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On 3 July 2019, the Australian Securities and Investments Commission (ASIC) issued the long-awaited Consultation Paper 315 (CP 315), setting out its proposals for the new regulatory regime for foreign financial service providers (FFSPs).
These proposals are to:
ASIC has not proposed that FFSPs must necessarily register in Australia as a foreign company. This is important to many FFSPs because of the requirement for registered foreign companies to file with ASIC annual financial statements that are publicly available.
On a more concerning note, ASIC has also not proposed that FAFSL holders be exempt from the requirement to file annual audited financial statements using the prescribed forms FS70 and FS71. Although these filings are not publicly available, the policy rationale for requiring an FAFSL holder to file them is not immediately obvious given the proposal that FAFSL holders be exempt from the financial resource requirements. Further, some FFSPs may be reluctant to file this information with ASIC, even though it is not publicly available. We intend to raise this in our submissions to ASIC.
The Current Exemption expires, but will be extended for a further six months from this date.
The FAFSL regime commences.
The ‘funds management’ exemption commences.
The transitional period for FFSPs relying on the Current Exemption (i.e. the ‘limited connection’ or ‘sufficient equivalence’ exemptions) commences.
ASIC legislative instruments grant two types of exemptions to FFSPs seeking to provide financial services in Australia to wholesale clients: the ‘sufficient equivalence’ exemption and the ‘limited connection’ exemption.
‘Sufficient equivalence’ exemption
Currently, certain regulated entities in six countries may benefit from the ‘sufficient equivalence’ exemption. This is conditional relief that exempts entities from holding an Australian financial services licence (AFSL) in order to provide certain financial services in Australia. These six countries are the USA, the UK, Hong Kong, Germany, Singapore, and Luxembourg. In addition to these countries, there are other countries where ASIC has exempted a particular FFSP from holding an AFSL on similar terms.
‘Limited connection’ exemption
FFSPs are exempt from holding an AFSL if the FFSP carries on a financial services business in Australia only by engaging in conduct that is intended to induce people in Australia to use the financial services they provide. This exemption applies to FFSPs that are deemed to carry on a financial services business in Australia only by operation of section 911D of the Corporations Act 2001 (Cth) (Corporations Act) where they provide financial services to wholesale clients.
Further extensions during transitional periods
ASIC proposes that both limbs of the Current Exemption be extended until 31 March 2020, with both being extended further under transitional periods. The ‘sufficient equivalence’ exemption is proposed to be extended under a transitional period commencing on 1 April 2020 and ending on 31 March 2022, and the ‘limited connection’ exemption is proposed to be extended under a transitional period commencing on 1 April 2020 and ending on 30 September 2020. The transitional periods will allow FFSPs that are already relying on the relevant exemption as at 31 March 2020, to continue relying on it, but will not allow new FFSPs to apply for it. FFSPs that do not currently have the benefit of the ‘sufficient equivalence’ exemption may apply for it until the commencement of the transitional periods on 1 April 2020. FFSPs wishing to do so should file the requisite documents with ASIC by 1 March 2020 to give ASIC sufficient time to consider them before the commencement of the transitional periods.
See our previous article Changes to the FFSP regime for more information.
ASIC will accept applications for an FAFSL from an FFSP if ASIC is satisfied that the FFSP is subject to a sufficiently equivalent regulatory regime in the FFSP’s home jurisdiction. FAFSLs will be limited to authorising the holder to providing financial services to wholesale clients, similar to the existing ‘sufficient equivalence’ exemption.
It is proposed that FAFSL holders must comply with conditions, including that they:
It is proposed that FAFSL holders be exempt from certain requirements that otherwise apply to AFSL holders. The proposed exemptions mean that FAFSL holders will not need to comply with certain requirements, including:
These exemptions mean that far fewer documents will need to be submitted to ASIC as part of the FAFSL application. In particular, FAFSL applicants will not need to submit a ‘B1 proof’ that sets out the nominated responsible manager’s experience (or the associated documents for responsible managers); nor will they have to submit a ‘B5 proof’ that sets out how the applicant will comply with the financial resource requirements. ASIC has indicated that this should result in a streamlined application process for FAFSL applications. To give an indication of current processing times for AFSLs, ASIC aims to complete processing an AFSL application within 150 days of filing. In FY17/18, ASIC met this 150 day goal in 74% of cases. In FY17/18, ASIC granted AFSLs (or rejected applications) within 240 days in 88% of the time.
The FAFSL regime is proposed to commence on 1 April 2020, and ASIC proposes to start receiving FAFSL applications from that date. The current ‘sufficient equivalence’ exemption is proposed to expire on 31 March 2022, giving FFSPs relying on the ‘sufficient equivalence’ exemption as at 31 March 2020 two years to apply for an FAFSL.
This exemption is proposed to be available to FFSPs that provide ‘funds management financial services’ to certain investors in Australia. It will only apply to FFSPs that derive a certain portion of their entire revenue from funds management services provided under the exemption – effectively, this means that an FFSP relying on this exemption must not derive more than 10 percent of its gross revenue from services it provides relying on the exemption.
ASIC proposes that ‘funds management financial services’ include:
‘Portfolio management services’ is proposed to cover the management of assets located outside Australia by a manager on behalf of ‘eligible Australian users’. ‘Eligible Australian users’ is proposed to include, inter alia, superannuation funds with over AU$10 million of assets under management, managed investment schemes with over AU$10 million of assets under management, statutory funds and exempt public authorities.
FFSPs seeking to rely on the ‘funds management’ exemption must:
The ‘funds management’ exemption is proposed to commence on 1 April 2020. FFSPs that are currently relying on the ‘limited connection’ exemption will have until 30 September 2020 to transition to new compliance arrangements. FFSPs that currently rely on the ‘limited connection’ exemption, but will be unable to rely on the proposed ‘funds management’ exemption, may be able to rely on another exemption provided by the Corporations Act or Corporations Regulations 2001 (Cth). Alternatively, they may be required to apply for an AFSL, an FAFSL (if they satisfy the applicable requirements) or cease providing financial services to persons in Australia.
Submissions to ASIC on CP 315 are due on 9 August 2019.
If the proposals in CP 315 are implemented in their current form, FFSPs relying on the Current Exemption will need to transition to new compliance arrangements before the relevant transitional periods expire.
Please contact us if you have any questions or wish to discuss any aspect of the AFSL regime.
 See https://asic.gov.au/regulatory-resources/forms/forms-folder/fs70-australian-financial-services-licensee-profit-and-loss-statement-and-balance-sheet/.
 See https://asic.gov.au/regulatory-resources/forms/forms-folder/fs71-auditor-s-report-for-afs-licensee/.
 ASIC policy on the definition of ‘significant’ investigation is set out in ASIC’s proposed draft of updated RG 176 (see https://asic.gov.au/for-finance-professionals/afs-licensees/applying-for-and-managing-an-afs-licence/licensing-certain-service-providers/foreign-financial-services-providers-practical-guidance/#questions).
 As defined in section 9 of the Corporations Act, this includes an AFSL holder and a person that controls at least AU$10 million (including any amount held by an associate or under a trust that the person manages).
Partners Austin Bell and Andi Milidoni have written the Australian chapter for the International Comparative Legal Guide: Public Investment Funds 2020.
On 10 March 2020, ASIC released its new regulatory framework for FFSPs providing financial services to Australian wholesale clients.
With significant regulatory change coming into effect the spotlight is staying firmly on
culture, ethics and regulatory compliance. An organisation’s social licence to operate
remains a priority...