Treasury consults on Relief for Foreign Financial Service Providers

On 9 July 2021, the Department of the Treasury of the Australian Government (Treasury) released Consultation Paper: Relief to Foreign Financial Service Providers (Consultation Paper) seeking industry feedback on regulatory relief for Foreign Financial Service Providers (FFSPs) and the options to create a streamlined Australian financial services (AFS) licensing process for FFSPs seeking to establish more permanent operations in Australia.

The release of the Consultation Paper follows an announcement by the Australian Government in the Federal Budget on 11 May 2021 that it will consult with the industry on options to:

• restore the regulatory relief from the requirement to hold an AFS licence for FFSPs that are licensed and regulated in jurisdictions that have comparable financial services laws and obligations and FFSPs that have a limited connection to Australia; and
• establish an expedited AFS licensing process for FFSPs that wish to establish more permanent operations in Australia.

The Consultation Paper does not contain proposals; it merely canvasses options and seeks views on additional options that the Australian Government should consider before settling on a regulatory framework for FFSPs.

In this note, we summarise the FFSP exemptions that have existed to date, as well as the options set out in the Consultation Paper.

Regulatory Background

A person who carries on a financial services business in Australia must hold an AFS licence authorising them to provide the relevant financial services, unless an exemption applies.

Shortly after the commencement of the AFS licensing regime in 2002, the Australian Securities and Investments Commission (ASIC) recognised the need for AFS licensing exemptions for certain FFSPs providing financial services to wholesale clients in Australia. These are summarised below.

FFSP Regulatory Regime before 31 March 2020

Since 2003, ASIC has provided two forms of licensing exemptions to FFSPs that provide financial services to wholesale clients in Australia:

• Sufficient Equivalence Relief: Relief that is provided under a range of class orders for FFSPs regulated by a regulatory regime in their home jurisdiction that ASIC has determined to be sufficiently equivalent to the regulatory regime in Australia.
• Limited Connection Relief: Relief that is provided for FFSPs that only need to be covered by an AFS licence because they are deemed to be carrying on a financial services business in Australia by virtue of their engaging in conduct that is intended to induce, or is likely to induce, wholesale clients in Australia to use their financial services.

FFSP Regulatory Regime between 31 March 2020 and 31 March 2023

Following years of consideration and consultation, ASIC outlined a new regulatory framework on 10 March 2020 for FFSPs which included a “foreign AFS licence” and the “Funds Management Relief”. ASIC also extended until 31 March 2022 the Sufficient Equivalence Relief for those FFSPs that were relying on it as at 31 March 2020. The Limited Connection Relief was also extended at that time. Our note on this development in the regulatory regime can be found here.

Following the Australian Government’s announcement that it intended to consult on restoring the previous forms of relief, ASIC issued ASIC Corporations (Amendment) Instrument 2021/510 on 11 June 2021. This extended the ability of FFSPs to rely on the Sufficient Equivalence Relief and Limited Connection Relief by an additional 12 months from 31 March 2022 until 31 March 2023. ASIC also announced that those FFSPs that were not currently relying on the Sufficient Equivalence Relief could seek to rely on it by providing ASIC with the requisite documents and otherwise complying with the other conditions.

FFSP Regulatory Regime after 31 March 2023

The regulatory regime that will apply to FFSPs after 31 March 2023 will depend on the outcome of Treasury’s consultation. The Consultation Paper contains several options. These are summarised below.

Options for establishing a framework for FFSPs

The Consultation Paper seeks comments and submissions on Treasury’s various options for establishing a new regulatory framework for FFSPs:

Option 1: Restore the previous FFSP Relief

The Consultation Paper contains two alternatives under the option to reinstate the former FFSP relief being:

Option 1A – Restore the Sufficient Equivalence Relief and Limited Connection Relief.

Option 1B – Restore the Sufficient Equivalence Relief and continue the Funds Management Relief instead of the Limited Connection Relief.

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

The Consultation Paper sets out the possibility for an exemption from the requirement to hold an AFS licence in order to provide certain financial services to wholesale clients in Australia. An FFSP relying on this relief would be restricted to providing the following financial services in relation to the following financial products:

Financial services:

• providing financial product advice;
• dealing in a financial product;
• making a market for a financial product; and
• providing a custodial or depository service.

Financial products:

• a derivative;
• a foreign exchange contract;
• a security;
• a debenture, stock or bond;
• a managed investment product;
• an interest in a managed investment scheme;
• a deposit taking facility;
• an eligible deposit product; and
• a facility for making non-cash payments.

The relief would only be available to those FFSPs from the following jurisdictions, and it would only be available to those FFSPs that were licensed to provide the same financial services in their home jurisdiction:

• Denmark (regulated by the Danish Financial Supervisory Authority);
• France (regulated by the Autorité des marchés financiers of France or the Autorité de contrôle prudentiel et de resolution of France);
• Germany (regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht);
• Hong Kong (regulated by the Securities and Futures Commission);
• Luxembourg (regulated by the Commission de Surveillance du Secteur Financier);
• Canada (regulated by the Ontario Securities Commission);
• Singapore (regulated by the Monetary Authority of Singapore);
• Sweden (regulated by the Finansinspektionen);
• United Kingdom (regulated by the Financial Conduct Authority); or
• United States (regulated by the Commodity Futures Trading Commission, the Federal Reserve and the Office of the Comptroller of the Currency or the US Securities Exchange Commission).

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

The Consultation Paper also canvasses an option that is analogous to Option 2 but extends the relief to all financial services provided to wholesale clients.

Option 2 and Option 3 Conditions

The exemptions provided under both Options 2 and 3 could be granted subject to certain conditions. Treasury is seeking submissions on whether some, or all, of a range of conditions should apply. These include the conditions that apply under the current Sufficient Equivalence Relief, as well as requiring the FFSP to comply with the following new conditions:

• complying with auditing and reporting requirements;
• ensuring that financial services are provided efficiently, honestly and fairly;
• applying protections for dealing with client’s money and property;
• having adequate conflict of interest arrangements in place;
• having adequate risk management systems in place;
• notifying clients when the FFSP is relying on the relief;
• ensuring representatives are appropriated trained;
• providing periodical information to ASIC including:
  • the FFSP’s fund or business type;
  • detailed description of the intended business activity, market presence and client groups targeted in Australia;
  • copy of the FFSP’s constitution and/or articles of association;
  • the FFSP’s investment strategy;
  • the number of Australian clients;
  • confirmation that financial services are only provided to wholesale clients or professional investors;
  • certain financial statements that cover the financial services provided in Australia;
  • assets under management (AUM) of Australian investors in funds;
  • increase/decrease in AUM from Australian investors from prior reporting period;
  • dealings with derivatives;
  • name of foreign legal entity adviser promoting fund(s) in Australia, including name of onshore Australian licensee where relevant;
  • the agreement with a local agent;
  • annual compliance attestation;
  • liquidity terms of the fund; and
  • for funds that offer liquidity, redemption information from the prior reporting period.

Options for fast-tracking the licensing process for FFSPs

The Consultation Paper seeks comments and submissions on the different ways of fast-tracking the AFS licensing process for FFSPs:

Option 1: Amendments to the Fit and Proper Person Test

As part of the AFS licence application process, applicants must provide information on their fit and proper people. This fit and proper person test is satisfied if ASIC can determine that there is no reason to believe that, for a body corporate applicant, any of the officers of the body corporate (and any officer of a body corporate that controls the applicant) are not fit and proper in performing one or more functions as officers of the body corporate that provides financial services under an AFS licence.

Treasury is considering legislative amendments to provide ASIC with the discretionary power to determine whether an FFSP is required to satisfy the fit and proper person test for every relevant person under section 913BA of the Corporations Act. This is based on the proposal to allow ASIC to rely on similar assessments undertaken by regulators in the home jurisdiction of the FFSP. It is designed to reduce duplicative regulatory burden where appropriate.

Option 2: Modifications to the AFS licensing regime for FFSPs that deal with wholesale clients

Another means of fast tracking the AFS licensing process is to introduce a modified AFS licensing regime that would apply to FFSPs that only provide financial services to wholesale clients in Australia. This fast tracked regime would only be available to FFSPs that are regulated by an overseas regulatory body that is a signatory to the International Organisation of Securities Commission’s (IOSCO) multilateral Memorandum of Understanding.

If this option were implemented, FFSPs would benefit from exemptions to the AFS licensing process and certain obligations under Chapter 7 of the Corporations Act where there is duplication with the regulatory regime in the FFSP’s home jurisdiction.

The Consultation Paper lists the following conditions that could apply to this modified AFS licensing regime:

• the FFSP is required to carry on business in its home jurisdiction;
• the FFSP must appoint a local agent and not fail to have an agent for any consecutive period of 10 business days (this condition has not been proposed for FFSPs that are body corporates);
• the FFSP must hold the reasonable belief that it is not in contravention of any laws in its home jurisdiction if it were to provide financial services to wholesale clients;
• the FFSP must provide written notice to ASIC as soon as practicable and in any event within 15 business days after becoming aware or after it should reasonably have become aware of the following:
  • any significant change to or termination of its registration/authorisation in its home jurisdiction;
  • any significant exemption or relief obtained in connection with regulatory requirements in its home jurisdiction; and
  • any significant investigation, enforcement or disciplinary action undertaken by the regulatory authority in its home jurisdiction in connection with the financial services it provides.

Options 3: Provision of automatic licensing for FFSPs with an overseas licence

Finally, Treasury is seeking submissions on the possibility of granting an AFS licence to an FFSP in circumstances where the FFSP is able to provide evidence of the following:

• the FFSP is regulated in its home jurisdiction by a regulatory authority that is an IOSCO board member;
• the FFSP holds an existing licence that specifically allows it to provide in its home jurisdiction the financial services that it intends to provide in Australia; and
• the FFSP will only provide financial services to wholesale clients in Australia.

Under this option, the FFSP would be subject to all of the obligations that are imposed on an AFS licensee, as well as being subject to the following conditions:

• the FFSP must carry on business in its home jurisdiction;
• the FFSP must appoint a local agent and not fail to have an agent for any consecutive period of 10 business days (this condition would not apply for FFSPs that are body corporates);
• the FFSP must hold the reasonable belief that it is not in contravention of any laws in its home jurisdiction if it were to provide financial services to wholesale clients;
• the FFSP must provide written notice to ASIC as soon as practicable and in any event within 15 business days after becoming aware, or after it should reasonably have become aware, of the following:
  • any significant change to or termination of its registration/authorisation in its home jurisdiction;
  • any significant exemption or relief obtained in connection with regulatory requirements in its home jurisdiction; and
  • any significant investigation, enforcement or disciplinary action undertaken by the regulatory authority in its home jurisdiction in connection with the financial services it provides.

Although the options outlined by Treasury in the Consultation Paper cover the spectrum of the different forms of FFSP AFS licensing exemptions that have existed, or been proposed, since 2003, a number of questions remain.

Submissions on the various options can be made until 30 July 2021. Please contact us if you would like more information on any of the options or to discuss the regulatory regime that applies to FFSPs more generally.

Important Disclaimer: The material contained in this article is comment of a general nature only and is not and nor is it intended to be advice on any specific professional matter. In that the effectiveness or accuracy of any professional advice depends upon the particular circumstances of each case, neither the firm nor any individual author accepts any responsibility whatsoever for any acts or omissions resulting from reliance upon the content of any articles. Before acting on the basis of any material contained in this publication, we recommend that you consult your professional adviser. Liability limited by a scheme approved under Professional Standards Legislation (Australia-wide except in Tasmania).