In brief
Written by Senior Associate Stephanie Malon and Lawyer Katerina Dandanis
Australia's market licensing regime has long been crying out for an overhaul, with regulatory guidance that largely dates back to the early 2000s struggling in the face of significant developments in financial markets since then. Fortunately, ASIC has taken heed and is due to release an updated market licensing regulatory guide this month. If the draft guidance is anything to go by, we should soon see a much more modern and flexible approach to market licensing.
Background
Until the commencement of the Corporations Amendment (Crowd-sourced Funding) Act 2017 (Cth) in March this year, market licensing in Australia was an 'all or nothing' affair.
There was no ability for the Minister or ASIC (to which these powers have been delegated) to exempt operators from particular obligations in Part 7.2 of the Corporations Act 2001 (Cth) – rather, the only options were to:
- grant an operator a domestic or overseas market licence, and subject them to the full range of applicable obligations in Part 7.2; or
- exempt an operator entirely from the requirement to hold a market licence, and all corresponding obligations in Part 7.2 of the Corporations Act.
The inflexibility of the regime presented a quandary for both ASIC and market operators, particularly when it came to operators of smaller or non-traditional markets. For these operators, compliance with the full set of obligations tends to be overly burdensome (if not completely infeasible), but ASIC was understandably keen to keep these operators under some form of supervision. These operators could apply for a full licensing exemption, but this was by no means a certain outcome – and in any event, typically required protracted negotiations with ASIC and entailed a range of exemption conditions that were not always easy to predict from the outset. Not surprisingly, the whole process could be enough to put off operators from entering the Australian market altogether.
The changes introduced by the Corporations Amendment (Crowd-sourced Funding) Act 2017 (Cth) finally ended this 'all or nothing' quagmire for the market licensing regime. In particular, they allow operators to be granted a market licence along with exemptions from certain obligations in Part 7.2. Of course, following the enactment of the changes, the question on everyone's lips was how ASIC would apply the amended legislation in practice. ASIC responded with its proposals in Consultation Paper 293 in July this year.
A tiered approach
Consultation Paper 293 proposes that ASIC will designate a market venue as tier 1 or tier 2, with this decision being based on its assessment of regulatory risk. In particular:
- 'traditional or significant exchanges' are more likely to be tier 1 (for example, domestic and overseas exchanges, and significant non-exchanges); and
- 'specialised or emerging' markets are more likely to be tier 2 (for example, crowdfunding, private markets, securities lending, and new venues).
The relevance of this distinction is that tier 1 licensees will typically be expected to comply with the full suite of licensing obligations in Part 7.2, whereas tier 2 licensees would be expected to comply with a smaller range of licensing obligations (with ASIC retaining flexibility to provide exemptions to specific obligations or impose conditions as appropriate to the particular market). It is worth noting that the two tier approach applies to both domestic and overseas licensees, with the approach tailored according to the category of licence.
ASIC's proposed approach for the relevant obligations is helpfully summarised in a table on pages 19 and 20 of the draft regulatory guide attached to Consultation Paper 293 (which is a proposed consolidation of existing Regulatory Guides 172 and 177).
Practical implications
Assuming that the proposals in Consultation Paper 293 will be reflected in the updated regulatory guidance to be released this month, we are hopeful that we will see a more streamlined approach to market licensing in Australia for both domestic and overseas operators (at least once any teething problems are worked through). If all goes to plan, we expect that there will be an increase in the number of market operators in Australia, including operators of more innovative markets.
However, as we all know, springtime roses do not come without their thorns – and operators should bear in mind the following proposals buried in Consultation Paper 293:
- Licensed operators of dormant markets should be aware that ASIC is proposing to adopt a 'use it or lose it' approach. In particular, ASIC has proposed to support the suspension or revocation of a licence or exemption where there has been a lack of activity for a duration of time, such as where a market has been dormant for six months or a new market fails to commence within 12 months (subject to a formal administrative process).
- Those who currently benefit from a market licence exemption should be aware that ASIC has proposed that these exemptions will cease, so that all operators will be brought within the new regime for consistency. Once the regulatory guidance is finalised, it may be prudent for exempt operators to consider how their market will fit into the tiered regime, the implications for their business and possible engagement with ASIC regarding transition to the new regime.