Background to the consultation paper
In the Federal budget delivered on 11 May 2021, the Federal Government announced a U-turn in relation to the proposed cessation of the existing licensing exemptions for foreign financial service providers (FFSPs), declaring that the Federal Government:
- would consult on options to restore previously well-established regulatory exemptions from holding an Australian financial service licence (AFSL) for FFSPs who:
- are licensed and regulated in jurisdictions with comparable financial service rules and obligations, or
- have a limited connection to Australia,
and deal with wholesale clients, in order to reduce duplicate regulatory requirements; and
- would also consult on options to create a fast-track licensing process for FFSPs who wish to establish more permanent operations in Australia, with the intention of shortening application timeframes and reducing barriers to entering the Australian market.
For more background, please refer to our article entitled Surprise licensing exemption developments for foreign financial service providers (FFSPs).
What has happened today?
Today, Treasury has released the consultation paper foreshadowed by the budget announcement noted above. The consultation paper is available at: https://treasury.gov.au/consultation/c2021-189465
FFSP exemptions consultation
The consultation paper covers the following options in relation to FFSP AFSL exemptions:
- Option 1 – restore the previous exemptions. This option has two sub-components:
- Option 1A - restore the passporting and limited connection exemptions as they applied before their repeal on 31 March 2020. The passporting exemptions would re-apply to FFSPs regulated by the United Kingdom, United States, Hong Kong, Singapore, Germany and Luxembourg.
- Option 1B - restore the passporting exemptions as they applied before their repeal on 31 March 2020 and continue the funds management exemption in place of the limited connection exemption for eligible FFSPs.
- Option 2 - provide an exemption to FFSPs providing the following four financial services to wholesale clients (provided that the FFSP is licensed to provide these services in its home jurisdiction):
- providing financial product advice;
- dealing in a financial product;
- making a market for a financial product; and/or
- providing a custodial or depository service.
Option 2 would require FFSPs to notify ASIC of their reliance on the exemption and to be from one of the following jurisdictions and regulated by one of the following authorities (which have been assessed as being sufficiently equivalent to the Australian regulatory regime for the regulation of financial services):
- Denmark (regulated by the Danish Financial Supervisory Authority);
- France (regulated by the Autorité des marchés financiers of France or the Autorité de contrôle prudentiel et de resolution of France);
- Germany (regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin);
- Hong Kong (regulated by the Securities and Futures Commission);
- Luxembourg (regulated by the Commission de Surveillance du Secteur Financier);
- Canada (regulated by the Ontario Securities Commission);
- Singapore (regulated by the Monetary Authority of Singapore);
- Sweden (regulated by the Finansinspektionen);
- United Kingdom (regulated by the Financial Conduct Authority);
- United States (regulated by the Commodity Futures Trading Commission, the Federal Reserve and the Office of the Comptroller of the Currency or the US Securities Exchange Commission).
Under Option 2 FFSPs would also need to comply with the conditions outlined below under the heading “Conditions attaching to Options 2 and 3”.
- Option 3 – as Option 2 but wider, providing an exemption to FFSPs for any financial services provided to wholesale clients (ie not limited to the four financial services specified under Option 2).
Conditions attaching to Options 2 and 3
The consultation paper provides a list of possible conditions that could be attached to Options 2 and 3, as follows:
- notifying ASIC when the FFSP is relying on the exemption or ceases to use the exemption;
- applying to ASIC for approval to use the exemption;
- consenting to information sharing between ASIC and the FFSP’s home jurisdiction regulator;
- assisting ASIC in any supervision or investigation matters;
- complying with directions from ASIC;
- complying with information requests from ASIC within the specified time;
- not dealing with unauthorised or unlicensed entities;
- notifying ASIC of any changes to the FFSP or the home jurisdiction regulator that affect their eligibility for the exemption;
- submitting to the jurisdiction of Australian courts;
- complying with any orders of an Australian court;
- complying with auditing and reporting requirements;
- ensuring that financial services are provided efficiently, honestly and fairly;
- applying protections for dealing with client’s money and property;
- having adequate conflict of interest arrangements in place;
- having adequate risk management systems in place;
- notifying clients when the FFSP is relying on the exemption;
- appointing a local agent for the FFSP;
- ensuring representatives are appropriated trained;
- providing periodical information to ASIC including:
- the FFSP’s fund or business type;
- a detailed description of the intended business activity, market presence and client groups targeted in Australia;
- a copy of the FFSP’s constitution and/or articles of association;
- the FFSP’s investment strategy;
- the number of Australian clients;
- confirmation that financial services are only provided to wholesale clients or professional investors;
- certain financial statements that cover the financial services provided in Australia;
- assets under management (AUM) of Australian investors in funds;
- increase/decrease in AUM from Australian investors from prior reporting period;
- dealings with derivatives;
- name of foreign legal entity adviser promoting fund(s) in Australia, including name of onshore Australian licensee where relevant;
- the agreement with a local agent;
- annual compliance attestation;
- liquidity terms of the fund; and
- for funds that offer liquidity, redemption information from the prior reporting period;
- breach reporting obligations, similar to that of AFSL holders;
- maintaining the relevant authorisation in the FFSP’s home jurisdiction to provide the financial service they are providing in Australia;
- providing each of the financial services in Australia in a manner which would comply, so far as is possible, with the home jurisdiction regulatory requirements if the financial service were provided in the home jurisdiction under like circumstances;
- a condition that ASIC can notify the FFSP of any additional conditions it believes are necessary to address any concerns ASIC may have; and
- a condition that ASIC can exclude FFSPs from relying on the exemption where it has concerns the FFSP is not fit to provide services to Australian clients, or where a FFSP is using the exemption in a manner inconsistent with the exemption's intention.
Some of these proposed conditions are consistent with the passporting exemption or the funds management exemption conditions but some of these conditions are new/novel, or reflect the conditions attaching to a standard of foreign AFSL. It will be important for FFSPs to consider the practical, compliance and legal implications of these proposed conditions and consider making a submission in relation to them.
If a condition is breached, or the FFSP does not comply with a request or direction from ASIC, it is proposed that ASIC may determine that further conditions should be imposed or that the FFSP is no longer eligible to rely on the exemption. Consideration is also being given to:
- providing ASIC with the ability to apply to the court for an injunction and to negotiate an enforceable undertaking with the FFSP; and
- attaching civil penalties to breaches of some or all conditions.
Fast tracking options
The consultation paper is also consulting on options to fast track AFSL applications for FFSPs:
- Option 4 - amend the fit and proper person test.
- Under Option 4, ASIC would be given the discretion to determine whether a fit and proper person test is required for every relevant person listed in section 913BA of the Corporations Act (eg the directors of the controllers of the applicant).
- This would enable ASIC to rely on similar assessments by other regulators rather than be required by law to form its own assessment, recognising that some jurisdictions do not require fit and proper assessments or that they impose different requirements for FFSPs providing financial services to Australian wholesale clients.
- Option 5 – introduce a modified licensing regime for FFSPs that:
- are regulated by an overseas regulatory authority that is a signatory to the IOSCO multilateral MOU; and
- provide financial services to wholesale clients in Australia.
Under Option 5, FFSPs could be exempted from some provisions relating to the licensing process or obligations in Chapter 7 of the Corporations Act, on the basis that it would be duplicative to impose Australia’s licensing requirements in addition to what is required in the home jurisdiction.
It is not yet clear what licensing requirements would be exempted or how this new licencing regime would sit with the foreign AFSL regime.
The potential conditions that could apply, as set out in the consultation paper, are similar to those applicable to the passporting exemption.
- Option 6 – automatically grant an AFSL to a FFSP that provides appropriate evidence to demonstrate that they:
- are regulated by an overseas regulatory authority that is an IOSCO board member;
- hold an existing licence and are specifically authorised to provide the financial services intended to be provided in Australia; and
- will only provide financial services to wholesale clients in Australia.
Under Option 6, the FFSP would be subject to all obligations that apply to a holder of a standard AFSL, which clearly results a higher compliance burden compared to the passporting exemption and the foreign AFSL.
Again, the potential conditions that could apply, as set out in the consultation paper, are similar to those applicable to the passporting exemption.
What happens next?
Submissions are due by 30 July 2021.
The contents of this publication are for reference purposes only and may not be current as at the date of accessing this publication. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication.
© Herbert Smith Freehills 2021