New exemptions from financial service licensing for foreign financial service providers

Introduction

On 7 August 2023, the Commonwealth Government released exposure draft legislation to introduce exemptions from the Australian financial service licence (AFSL) regime for foreign financial service providers (FFSPs). This Bill was released on the back of previous consultations to amend and replace exemptions available to FFSPs, including a contemplated foreign AFSL regime and funds management exemption in early 2020, and consideration of the comparable regulator and professional investor exemptions in late 2021.

ASIC has, in parallel, extended the current transitional relief available to FFSPs to 31 March 2025 and delayed the commencement of the funds management exemption until 1 April 2025.

What’s proposed?

The proposed amendments are intended to make it easier for FFSPs to enter the Australian market by providing a conditional exemption to certain FFSPs from holding an AFSL. The rationale is that this exemption will increase diversity of investments by professional and wholesale investors and inject liquidity into the Australian economy.

The draft legislation proposes the introduction of four new exemptions.

1. Professional investor exemption

This exemption applies to persons that provide financial services from outside Australia to “professional investors” (as specifically defined for the purpose of this exemption). It replaces the existing professional investor exemption available in s911A(2E) of the Corporations Act 2001 (Cth) and requires the following to be satisfied:

• the financial service is provided only to professional investors;
• the financial service doesn’t involve a dealing in certain financial products tradeable on certain licensed markets;
• the person provides the financial service from a place outside this jurisdiction (except during limited marketing visits to Australia);
• the person’s head office and principal place of business are located at one or more places outside this jurisdiction; and
• the person reasonably believes that providing the financial service would not contravene any law applying in the person’s principal place of business, head office or the place from where the financial services are provided.

2. Comparable regulator exemption

This exemption applies to persons regulated by comparable regulators and that provide financial services in Australia only to wholesale clients. It replaces the existing sufficient equivalence relief and requires several conditions to be satisfied, including the following:

• the person must consent to information sharing between ASIC and each comparable regulator;
• the person must notify ASIC of certain matters, including any significant enforcement action, disciplinary action or investigation undertaken against it by a foreign regulator, government authority or financial market operator;
• the person must have an agent in Australia;
• the person must do all things necessary to ensure that the financial services are provided efficiently, honestly and fairly; and
• the person must maintain adequate oversight over its representatives and take reasonable steps to ensure that its representatives are adequately trained and competent to provide the financial services.

A person relying on this exemption must also notify ASIC in writing that the person agrees to legal proceedings being brought in a court in Australia where the proceedings relate to the provision of financial services under the exemption. The person must also agree that these proceedings would be subject to the law applicable to the provision of those financial services that is in force in Australia.

The Minister will have the power to determine who qualifies as a comparable regulator. It is expected that those regulators that currently satisfy the sufficient equivalence relief will be comparable regulators upon the commencement of the new legislation.

3. Market maker exemption

This exemption applies to persons that provide financial services involving making a market for derivatives that are able to be traded on prescribed licensed markets. It is a new exemption and available if the following conditions are met:

• the person is making a market for derivatives that are able to be traded on a licensed market prescribed by the regulations;
• the person provides the financial service from a place outside this jurisdiction;
• the person’s head office and principal place of business are located at one or more places outside this jurisdiction; and
• the person reasonably believes that providing the same or substantially the same financial service would not contravene any law applying in any of the places referred to in the above dot points.

4. Fit and proper person assessment exemption

Foreign entities only providing financial services to wholesale clients, that are authorised, registered or licensed by a comparable regulator to provide the same financial services, are exempt from the requirement to satisfy the fit and proper person test when applying for an AFSL.

This exemption aims to fast-track the licensing process for financial service providers who are already being regulated by comparable regulators and who wish to apply for an AFSL instead of relying on an exemption.

What’s next?

The Government is seeking submissions from interested parties on the draft legislation from now until 8 September 2023.

During the extended transitional relief period, FFSPs may submit new applications for individual temporary licensing relief, or new AFSL applications. FFSPs that have been relying on the transitional relief, may continue to do so until 31 March 2025. Additionally, FFSPs may continue to provide financial services in Australia under their existing licence.

Related material

The exposure draft legislation may be accessed here.

The explanatory memorandum may be accessed here.

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).