FFSP AFS licensing exemptions tabled in the Australian Parliament

On 30 November 2023, the Treasury Laws Amendment (Better Targeted Superannuation Concessions and Other Measures) Bill 2023 (Amendment Bill) was tabled in the Australian Parliament. Schedule 7 to the Amendment Bill is titled, “Licensing exemptions for foreign financial services providers”. It sets out the Government’s proposed legislative exemptions for foreign financial service providers (FFSPs). Schedule 7 to the Amendment Bill represents the latest development in the review of the FFSP regulatory regime that ASIC commenced in 2016.

Schedule 7 to the Amendment Bill amends the Corporations Act 2001 (Cth) and provides the following exemptions to FFSPs:

• an exemption from the requirement to hold an AFS licence for persons that provide financial services from outside Australia to “professional investors” (Professional Investor Exemption);
• an exemption from the requirement to hold an AFS licence for persons regulated by comparable regulators and that provide financial services in Australia to “wholesale clients” (Comparable Regulator Exemption); and
• an exemption from the requirement to hold an AFS licence for persons that provide financial services that involve making a market for derivatives that are able to be traded on a specified licensed market (Market Maker Exemption).

Schedule 7 also contains provisions that are intended to expedite the AFS licensing process by exempting persons regulated by comparable regulators from the fit and proper person test when applying for an AFS licence to provide financial services to wholesale clients. This note provides an overview of the Professional Investor Exemption and the Comparable Regulator Exemption.

Currently, most FFSPs are likely to rely on one of two main exemptions: the sufficient equivalence relief or the limited connection relief. The sufficient equivalence relief requires the FFSP to be established and regulated in a foreign jurisdiction that ASIC has assessed as having sufficiently equivalent regulation as Australia (these include the US, UK, Singapore, Hong Kong, Germany and Luxembourg). An FFSP that relies on this exemption must comply with specified conditions and notify ASIC that it is relying on the exemption before it applies.

The limited connection relief applies in more narrow circumstances. There is no requirement on an FFSP to notify ASIC that the FFSP is relying on the limited connection relief. Both of the sufficient equivalence relief and the limited connection relief are scheduled to stop applying after 31 March 2025.

An FFSP that currently relies on the sufficient equivalence relief may decide to rely on either or both of the Professional Investor Exemption or the Comparable Regulator Exemption. Which exemption an FFSP selects will largely depend on the FFSP’s activities within Australia. For example, an FFSP currently relying on the sufficient equivalence relief may decide to rely on the Professional Investor Exemption, not the Comparable Regulator Exemption, if the FFSP only conducts limited activities in Australia, that amount to providing financial services, such as marketing visits over short periods of time.

Professional Investor Exemption

The Explanatory Memorandum for the Amendment Bill states that the Professional Investor Exemption replaces the existing professional investor exemption in section 911A(2E) of the Corporations Act, as inserted by Corporations Regulation 7.6.02AG. This existing professional investor exemption only applies to a limited range of financial products, and therefore, was unlikely to be used by many FFSPs. Although the Professional Investor Exemption shares some common characteristics with the limited connection relief, there are some differences.

The Professional Investor Exemption is available in the following circumstances:

• the financial service is provided only to “professional investors” – see the definition at the end of this note;
• the person provides the financial service from a place outside Australia (except during limited marketing visits);
• the person’s head office and principal place of business are located at one or more places outside Australia;
• the person reasonably believes that providing the same or substantially the same 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; and
• the person notifies ASIC that it intends to rely on this exemption to provide the financial service.

A person relying on this exemption is permitted to conduct “marketing visits” to Australia, provided its representatives do not spend more than 28 days each in any financial year in Australia engaging in activities that amount to providing financial services. Because the 28 days applies to each representative of the person providing the financial service, the person could actually spend much more than 28 days in a given financial year providing financial services in Australia, provided the days were spread across different representatives who, themselves individually, did not spend more than 28 days each providing financial services from within Australia. The 28 days does not include days that a representative may be in Australia, but not engaging in activities that amount to providing financial services.

A person that uses the Professional Investor Exemption to provide financial services to professional investors must comply with certain conditions. These conditions include:

• doing all things necessary to ensure that financial services that are provided predominantly inside this jurisdiction are provided efficiently, honestly and fairly – there are currently no restrictions on the types of financial services that may be provided during the marketing visits, but the legislation provides that regulations may be made to restrict the scope of the financial services, financial products, financial markets or professional investors that would apply for the purposes of this exemption (a factor FFSPs will want to take into consideration when deciding which of these two exemptions will be best for them);
• notifying ASIC of the person’s intention to rely on the exemption – this is a significant difference to the limited connection relief;
• submitting to the non-exclusive jurisdiction of the Australian courts when proceedings are brought by ASIC or a Commonwealth authority; and
• complying with reasonable requests for assistance from ASIC.

Comparable Regulator Exemption

The Comparable Regulator Exemption will only be available where the person is authorised, registered or licensed (as necessary) by a comparable regulator in a place outside of Australia.

The Comparable Regulator Exemption applies where:

• the financial service is provided only to wholesale clients;
• the person is a foreign company or a partnership formed outside this jurisdiction;
• the person has and maintains any authorisations, registrations or licences necessary to provide, legally, the same, or substantially the same, financial service in a place outside this jurisdiction where the regulator administering those authorisations, registrations or licences for the comparable jurisdiction is a regulator determined by the Minister (comparable regulator);
• the person providing the financial service is regulated by the comparable regulator (these are likely to include the regulators that ASIC previously assessed as administering sufficiently equivalent regulation and include the SEC in the USA, the FCA in the UK, the MAS in Singapore, the SFE in Hong Kong, BaFin in Germany and CSSF in Luxembourg; and
• the person notifies ASIC that it intends to rely on this exemption to provide the financial service.

In addition to the conditions that apply to the Professional Investor Exemption (see above), an FFSP relying on the Comparable Regulator Exemption must also satisfy other conditions, including that the FFSP must:

• consent to information sharing between ASIC and each comparable regulator;
• notify ASIC of any significant enforcement action, disciplinary action, or investigation undertaken against the person by any regulator, government authority, or relevant financial market operator in any place outside Australia; and
• have an agent in Australia.

Next steps

The “introduction and first reading” of the Amendment Bill, as well as the “second reading speech” in the House of Representatives, was completed on 30 November 2023. The “second reading debate” has been adjourned to a future date. This is typically five clear/calendar days after the “second reading speech”.

The date of the stages following the “second reading debate” will be determined by the House of Representatives; the House is scheduled to sit again on 7 December 2023 for one day, and then resumes a longer sitting on 6 February 2024.

After the “second reading debate”, there is a third reading; consideration by the Senate; consideration of amendments by the House; and then Royal Assent. These steps are likely to take several months to complete.

Definition of "professional investor"

A professional investor includes:

• an AFS licencee;
• a body regulated by the Australian Prudential Regulatory Authority (other than a trustee within the meaning of the Superannuation Industry (Supervision) Act 1993 (Cth)) (such as a bank, general insurance company or credit union);
• a registered entity within the meaning of the Financial Sector (Collection of Data) Act 2001 (Cth);
• a trustee of certain superannuation trusts or schemes within the meaning of the Superannuation Industry (Supervision) Act 1993 (Cth) that have assets of at least $10 million;
• a person that has or controls gross assets of at least $10 million (including any assets 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;
• an investment company that is a body corporate or unincorporated body that carries on a business of investment in financial products, interests in land or other investments or invests funds received 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 these categories.

Definition of "wholesale client"

The Explanatory Memorandum summarises the definition of a “wholesale client” as follows:

• if the price for the provision of the financial product, or the value of the financial product to which the financial service relates, is equal to or greater than $500,000;
• if the financial product or service, is provided for use in connection with a business that is not a small business;
  • a "small business" is defined as a business that has less than 20 employees or, if it is a manufacturing business, has less than 100 employees.
• the financial product or service is not provided for use in connection with a business, and the person acquiring the financial product or service provides a certificate from a qualified accountant that the person:​​​
  • has net assets of at least $2.5 million; or
  • has a gross income for each of the past two financial years of at least $250,000.
• the investor is a "professional investor" (defined in section 9 of the Corporations Act) or a "sophisticated investor" (defined in section 761GA of the Corporations Act); or
• the person is controlled by a person who is a wholesale client.