ASIC overhauls AFS licensing relief for foreign financial service providers

In brief

The Australian Securities and Investments Commission has released its highly anticipated consultation paper on licensing relief for foreign financial services providers. The regulator is proposing a new licensing regime that will be broadly in line with that applied to other AFS licensees, but with relief from some provisions of the Australian Corporations Act and the imposition of certain additional tailored licence conditions. Partner Penny Nikoloudis, Senior Associate Jo Ottaway and Law Graduate Tom Lawson report.

Background

On 1 June 2018, the Australian Securities and Investments Commission (ASIC) released its Consultation Paper 301 - Foreign financial services providers (CP 301), which outlines the regulator's proposal for creation of a modified AFS licensing regime for foreign financial services providers (FFSPs) who provide financial services in Australia to wholesale clients only.

CP 301 proposes the creation of a 'modified  licensing regime' for FFSPs who hail from 'sufficiently equivalent jurisdictions'. ASIC will give FFSPs time to transition to the new regime by extending the existing relief for a further 12 months until 30 September 2019, and then – ASIC proposes – a 12-month transition period from 30 September 2019 to 30 September 2020 will be granted, during which affected FFSPs can apply for a new 'modified' Australian financial services (AFS) licence for FFSPs (if eligible).

Under the AFS licensing regime, if a person carries on a 'financial services business' in Australia they must hold an AFS licence unless a relevant licensing exemption applies.

To date, there have been two principal avenues of licensing relief for FFSPs from the requirement to hold an AFS licence, namely:

• 'sufficient equivalence relief', which applies where an FFSP provides certain financial services to wholesale clients only and is regulated by an overseas regulatory regime that is sufficiently equivalent to the Australian regulatory regime (Sufficient Equivalence Relief);
• ‘limited connection relief’, which provides an exemption for a FFSP that is 'only engaged in inducing, or intending to induce, a person in Australia to use its financial services' (Limited Connection Relief).¹

The Sufficient Equivalence Relief was originally contained in seven ASIC Class Orders (namely, [CO 03/1099] UK regulated financial service providers; [CO 03/1100] US SEC regulated financial service providers; [CO 03/1101] US Federal Reserve and OCC regulated financial service providers; [CO 03/1102] Singapore MAS regulated financial service providers; [CO 03/1103] Hong Kong SFC regulated financial service providers; [CO 04/829] US CFTC regulated financial services providers and [CO 04/1313] German BaFin regulated financial service providers). In September 2016, these Sufficient Equivalence Class Orders were repealed; however, the relief provided under them was temporarily extended until 27 September 2018.² In November 2016, ASIC passed ASIC Corporations (CSSF-Regulated Financial Services Providers) Instrument 2016/1109, which extended Sufficient Equivalence Relief for a limited period to FFSPs regulated in Luxembourg.

The Limited Connection Relief was originally contained in ASIC Class Order [CO 03/824] Licensing relief for financial services providers with limited connection to Australia dealing with wholesale clients (CO 03/824). CO 03/824 has also been repealed, but the relief provided under it was extended to 27 September 2018 following industry consultation.³

ASIC's reasons for the proposed changes

ASIC states the aim of the proposed reforms as being to strike 'the appropriate balance between cross-border investment facilitation, market integrity and investor protection'.⁴ The regulator believes the current regime no longer strikes that balance.

More specifically, ASIC has noted the following reasons for the changes:

• there have been a number of incidents of non-compliance under the current regime.⁵
• ASIC has found it difficult to administer the supervision and enforcement of FFSPs under the current system.⁶
• there has been little-to-no mutual recognition of Australian entities by foreign regulators. ASIC notes that compared to other, similar jurisdictions, Australia's exemptions for FFSPs are particularly broad.⁷
• recently, global standard setters such as IOSCO have suggested that greater supervision and enforcement is required from regulators to minimise misconduct in wholesale markets.⁸

What will the new licensing regime look like?

As noted above, ASIC proposes the creation of a 'modified form' of AFS licence for FFSPs, which it refers to in CP 301 as a 'Foreign AFS licence'. Eligible FFSPs (ie those from sufficiently equivalent jurisdictions) will be able to apply for a Foreign AFS licence (rather than a standard AFS licence), and will be granted relief from certain provisions of the Corporations Act 2001 (Cth) (the Corporations Act) given they are already subject to regulation in their home jurisdiction. Tables 4-7 of CP 301 set out in full the obligations under the Corporations Act and Corporations Regulations 2001 (Cth) that will and will not apply to FFSPs holding a Foreign AFS licence. 

Under the proposed new regime, the following provisions (among others) will apply to FFSPs holding a Foreign AFS licence:

• ASIC's directions powers (s 912C);
• significant breach reporting requirements (s 912D);
• the requirement to assist ASIC during surveillance checks (s 912E); and
• certain remedies and penalties available to ASIC against AFS licensees, such as the powers to impose or vary license conditions; vary, suspend or cancel a license; seek injunctions; and impose penalties.⁹

These provisions do not currently apply to FFSPs providing financial services in Australia under the existing relief, meaning ASIC will have greater supervisory and enforcement tools at its disposal under the new regime.

As ASIC proposes the exemption of holders of Foreign AFS licences from certain requirements under the Corporations Act, it intends to impose certain additional licence conditions on Foreign AFS licensees relating to:

• representatives (ie only certain representatives will be permitted to provide financial services to wholesale clients in Australia);
• local agents (ie Foreign AFS licensees will be required to notify changes to contact details of their local agents); and
• certain notification requirements (ie Foreign AFS licensees will be required to notify significant changes to, and exemptions from, their regulation in their home jurisdiction, as well as any significant enforcement action).

It is proposed that the application process for a Foreign AFS licence will be  largely similar to that for a standard AFS licence, and will require the provision of similar documentation.¹⁰ From our experience, an AFS licence application takes many months to prepare (generally, two-to-four months), so if the proposed changes proceed, we would encourage affected FFSPs to commence preparing their Foreign AFS licensing applications early.

Eligibility for a Foreign AFS licence

Only FFSPs from jurisdictions that have been assessed as being 'sufficiently equivalent' to Australia's regime will be eligible to apply for the new Foreign AFS licence.¹¹ ASIC does not propose undertaking new 'sufficient equivalence' assessments for jurisdictions that have already been assessed as being sufficiently equivalent. This means that FFSPs who are currently relying on the Sufficient Equivalence Relief are eligible to apply. Similarly, FFSPs currently relying on individual relief (ie tailored to the individual applicant) from Denmark, Sweden, France and Brazil are also eligible to apply.

FFSPs from jurisdictions that have not been assessed as 'sufficiently equivalent' (which could include some FFSPs currently relying on the Limited Connection Relief) may also be eligible to apply, but must engage with ASIC, so that ASIC can undertake an evaluation of whether that jurisdiction is sufficiently equivalent to the Australian regime.¹²

What is happening to the Limited Connection Relief?

At this stage, ASIC will extend the Limited Connection Relief for a further 12 months until 30 September 2019, but does not propose extending that relief beyond that date. This means that after 30 September 2019, and subject to the 12-month transitional period until 30 September 2020, FFSPs will need to either:

• rely on another licensing exemption for FFSPs;
• apply for a Foreign AFS licence (if eligible, or a standard AFS licence, if ineligible); or
• cease to provide financial services in Australia.

Will it be necessary to register as a foreign company to become a Foreign AFS licensee?

CP 301 does not state that a Foreign AFS licensee would need to register as a foreign company, although it does state at para 1: 'You will also need to consider whether you have to register as a foreign company'. Therefore, it may still be possible to become a Foreign AFS licensee without registering as a foreign company.

Timing and transition

To facilitate the transition to the new regime for FFSPs, ASIC will extend the Sufficient Equivalence Relief and the Limited Connection Relief for a further 12 months, until 30 September 2019. It is then proposing a 12-month transition period from 1 October 2019 to 30 September 2020, during which affected FFSPs can apply for Foreign AFS licence (or a general AFS licence, if they are ineligible for a Foreign AFS licence).

Consultation period

ASIC has invited submissions on the proposed changes in CP 301. Submissions are due by 31 July 2018. Allens' Funds, Super & Wealth team has experience in drafting submissions to ASIC and can provide assistance to affected FFSPs wishing to make a submission to ASIC in relation to the proposed changes.

ASIC has also requested information on the likely compliance cost of the proposed changes, their likely effect on competition, and any other impacts, costs or benefits that might be relevant.

Comments should be sent by 31 July 2018 to:

Alan Worsley
Senior Specialist, Strategic Policy
Australian Securities and Investments Commission
Level 5, 100 Market Street, Sydney 2000
facsimile: 02 9911 2414
email: policy.submissions@asic.gov.au