ASIC releases new regulatory framework for foreign financial services providers (FFSPs)

Articles Written by Austin Bell (Partner), Rajiv Chandrasena, Jared McLachlan (Associate)

On 10 March 2020, ASIC released its new regulatory framework for foreign financial services providers (FFSPs) providing financial services to Australian wholesale clients. The full media release can be accessed here and the updated ASIC Regulatory Guide 176 (RG 176) here.

The new regulatory framework has two main parts:

  • a new foreign Australian financial services (AFS) licensing regime for FFSPs – this will replace the existing “sufficient equivalence” exemption which is extended to FFSPs that are regulated in a foreign jurisdiction that ASIC has determined has a sufficiently equivalent level of regulation to Australia; and
  • a conditional exemption from holding an AFS licence for FFSPs that induce certain types of professional investors in Australia in relation to “funds management financial services” (funds management exemption) – this will, effectively, replace the existing “limited connection” relief that was first provided under ASIC Class Order 03/824 and is currently available under ASIC Corporations (Foreign Financial Services Providers – Limited Connection) Instrument 2017/182.

What do FFSPs relying on the existing sufficient equivalence exemption need to do?

  • Consider the requirements of the new regulatory regime in light of their activities in connection with Australia.
  • Consider the potential taxation and ongoing filing requirements.
  • Consider the contractual implications with existing Australian clients.
  • Decide if and how they will provide financial services in Australia under the new regime.

Timing considerations

FFSPs that currently rely on an AFS licensing exemption granted by ASIC (on the basis that the FFSP is subject to sufficiently similar regulation in their home jurisdiction) may continue to rely on this exemption until 31 March 2022, provided they comply with all applicable conditions.

If an FFSP intends to apply for a foreign AFS licence or standard AFS licence to continue providing financial services in Australia, ASIC recommends lodging a licence application as soon as possible following commencement of the new regime on 1 April 2020.

The “limited connection” exemption from the AFS licensing regime has been extended until 31 March 2022. The funds management exemption will begin on 1 April 2022.

New foreign AFS licensing regime

From 1 April 2020, certain FFSPs that are regulated by the following foreign regulators may apply to ASIC to obtain a foreign AFS licence.

  • UK FCA;
  • US SEC;
  • US Federal Reserve and OCC;
  • US CFTC;
  • Singapore MAS;
  • Hong Kong SFC;
  • German BaFin;
  • Luxembourg CSSF;
  • Danish FSA;
  • Swedish FI;
  • French AMF;
  • French ACPR; and
  • Ontario, Canada OSC.

Specific details are set out in Schedule 1 of ASIC Corporations (FFSP – Foreign AFS Licensees) Instrument 2020/198 (Instrument 2020/198).  If another foreign regulated entity has been specified in an individual relief instrument that is on substantially the same terms as Instrument 2020/198, they may also apply for a foreign AFS licence.  Applications may also be made to ASIC for it to recognise other foreign jurisdictions as having sufficiently equivalent regulation so that a foreign regulated entity in that jurisdiction may apply for a foreign AFS licence: see Part D of RG 176.

Foreign AFS licensees will be licensed to provide financial services in Australia to wholesale clients and will be exempt from some of the regulatory requirements in the Corporations Act 2001 (Cth) (Corporations Act) that apply to standard AFS licensees. The exemptions are extended on the basis that the FFSP is subject to:

(a) sufficiently equivalent overseas regulatory requirements that achieve similar outcomes to the exempted provisions; and

(b) supervision and enforcement action by a regulator abroad under a sufficiently equivalent overseas regime in relation to those requirements.

The exempted regulatory requirements are summarised in Table 3 of RG 176 (exempt provisions) and include an exemption from maintaining adequate resources and competence to provide the financial services. This should mean that it will be unnecessary to file “people proofs” when applying for a foreign AFS licence, a factor that will simplify the application process. The application procedures applicable to foreign AFS licensees will be set out in updated ASIC Regulatory Guides 1 and 2. ASIC has indicated these will be released later this month.

Notable differences between existing exemption and new exemption

One of the key changes between the existing sufficient equivalence exemption and the new regime is the law that will apply to the FFSP when it provides financial services in Australia. Under the current sufficient equivalence exemption, FFSPs must provide financial services in Australia in accordance with the laws of their home jurisdiction. Under the new regime, an FFSP holding a foreign AFS licence will have to provide financial services in Australia in accordance with Australian laws.

Another key difference for some FFSPs is the obligation to file annual financial statements with ASIC. Under the existing exemption, there is no requirement for an FFSP to file financial statements with ASIC, unless the FFSP is registered in Australia as a foreign company.

Under the new regime, a foreign AFS licensee has relief from the ongoing financial reporting obligations imposed on regular AFS licensees, but the relief is conditional on the foreign AFS licensee filing the following documents each year with ASIC:

(a) a balance sheet made up to the end of its last financial year;

(b) a cash flow statement for its last financial year; and

(c) a profit and loss statement for its last financial year.

These documents must be accompanied by a certified copy of a document setting out the views of the foreign AFS licensee’s auditor about the documents that it reasonably believes were audited in accordance with the requirements for the time being applicable to the foreign AFS licensee in its home jurisdiction. If the foreign AFS licensee did not rely on this relief, it could comply with the usual provisions of the Corporations Act applicable to AFS licensees and foreign companies (where applicable) and prepare and file those financial reports.

Applying for a foreign AFS licence

Applications for a foreign AFS licence may be made online to ASIC. ASIC has indicated that the application process will be streamlined and require the FFSP applicant to:

(a) register as a foreign company (if required under the Corporations Act);

(b) provide ‘proof’ documents – the number and type of which will depend on:

(i) the complexity of the financial services and products that are the subject of the application; and

(ii) ASIC’s analysis of the FFSP’s business and market;

(c) ensure it can comply with its obligations – these are the same obligations as a standard AFS licensee, other than the exempt provisions noted above;

(d) file its application together with supporting proof documents online; and

(e) pay the application fee (which has yet to be published).

Obligations of a foreign AFS licensee

Foreign AFS licensees will be subject to a number of conditions. These include the requirement to:

(a) carry on a business in the relevant foreign jurisdiction;

(b) appoint an agent at the time it purports to rely on the exemption and not fail to have an agent for 10 consecutive business days (unless it is a company);

(c) reasonably believe it would not contravene any home jurisdiction laws relating to the provision of financial services if it were to provide them there; and

(d) notify ASIC, within 15 business days, of significant changes to the licensee’s registration / authorisation in its home jurisdiction, exemptions or other relief it obtains in its home jurisdiction and of any investigation or action undertaken by overseas regulators against it in a foreign jurisdiction in relation to the financial services it provides in that jurisdiction.

Loss of sufficient equivalence

In the event an overseas regulatory regime ceases to be ‘sufficiently equivalent’, ASIC will notify the relevant foreign AFS licensee and invite submissions concerning its preliminary finding of a lack of sufficient equivalence. Should ASIC still consider that the overseas regulatory regime is not sufficiently equivalent to Australia, ASIC will remove the overseas regulatory regime from Schedule 1 of Instrument 2020/198 or repeal any individual relief instrument made on similar terms.

The AFS licensee must then cease providing financial services under its licence or face suspension or revocation of its licence.

If a foreign AFS licensee wishes to continue to provide financial services under its licence, it may either apply to vary its foreign AFS licence into a standard AFS licence covering those financial services, or apply for transitional relief to enable the foreign AFS licensee to continue to provide financial services under its foreign AFS licence while an application to vary its license is being made or assessed.

A cancellation request should be made to ASIC if the foreign AFS licensee does not wish to continue providing financial services under its licence.

Funds management licensing relief

From 1 April 2022, FFSPs may be given relief from the requirement to hold an AFS licence if they are only carrying on a financial services business in Australia because of the operation of s 911D of the Corporations Act in relation to the provision of ‘funds management financial services’ to certain ‘eligible Australian users’.

Section 911D of the Corporations Act is effectively a deeming provision. It provides that a financial services business is taken to be carried on in Australia by a person if, in the course of carrying on the business, the person engages in conduct that is intended to induce people in Australia to use the financial service the person provides, or is likely to have that effect.

The scope of this exemption is very limited; it only applies to inducing conduct.

What are “funds management financial services” and “eligible Australian users”?

“Funds management financial services” are certain financial services provided to an eligible Australian user. These financial services include:

(a) dealing in financial products in, or issued by, an offshore fund;

(b) providing financial product advice in relation to offshore fund financial products;

(c) making a market for offshore fund financial products as a result of redeeming or buying back those financial products; and

(d) providing a custodial or depositary service in relation to offshore fund financial products.

Funds management financial services also include the following financial services that are provided to an eligible Australian user under an agreement or arrangement between the FFSP and the eligible Australian user (portfolio management services mandate):

(a) dealing in financial products;

(b) providing financial product advice in relation to financial products; and

(c) making a market for financial products in or issued by a managed investment scheme as a result of redeeming or buying back those financial products.

Funds management financial services include a custodial or depositary service to an eligible Australian user under, or in relation to, a portfolio management services mandate.

“Eligible Australian users” include:

(a) a responsible entity of a registered scheme;

(b) a trustee of a superannuation fund within the meaning of the Superannuation Industry (Supervision) Act 1993 (Cth); and

(c) a trustee of a wholesale trust who holds an AFS licence.

Complete definitions of “funds management financial services” and “eligible Australian users” are set out in section 4 of ASIC Corporations (FFSP – Funds Management Financial Services) Instrument 2020/199 (Instrument 2020/199).

When is the funds management financial services available?

The funds management relief will only be available to FFSPs that:

(a) provide ASIC with written confirmation that:

(i) the FFSP intends to rely on the relief;

(ii) identifies its home jurisdiction and confirms it would not contravene any of its financial services laws if providing those services in that jurisdiction;

(iii) there is an overseas regulator of the FFSP in its home jurisdiction that is a signatory to the IOSCO MMOU;

(iv) on the written request of ASIC or the overseas regulator in its home jurisdiction, the FFSP will give or vary written consent and take all other practicable steps to enable and assist the overseas regulator to disclose to ASIC and ASIC to disclose to the overseas regulator any information or document that the overseas regulator or ASIC has that relates to the person;

(v) the FFSP will comply with written notices issued by ASIC regarding the financial services it provides;

(vi) the FFSP will give such assistance to ASIC, or a person authorised by ASIC, as ASIC or the authorised person reasonably requests in relation to whether the FFSP is complying with the financial services laws, and in relation to the performance of ASIC’s other functions; and

(vii) the FFSP has appointed an agent for service, specifying its name and address; and

(b) do not have a place of business in Australia;

(c) will notify ASIC within 30 days upon a change in the FFSP’s home jurisdiction; and

(d) comply with the following conditions:

(i) not fail to have an agent for service for any consecutive period of 10 business days; and

(ii) provide ASIC with written details of a natural person ceasing or commencing to be its agent for service, or any change in name or address of its agent for service, within 10 days of cessation, commencement or change.

Breach of FFSP requirement

ASIC may notify an FFSP or its agent of its intention to exclude reliance on the funds management relief. It may do this when:

(a) the FFSP provides financial services to persons other than ‘eligible Australian user’;

(b) it receives reports of misconduct from the public or referrals from other regulators; and / or

(c) it suspects non-compliance based on its own monitoring and surveillance work.

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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