Treasury consults on exposure draft legislation on foreign financial service provider exemptions

Articles Written by Austin Bell (Partner), Jared McLachlan (Law Graduate)
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On 20 December 2021, the Department of the Treasury of the Australian Government (Treasury) released the Treasury Laws Amendment (Measures for Consultation) Bill 2021: Licensing exemptions for foreign financial service providers exposure draft legislation (Amendment Bill) on the new proposed exemptions for foreign financial service providers (FFSPs). The exemptions contained in the Amendment Bill are designed to encourage broader investment opportunities for Australian investors and to generate greater liquidity in Australian markets.

Background to the FFSP exemptions

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

In 2003, shortly after the AFS licensing regime commenced, the Australian Securities and Investments Commission (ASIC) exercised its power as a regulator and introduced two AFS licensing exemptions for FFSPs that provide financial services to wholesale clients in Australia:

  • Sufficient Equivalence Relief: Relief 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. This relief was implemented through a series of ASIC Class Orders specific to each regulated foreign jurisdiction.
  • Limited Connection Relief: Originally prescribed in Class Order [CO 03/824] and continued under ASIC Corporations (Foreign Financial Services Providers – Limited Connection) Instrument 2017/182, this  relief  is provided to FFSPs that only need to hold an AFS licence because they are deemed to be carrying on a financial services business in Australia pursuant to section 911D of the Corporations Act 2001 (Cth) (Corporations Act) (i.e. by virtue of conduct that is intended to induce, or is likely to induce, persons in Australia to use their financial services).

ASIC terminated the Sufficient Equivalence Relief and Limited Connection Relief, with effect from 31 March 2020, subject to the relief being continued until 31 March 2022 for FFSPs relying on the relief at that time.

On 11 May 2021, in the Budget 2021–22, the Federal Government announced that it would consult with the financial services industry on options to restore the previous relief and to establish an expedited AFS licensing process for FFSPs.[1]

In response to the Budget 2021–22, on 11 June 2021 ASIC issued ASIC Corporations (Amendment) Instrument 2021/510 (ASIC Instrument 2021/510) which extends the transitional period of relief for FFSPs pending the outcome of the Federal Government’s consultation. Specifically, ASIC Instrument 2021/510 enables FFSPs to rely on the Sufficient Equivalence Relief and Limited Connection Relief until 31 March 2023 instead of 31 March 2022 which was the previous expiry date.

While the Limited Connection Relief applies to any FFSP that satisfies the requirements of the relief, the Sufficient Equivalence Relief only applies to those FFSPs that were relying on it as at 31 March 2020. Any FFSP not relying on the Sufficient Equivalence Relief as at 31 March 2020 must make an individual application to ASIC in order to obtain the same relief. If ASIC is satisfied with the application, it will grant the individual relief under a separate legislative instrument on substantially the same terms as the Sufficient Equivalence Relief.

Amendment Bill

The Amendment Bill, in its current form and if passed, provides the following AFS licensing exemptions to FFSPs:

  • Professional Investor Exemption;
  • Comparable Regulator Exemption; and
  • Fit and Proper Person Test Exemption.

The Amendment Bill amends the Corporations Act and therefore will need to go through the parliamentary process to become law; the amendments are not merely regulations that the executive may make without parliamentary consideration. Given the current uncertainty about the timing of the next Federal Government election, it is possible that parliament will be prorogued before the Amendment Bill is passed. If this happened, the Amendment Bill would lapse when parliament was prorogued and, in order for the proposed amendments to become law, they would need to be re-introduced by the new government when parliament resumes after the election.

If the Amendment Bill were not passed before parliament is prorogued, FFSPs currently relying on the Sufficient Equivalence Relief will, again, find themselves in uncertain territory since their relief is due to expire on 31 March 2023, less than 12 months from the date that parliament will be resumed. If there is a change of government, there is no guarantee that legislation similar to the Amendment Bill will be reintroduced and/or passed. 

Professional Investor Exemption

The Professional Investor Exemption provides an exemption from the requirement to hold an AFS licence for FFSPs that provide financial services from outside Australia to professional investors. The Professional Investor Exemption is only available in the following circumstances:

  • the financial service is provided only to professional investors;
  • the FFSP provides the financial service from outside Australia;
  • the FFSP’s head office and principal place of business are located outside Australia;
  • the FFSP reasonably believes that the provision of the financial service does not contravene any laws that apply in the FFSP’s principal place of business, head office or the place from where the financial services are provided; and
  • the FFSP has complied with the requirements (see below).

Whilst FFSPs may only rely on the Professional Investor Exemption if they provide the financial service from outside Australia, the Exposure Explanatory Memorandum states that this condition does not prevent the FFSP from appointing local representatives or making infrequent marketing visits to Australia.

Definition of Professional Investor

Under the Professional Investor Exemption, FFSPs may only provide financial services in Australia to professional investors. Section 9 of the Corporations Act, as modified by regulation 7.6.02AE of the Corporations Regulations 2001 (Cth), provides that a professional investor includes any of the following:

  • an AFS licensee;
  • a body regulated by the Australian Prudential Regulatory Authority (other than a trustee within the meaning of the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act));
  • a registered entity within the meaning of the Financial Sector (Collection of Data) Act 2001 (Cth):
  • a trustee of certain superannuation funds within the meaning of the SIS Act that have net assets of at least A$10 million;
  • a person that controls at least A$10 million (including any amount held by an associate or under a trust that the person manages);
  • a listed entity, or a related body corporate of a listed entity;
  • an exempt public authority;
  • a company or unincorporated body that:
    • carries on a business of investment in financial products, interests in land or other investments; and
    • for those purposes, invests funds received (directly or indirectly) following an offer or invitation to the public; or
  • a foreign entity that, if established or incorporated in Australia, would be covered by one of points listed above.

Requirements to rely on the Professional Investor Exemption

An FFSP that uses, or intends to use, the Professional Investor Exemption must:

  • notify ASIC that it has used, or intends to use, the Professional Investor Exemption;
  • provide reasonable assistance to ASIC in order to enable ASIC to perform its functions and exercise its powers;
  • notify ASIC that it agrees to be subject to Australian courts, Australian laws and comply with any order of an Australian court, except to the extent that the order conflicts with an order made by a court in the FFSP’s home jurisdiction;
  • comply with directions from ASIC that require the FFSP to provide information about its financial services or financial services business;
  • notify Australian clients that the FFSP is exempt from the requirement to hold an AFS licence; and
  • notify ASIC of changes to the FFSP’s contact details as soon as practicable following the change.

Comparable Regulator Exemption

The Comparable Regulator Exemption provides an exemption from the requirement to hold an AFS licence for foreign companies that provide financial services to wholesale clients. The Comparable Regulator Exemption applies in the following circumstances:

  • the financial service is provided only to wholesale clients;
  • the FFSP is a foreign company (certain limited partnerships established outside of Australia could be a “foreign company”);
  • the FFSP has, and maintains, all authorisations, registrations or licences necessary to provide legally the same financial service outside of Australia;
  • the Minister has determined that the regulator for the foreign jurisdiction is a comparable regulator; and
  • the FFSP has complied with the requirements (see below).

It is expected that the list of comparable regulators will include the same foreign regulators that were listed as part of the Sufficient Equivalence Relief. The Explanatory Memorandum lists the following foreign regulators that, subject to the Minister’s decision, could be comparable regulators for the purpose of the exemption:

  • Securities and Exchange Commission (US SEC);
  • US Federal Reserve and Office of the Comptroller of the Currency (OCC);
  • Commodity Futures Trading Commission (US CFTC);
  • Monetary Authority of Singapore (Singapore MAS);
  • Securities and Futures Commission (Hong Kong SFC);
  • Bundesanstalt für Finanzdienstleistungsaufsicht of Germany (German BaFin);
  • Luxembourg Commission de Surveillance du Secteur Financier (CSSF);
  • UK Financial Conduct Authority or Prudential Regulatory Authority (UK FCA or PRA);
  • Danish Financial Supervisory Authority (Danish FSA);
  • Finansinspektionen (Swedish FI);
  • Autorité des Marches Financiers of France (French AMF);
  • Autorité de contrôle prudentiel et de resolution of France (French ACPR); and
  • Ontario Securities Commission (Ontario OSC).

Definition of Wholesale Client

Under the Comparable Regulator Exemption, FFSPs may only provide financial services in Australia to wholesale clients. Sections 761G and 761GA of the Corporations Act (and the specific regulations) provide that a wholesale client includes a person to whom a financial product or service is to be provided:

  • for which the minimum investment is A$500,000 or more (not taking into account any loans given by the product issuer or any associate);
  • is a business which is not a small business (i.e. a non-manufacturing business with more than 20 employees or a manufacturing business with more than 100 employees);
  • has provided to the provider of the financial product or service a copy of a certificate given within the preceding six months by a qualified accountant stating that the person has net assets of A$2.5 million or has a gross income for each of the last two financial years of at least A$250,000 each year;
  • is a "professional investor" within the meaning of section 9 of the Corporations Act (the definition of which is included above) or a “sophisticated investor” within the meaning of section 761GA of the Corporations Act; or
  • is controlled by an entity that is a wholesale client.

Requirements to rely on the Comparable Regulator Exemption

An FFSP that uses, or intends to use, the Comparable Regulator Exemption must:

  • notify ASIC that it has used, or intends to use, the Comparable Regulator Exemption;
  • provide reasonable assistance to ASIC in order to enable ASIC to perform its functions and exercise its powers;
  • notify ASIC that it agrees to be subject to Australian courts, Australian laws and comply with any order of an Australian court, except to the extent that the order conflicts with an order made by a court in the FFSP’s home jurisdiction;
  • comply with directions from ASIC that require the FFSP to provide information about its financial services or financial services business;
  • notify Australian clients that the FFSP is exempt from the requirement to hold an AFS licence;
  • notify ASIC of any significant enforcement action, disciplinary action or investigation undertaken against the FFSP outside of Australia;
  • appoint a local agent in Australia; and
  • maintain sufficient oversight of its representatives who provide financial services in Australia and take reasonable steps to ensure that its representatives comply with the financial services laws.

Fit and Proper Person Test Exemption

The Fit and Proper Person Test Exemption is an exemption from the requirement to satisfy the fit and proper person requirements when applying for an AFS licence or when applying to vary an existing AFS licence. The exemption applies to foreign companies that are authorised, registered or licensed by a comparable regulator and are only applying for (or applying to vary) an AFS licence that is authorised to provide financial services to wholesale clients. 

The fit and proper person test refers to the requirement imposed on AFS licence applicants to satisfy ASIC that it should have no reason to believe that the entities, in the case of companies, entities’ officers and any officer of its controllers are not fit and proper people.

Application and Transitional Provisions

The Professional Investor and Comparable Regulator Exemptions will be available in relation to financial services provided on or after the date the Amendment Bill commences.

The Fit and Proper Person Test Exemption will apply to applications for an AFS licence on or after the date the Amendment Bill commences (this is the same for applications to vary an existing AFS licence). Applications for an AFS licence made prior to the commencement of the Amendment Bill, including applications that remain on foot, are subject to the existing requirements and must satisfy the fit and proper person test.

Comment

The Comparable Regulator Exemption is largely similar to the existing Sufficient Equivalence Relief. One notable change is that the Comparable Regulator Exemption expressly requires the FFSP to comply with Australian financial services laws and to take reasonable steps to ensure that its representatives providing financial services in Australia comply with these laws. Under the Sufficient Equivalence Relief, the express requirement pursuant to the ASIC Class Order was for the FFSP to provide each of the financial services in Australia in a manner which would comply, so far as is possible, with the regulatory requirements of the FFSP’s home jurisdiction, although the FFSP had to submit to the non-exclusive jurisdiction of the Australian courts. Having to comply with Australian financial services laws is likely to increase the compliance burden and costs to FFSPs relying on the Comparable Regulator Exemption. The same requirement applies to the Professional Investor Exemption.

At this stage, the Professional Investor and Comparable Regulator Exemptions, unlike the Sufficient Equivalence and Limited Connection Relief, do not restrict the types of financial services or financial products that may be provided to professional investors or wholesale clients, as the case may be. FFSPs would, therefore, be able to provide the same financial services to wholesale clients in Australia that they are authorised to provide in their home jurisdiction, provided they maintain all of the requisite authorisations, registrations or licences to provide the same financial service in their home jurisdiction. However, the Amendment Bill contains provisions that allow for regulations to be made to restrict particular kinds of financial services, financial products and professional investors from the benefit of the Professional Investor Exemption.  The extent to which this power will be exercised remains unclear.

As the proposed relief is proposed to apply only to professional investors and wholesale clients, it is important to note that the definitions of “professional investor” and “wholesale client” may change; in particular, following the completion of the Quality of Advice Review which is currently considering, among other things, the processes through which investors are designated as wholesale clients.

Navigating the fit and proper person requirements is one of the more onerous aspects of completing an application for, or variation of, an AFS licence, particularly with entities that have complex ownership structures. The Fit and Proper Person Test Exemption is, therefore, likely to be welcomed by eligible AFS licensee applicants.

The Limited Connection Relief and Sufficient Equivalence Relief are due to expire on 31 March 2023 under ASIC Instrument 2021/510. Presumably, ASIC will not bring forward the expiry of this relief. In any event, greater clarity on the transition arrangements, and in particular, whether the Limited Connection Relief and the Professional Investor Exemption will co-exist for a period, would be welcome.

Please contact us if you would like more information on any of the existing or proposed forms of relief or to discuss the regulatory regime that applies to FFSPs more generally.


[1] The Commonwealth of Australia, Budget 2021-22 (Budget Paper No. 2, 11 May 2021), 190.

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).

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