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Exposure draft legislation released for new FFSP AFSL exemptions

20 December 2021 | Australia
Legal Briefings – By Fiona Smedley, Ewan MacDonald and Tori Pearson

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The eagerly awaited detail of the proposed new foreign financial service provider (FFSP) exemptions from the need to hold an Australian financial services licence (AFSL) was released today.

Earlier this year, Treasury consulted on restoring the ‘previously well-established regulatory exemptions’, and to create a fast-track licensing process for FFSPs wishing to establish more permanent operations in Australia. Following this consultation, Treasury has released Exposure Draft Legislation, Treasury Laws Amendment (Measures for Consultation) Bill 2021: Licensing exemptions for foreign financial service providers and related explanatory memorandum (Exposure Draft).

For more background to the FFSP reforms, see our earlier articles:

WHAT IS PROPOSED?

  1. The limited connection exemption will be replaced by the ‘professional investor exemption’.
    1. As the name suggests the exemption is limited to providing financial services to professional investors, which is a sub-set of wholesale clients, so its scope is narrower. 
    2. FFSPs using the ‘professional investor exemption’ will be more regulated than they were under the limited connection exemption and will need to give notice to ASIC and to comply with ongoing conditions.
    3. See What does the ‘professional investor exemption’ involve? below for more information.
  2. The passporting exemptions will be replaced by the ‘comparable regulator exemption’. 
    1. This is similar to the passporting exemption but more conditions will apply including giving assistance to ASIC, complying with directions and maintaining oversight of representatives.  
    2. See What does the ‘comparable regulator exemption’ involve? below for more information.
  3. The fast tracking of wholesale AFSL applications for FFSPs authorised to provide financial services in comparable regulatory regimes will take the form of an exemption from the fit and proper person test.
    1. This exemption will remove the need to obtain solvency checks and criminal history checks for officers of the applicant and its controlling entities, which is a welcome development for foreign entities who have many overseas resident officers who would otherwise in scope for these checks.
    2. The exemption does not apply to AFSL applications more generally.
    3. See What is the proposed fast tracking? below for more information.

The position of foreign AFSL holders and applicants is not addressed in the Exposure Draft.

WHAT DOES THE ‘PROFESSIONAL INVESTOR EXEMPTION’ INVOLVE?

The differences between the limited connection exemption and this new professional investor exemption are quite significant and are summarised in the table below:

Factor

Limited connection exemption

Professional investor exemption

Australian clients

Wholesale clients

Professional investors (a subset of wholesale clients). 

This category does not include investors who hold a ‘qualifying accounting certificate’.  

Connection to Australia

The FFSP was not able to provide services or products ‘while in Australia’.

The FFSP’s head office and principal place of business must be located at one or more places outside Australia.

The FFSP must provide the financial service ‘from a place outside Australia’.  This is subtly different and intended to clarify that the FFSP may have a presence in Australia and appoint local representatives and may send representatives on infrequent visits to Australia. 

Notification to ASIC

None required

The FFSP must notify ASIC as soon as practicable (and before the 15th business day) after the first time that it starts to use the exemption.

Content of notice to ASIC

Not applicable

This notice must state the FFSP’s intention to rely on the exemption  and include the FFSP’s agreement: 

  • that legal proceedings relating to the provision of the financial services may be brought in an Australian court;
  • that such proceedings would be subject to Australian law; and
  • to comply with any order of a court from such proceedings, to the extent that the order does not conflict with an order made by a court in the FFSP’s home jurisdiction.

This notice must be in writing and in a form that is approved by ASIC but may be submitted electronically. It must include the FFSP’s contact details, and any information, statements, explanations, or other matters required by ASIC and be accompanied by any other material specified by ASIC. 

Ongoing obligations and conditions  

None applied

The FFSP must:

  1. reasonably believe that the provision of the financial services does not contravene any laws that apply in its principal place of business, head office or the place from where the financial services are provided;
  2. give reasonable assistance to ASIC in relation to the performance of ASIC’s functions or the exercise of ASIC’s powers (including giving ASIC a copy of the FFSP’s books which FFSPs may find problematic);
  3. comply with a direction given by ASIC to provide information (within the time specified or a reasonable time) about the FFSP’s financial services or financial services business;
  4. give a written notice to each new professional investor client stating that the FFSP is exempt from the requirement to hold an AFSL before providing a financial product or service to them or if that is not practicable (eg because the service is provided at the request of the client), then as soon as practicable after the product or service is provided to them; and
  5. notify ASIC of any changes to the person’s contact details as soon as practicable after the change happens.

Liability for failing to comply with conditions and loss of exemption 

Not applicable

If a FFSP fails to comply with a condition to the exemption ASIC may:

  1. cancel their exemption (after giving notice of the proposed decision and an opportunity to appear at a hearing or make a submission);   
  2. impose additional conditions on their use of the exemption; or
  3. apply to the court for a civil penalty and pecuniary penalty order.

ASIC also has the power to cancel a FFSP’s exemption if:

  1. it reasonably believes that an officer of the FFSP or a controlling entity of the FFSP is not a fit and proper person to provide financial services or products; or
  2. the FFSP fails to provide details of a contravention of the exemption within 15 business days from when the FFSP would reasonably have been expected to have become aware of the contravention, after having made reasonable enquiries.

This exemption is proposed to apply to all types of financial services and products at the outset but regulations may later prescribe that it cannot be used for specified services or products.

WHAT DOES THE ‘COMPARABLE REGULATOR EXEMPTION’ INVOLVE?

The comparable regulator exemption builds on the passporting exemptions to allow FFSPs to provide financial services and products to wholesale clients in Australia but:

  • applies some more regulation and conditions; and
  • seeks to expand the list of comparable regulators of FFSP (by the Minister’s determinations from time to time of foreign regulators administering a comparable regulatory regime to the AFSL), to expand the scope of FFSPs eligible to use this exemption.

The key differences and developments are summarised below.

Factor

Comparable regulator investor exemption

Eligibility

  1. The FFSP must meet the definition of ‘foreign company’ - which is not as bad as it sounds as some foreign limited partnerships will meet the 2nd limb of this test. A ‘foreign company’ is:
    1. a body corporate incorporated in an external territory, or outside Australia and the external territories, and is not a corporation sole, or an exempt public authority; or
    2. an unincorporated body that (is formed in an external territory or outside Australia and the external territories and) may sue or be sued or may hold property in the name of its secretary or of an appointed officer of the FFSP and does not have its head office or principal place of business in Australia.
  2. The FFSP’s home regulator must have been determined by the Minister to be comparable. Determinations will be made by legislative instrument having regard to whether the overseas regulatory regime produces comparable outcomes to Australia’s regulatory regime in regulating and improving the performance of the relevant financial services system and the financial services providers in that system.  The Minister may have regard to:
    1. whether the overseas regulatory regime is clear, transparent, certain, adequately enforced and broadly consistent with the Objectives and Principles of Securities Regulation, developed by the International Organization of Securities Commissions (IOSCO); and
    2. whether the overseas regulator is either a signatory to the Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information, developed by IOSCO or is otherwise a party to any other effective cooperation arrangement with ASIC.
  3. The FFSP must have and maintain the foreign regulator’s licence covering the financial services and products it provides in Australia under the exemption. Analysis may be needed to confirm that the scope of an overseas licence covers the Australian activity which the FFSP undertakes.

Notification to ASIC

The FFSP must notify ASIC as soon as practicable (and before the 15th business day) after the first time that it starts to use the exemption.

Passported FFSPs will need to re-apply to ASIC in order to use this exemption – their passporting exemption will not automatically roll over.

Content of notice to ASIC

This notice must state the FFSP’s intention to rely on the exemption and include the FFSP’s agreement: 

  • that legal proceedings relating to the provision of the financial services may be brought in an Australian court;
  • that such proceedings would be subject to Australian law; and
  • to comply with any order of a court from such proceedings, to the extent that the order does not conflict with an order made by a court in the FFSP’s home jurisdiction.

For passported entities it is not clear how this new agreement will fit with the deed submitted with their passporting application.   

Ongoing conditions 

The FFSP must comply with a number of conditions similar to the passporting exemption conditions:

  1. notify ASIC that the FFSP consents to ASIC and the FFSP’s home regulator sharing information about the FFSP;
  2. notify ASIC of any significant enforcement action, disciplinary action or investigation undertaken against the FFSP in any place outside Australia (note, not just in the home jurisdiction) unless giving that notice would be contrary to a law overseas as soon as practicable but before 15 business days after the day on which the FFSP becomes aware (or would reasonably be expected to have become aware) of the matter; and
  3. appoint an agent in Australia and not be without an agent for ten or more consecutive days while using the exemption,

and comply with new conditions:

  1. give reasonable assistance to ASIC in relation to the performance of ASIC’s functions or the exercise of ASIC’s powers (including giving ASIC a copy of the FFSP’s books which FFSPs might find problematic);
  2. comply with a direction given by ASIC to provide information (within the time specified or a reasonable time) about the FFSP’s financial services or financial services business;
  3. give a written notice to each new wholesale client that the FFSP is exempt from the requirement to hold an AFSL before providing a financial product or service to them or if that is not practicable (eg because the service is provided at the request of the client), then as soon as practicable after the product or service is provided to them.
    1. There is more flexibility in the timing of this notice now and the content of this notice is no longer prescribed and is not required to be prominent.
    2. The Exposure Draft is not clear whether it needs to be given for the provision of each financial service under the exemption, not just when first providing any financial services to a client under the exemption (clarification of the note to the Exposure Draft is recommended); and
  4. maintain sufficient oversight over the FFSP’s representatives who provide the financial products or services in Australia and take reasonable steps to ensure that those representatives comply with financial service laws (as defined in the Corporations Act). This includes ensuring that the representatives are appropriately trained.

Loss of exemption

As is the case for the ‘professional investor exemption’, under this ‘comparable regulator exemption’, ASIC has the power to cancel a FFSP’s exemption if:

  1. it reasonably believes that an officer of the FFSP or a controlling entity of the FFSP is not a fit and proper person to provide financial services or products; 
  2. the FFSP fails to provide details of a contravention of the exemption within 15 business days from when the FFSP would reasonably have been expected to have become aware of the contravention, after having made reasonable enquiries; or
  3. the FFSP fails to comply with a condition to the exemption,

(after giving notice of the proposed decision and an opportunity to appear at a hearing or make a submission). Additionally, ASIC can impose additional conditions on the FFSP’s use of the exemption and may apply to the court for a civil penalty and pecuniary penalty order.

WHAT IS THE PROPOSED FAST TRACKING?

The fast tracking of wholesale AFSL applications for FFSPs authorised to provide financial services in comparable regulatory regimes will take the form of an exemption from the fit and proper person test.

This exemption will remove the need to obtain solvency checks and criminal history checks for officers of the applicant and its controlling entities, which is a welcome development for foreign entities who have many overseas resident officers who would otherwise in scope for these checks.

This exemption applies when the FFSP is a foreign company (see above in relation to the eligibility for the ‘comparable regulator exemption’) and applies for a wholesale AFSL. This exemption does not apply to AFSL applications more generally.

The exemption does not apply to AFSL applications submitted before the commencement of the new laws or if the FFSP applies to vary its AFSL to remove or amend a condition.

WHAT HAPPENS NEXT?

FFSPs may submit their views on the Exposure Draft before 12 January 2022.

If the Exposure Draft is implemented in its current form, FFSPs currently using the limited connection and passporting exemptions will need to:

  1. give a notice to ASIC in relation to their use of the new exemptions;
  2. put a new agreement in place in relation to accepting Australian jurisdiction (unless ASIC permits passported entities to continue to use the deeds they gave ASIC in relation to their passporting); and
  3. update their compliance arrangements for the ongoing conditions and obligations and, for limited connection exemption users, the narrowing of the scope of the exemption to professional investors only.

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