ASIC engages in further consultation on regulation of foreign investment advisers and other FFSPs

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:

• repeal the existing exemptions (also referred to as “relief”) for FFSPs – this includes both the ‘sufficient equivalence’ exemption and the ‘limited connection’ exemption (Current Exemption);
• establish a foreign Australian financial services licence (FAFSL) regime for FFSPs – FAFSLs would permit FFSPs to provide wholesale clients in Australia with the same (or substantially the same) financial services that they are authorised to provide in their sufficiently equivalent home jurisdiction.  Holders of an FAFSL would be exempt from having to comply with certain aspects of the Australian regulatory regime; and
• provide a new conditional ‘funds management’ exemption to FFSPs that provide ’funds management financial services’ – this exemption would only be available where the revenue earned by the FFSP for services provided pursuant to the exemption is less than 10 percent of the FFSP’s total revenue. This exemption would also only apply when financial services were provided to a subset of wholesale clients, not all wholesale clients.

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[1] and FS71.[2]  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.

Key dates of ASIC’s proposals

Date	Description
30 September 2019	The Current Exemption expires, but will be extended for a further six months from this date.
31 March 2020	The proposed extension of the Current Exemption expires.
1 April 2020	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.
30 September 2020	The transitional period for the ‘limited connection’ exemption expires.
31 March 2022	The transitional period for the ‘sufficient equivalence’ exemption expires.

Current Exemption

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. 

Foreign Australian financial services licence

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:

• continue to carry on a business in their relevant home jurisdiction;
• notify ASIC if there is any significant change, exemption or investigation pertaining to the FFSP’s provision of financial services in their home jurisdiction;[3]
• comply with relevant provisions of the Corporations Act, such as the requirements to:
  • provide financial services efficiently, honestly and fairly;
  • have in place adequate arrangements for management of conflicts of interest;
  • comply with the conditions on their FAFSL;
  • have adequate risk management systems; and
  • report significant breaches to ASIC.

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:

• the requirement to have adequate resources (including financial, technological and human resources);
• the competence requirements set out in the Corporations Act; and
• the requirement that representatives be adequately trained and competent to provide the authorised financial services.

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.

‘Funds management’ exemption

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:

• the provision of the following financial services to professional investors[4] in Australia:
  • dealing in interests of a managed investment scheme established outside of Australia (Offshore Scheme);
  • dealing in interests of a body that carries on a business of investment that is not incorporated in Australia (Offshore Body);
  • providing financial product advice in relation to interests in an Offshore Scheme or an Offshore Body; and
  • making a market in relation to interests in an Offshore Scheme or an Offshore Body; and
• providing ‘portfolio management services’ to ‘eligible Australian users’.

‘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:

• not be a registered foreign company (which means that it must not carry on a business in Australia);
• not hold an AFSL covering the provision of the ‘funds management financial services’;
• have appointed a local agent in Australia;
• submit to the non-exclusive jurisdiction of the Australian courts in relation to action by ASIC and other Australian regulators;
• notify ASIC of the types of funds management services the FFSP is intending to provide in Australia; and
• comply with any direction by ASIC to give specified information about any financial services the FFSP is providing, or intending to provide, in Australia.

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.

Next steps

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.

---

[1]     See https://asic.gov.au/regulatory-resources/forms/forms-folder/fs70-australian-financial-services-licensee-profit-and-loss-statement-and-balance-sheet/.

[2]     See https://asic.gov.au/regulatory-resources/forms/forms-folder/fs71-auditor-s-report-for-afs-licensee/.

[3]     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).

[4]     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).

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).