayed the commencement of the 'funds management' relief to 1 April 2024.
Permanent relief under the Bill and what its lapsing means
The Bill, which was introduced to Parliament in February 2022, sought to introduce the following two new permanent forms of licensing relief that would have commenced from 1 April 2023 (when the transition period for the existing forms of relief was scheduled to expire):
- Professional investor exemption: for FFSPs providing financial services only to 'professional investors'; and
- Comparable regulator exemption: for FFSPs regulated by a 'comparable regulator' and providing services to wholesale clients (similar to the existing sufficient equivalence relief).
The Bill also sought to create a fast-tracked process for certain FFSPs applying for an AFS licence by exempting them from the requirement to satisfy the fit and proper test.
The Bill lapsed with the dissolution of Parliament following the announcement of the federal election in April 2022. It will therefore be necessary for the Bill to be reintroduced into Parliament for the proposed forms of relief to be put in place. However, after a change in government at the election, it is unclear whether the Bill will be reintroduced, and if it is, what the final form of relief will look like.
Proposed professional investor exemption
The proposed professional investor exemption would have been available where:
- the financial service was provided only to 'professional investors' (a subset of wholesale clients);
- the financial service was provided from outside Australia;
- the FFSP's head office and principal place of business were located outside Australia; and
- the FFSP reasonably believed that providing the financial service would not contravene any law applying in the FFSP’s principal place of business, head office or the place from which the financial service is provided.
While there is an existing 'professional investor' exemption, the proposal would have significantly broadened the scope of the relief by expanding it to all financial services and products. The new relief would also have clarified a number of issues regarding the FFSP's location, which are unclear under the existing relief (by allowing FFSPs to have some presence in Australia and carry out limited marketing visits in Australia).
However, the exemption would have introduced a number of new conditions that FFSPs would have been required to comply with, including (among others) notifying ASIC of the intention to rely on the exemption, notifying clients of its reliance on the exemption and complying with ASIC's directions to provide information.
Proposed comparable regulator exemption
The proposed comparable regulator exemption was broadly similar to the sufficient equivalence relief and would have been available where:
- the financial service was provided only to 'wholesale clients';
- the FFSP is authorised to provide the same (or substantially the same) financial service in a place outside Australia (the comparable jurisdiction);
- the regulator administering that authorisation is determined to be a 'comparable regulator'; and
- the financial service is provided from Australia or the comparable jurisdiction.
Similar to the proposed professional investor exemption, entities relying on the exemption would be subject to a number of additional conditions, including (among others) to notify ASIC of the intention to rely on the exemption, notify clients of their reliance on the exemption, agree to information sharing between ASIC and its comparable regulator, and to maintain adequate oversight over their representatives providing financial services in reliance on the exemption.
The initial list of proposed comparable regulators included:
- North America: US SEC, US OCC, US CFTC, Ontario OSC
- Europe: German BaFin, Luxembourg CSSF, UK FCA or PRA, Danish FSA, Swedish FI, French AMF, French ACPR
- Asia: Singapore MAS, Hong Kong SFC
Following ASIC's extension of the transitional relief, FFSPs currently relying on the sufficient equivalence or limited connection relief can continue to do so until 31 March 2024.
New FFSPs that are not currently relying on either form of relief can:
- consider whether they are eligible to rely on the limited connection relief until 31 March 2024;
- apply for individual relief based on the sufficient equivalence class orders (although the transitional relief for sufficient equivalence only extends to FFSPs already relying on the relief, ASIC is still processing individual relief on an equivalent basis); or
- consider applying for a standard or foreign AFS licence to the extent they are unable to rely on a licensing exemption (ASIC has stated it will continue to consider new applications for standard and foreign AFS licences during the extended transitional relief period).
As it is currently unclear what particular form of licensing relief will be available to FFSPs after 31 March 2024 (in particular, whether or not the Bill will be reintroduced, or if FFSPs will need to revisit the options that were available to them before the 2021-22 Federal Budget announcement), we recommend that FFSPs sit tight for now and continue to monitor this space for developments.
We will continue to monitor and update you in relation to these important reforms.
We encourage FFSPs to start considering their licensing options early, so that they have sufficient time to prepare for changes to their existing arrangements to ensure compliance with new regulations and conditions.
Allens is well-placed to assist you in assessing your licensing needs.