Foreign financial services provider licensing relief bill passed by Federal Parliament

The Federal Parliament has today passed a new bill providing significant licensing relief for foreign financial service providers 13 min read

Following the Federal Government's announcement in the 2021-22 Federal Budget to consult on restoring existing licensing relief for Foreign Financial Service Providers (FFSPs), the Australian Parliament has passed the Treasury Laws Amendment (Streamlining and Improving Economic Outcomes for Australians) Bill 2022 (Cth) (the Bill), which sets out the long-awaited licensing relief for FFSPs, which will commence on 1 April 2023.

The passing of the Bill is welcome news for FFSPs currently relying on the former 'Sufficient Equivalence Relief' and 'Limited Connection Relief' and represents the final step in establishing concrete licensing relief from April 2023 onwards, although it is likely to come as a surprise to FFSPs currently relying on the existing professional investor exemption. For more details tracking the development of the FFSP licensing regime until now, see our previous Insights, here and here.

Key takeaways

The Bill introduces two new forms of licensing relief, namely the:

• Professional Investor Exemption: this provides an exemption from the requirement to hold an Australian financial services (AFS) licence for persons providing financial services from outside Australia (subject to limited marketing visits) to 'professional investors'. It replaces and broadens the existing professional investor exemption – however, will require persons relying on the exemption to satisfy a number of new conditions, including notification requirements to the Australian Securities and Investments Commission (ASIC) and clients; and
• Comparable Regulator Exemption: this broadly replaces the existing 'Sufficient Equivalence Relief' by providing an exemption from the requirement to hold an AFS licence for foreign companies and partnerships formed outside Australia that provide financial services to wholesale clients.

Significantly, there is no replacement or continuation of the 'Limited Connection Relief'.

The Bill also introduces an exemption from the requirement to satisfy the fit and proper test when applying for an AFS licence for FFSPs that are regulated by a 'Comparable Regulator' and that only wish to provide financial services to wholesale clients. This is designed to fast-track the licensing process for FFSPs that are seeking to establish more permanent options in Australia.

New Professional Investor Exemption

The New Professional Investor Exemption replaces the existing professional investor exemption contained in section 911A(2E) of the Corporations Act 2001 (Cth) (Corporations Act).¹

The existing professional investor exemption applies where the relevant FFSP:

• is not in this jurisdiction (i.e. effectively, Australia);
• provides certain financial services to a 'professional investor'; and
• the financial service consists of dealing in, providing advice on, or making a market in derivatives, foreign exchange contracts, carbon units, Australian carbon credit units, or eligible international emission units (Existing Professional Investor Exemption).

The New Professional Investor Exemption will apply where the:

• FFSP provides the financial service to 'professional investors' only;
• financial service is provided from a place outside this jurisdiction (except for limited marketing visits);
• FFSP's head office and principal place of business are located at one or more places outside this jurisdiction; and
• FFSP reasonably believes that providing the same or substantially the same financial service would not contravene any law applying in the FFSP’s principal place of business, where its head office is located or the place from which the financial service is provided (New Professional Investor Exemption).

The introduction of the New Professional Investor Exemption is a significant reform, which has the potential to provide long term AFS licensing relief to FFSPs currently relying on the 'Limited Connection Relief' or the 'Sufficient Equivalence Relief', provided that the FFSP's clients come within the definition of a 'professional investor' (and the other conditions are met).

Clients must be limited to 'professional investors'

A 'professional investor' is defined in section 9 of the Corporations Act. A 'professional investor' is a subclass of wholesale clients, which includes (amongst others):

• AFS licence holders;
• certain bodies regulated by the Australian Prudential Regulation Authority (APRA) (including banks and certain regulated superannuation funds);
• a person controlling at least $10 million;
• a listed entity or its related body corporate; and
• an exempt public authority.

Financial services and financial products are not currently limited

Compared to the Existing Professional Investor Exemption, the New Professional Investor Exemption is much broader in its potential application, as it is not limited to certain financial services relating to derivatives, foreign exchange contracts and certain carbon related products, but rather can apply to any financial service in relation to any financial product (provided the FFSP is authorised to provide such financial services in its principal place of business, where its head office is located or the place from which the financial service is provided).  That said, there is provision for regulations to be made at a later date excluding particular financial services, financial products, or classes of professional investors from the new exemption (although there is no proposal for any such regulations at this stage as the regulations are targeted at responding to emerging risk).

Location requirements

The requirements relating to the location of the FFSP are also much clearer, than under the Existing Professional Investor Exemption, which required that the FFSP 'is not in this jurisdiction' in order to rely on the exemption (and, therefore, raised questions about an FFSP's ability to appoint a local representative or make infrequent marketing trips). As noted above, the New Professional Investor Exemption stipulates that to rely on the exemption:

• the financial service must be 'provided from a place outside this jurisdiction' (except for limited marketing visits); and
• the FFSP's head office and principal place of business are located at one or more places outside this jurisdiction.

This is a small, but important change, and means that a FFSP could have a presence in Australia (e.g. register as a foreign company, establish a registered office, and have a representative or agent here) and still rely on the exemption, provided, of course, that the financial services are provided from offshore (subject to limited marketing visits) and that the other location requirements are met. 

Limited marketing visits

The exception for 'limited marketing visits'² is helpful and will enable a FFSP to provide financial services in Australia during limited marketing visits undertaken by representatives of the FFSP. These marketing visits can be undertaken in one or more visits, by one or more representatives of the FFSP (including at the same time), so long as the total length of the marketing visits in a financial year is no more than 28 calendar days.

Conditions apply

Finally, it is important to note that, unlike either the 'Limited Connection Relief' or the Existing Professional Investor Exemption, a series of conditions will apply to a FFSP relying on the New Professional Investor Exemption, including notification requirements (to ASIC and clients) and breach reporting obligations. See section [4] below for details. Accordingly, the New Professional Investor Exemption will impose a greater regulatory burden on FFSPs.

Comparable regulator exemption

The new Comparable Regulator Exemption applies to an FFSP if the:

• financial service is provided only to wholesale clients;
• FFSP is a foreign company or partnership formed outside this jurisdiction (i.e. effectively, Australia);
• FFSP has and maintains any authorisations, registrations or licences necessary to legally provide the same, or substantially the same, financial service in a place outside this jurisdiction (the comparable jurisdiction);
• regulator administering those authorisations, registrations or licences for the comparable jurisdiction is a 'comparable regulator' (as determined by the Minister); and
• financial service is provided from this jurisdiction or from the comparable jurisdiction (Comparable Regulator Exemption).

On the whole, the 'Comparable Regulator Exemption' is very similar to the current 'Sufficient Equivalence Relief', although not identical.

Financial services and financial products are not limited

Unlike the 'Sufficient Equivalence Relief', which is limited to the provision of the financial services and financial products set out in the separate jurisdiction-based class orders, the financial services and financial products covered by the Comparable Regulator Exemption are not limited – however, the FFSP must have and maintain the authorisations, registrations or licences to provide the same, or substantially the same, financial service in the comparable jurisdiction. To the extent that there is no requirement in the comparable jurisdiction to hold an authorisation, registration or licence to provide the financial service, the requirement is taken to be satisfied.

Comparable regulators

The Minister will have the power to determine 'comparable regulators', rather than ASIC. In determining whether a foreign regulator is a 'comparable regulator', the Minister is required to consider a variety of factors. However, it is proposed that regulators that have already been assessed by ASIC as having sufficiently equivalent regulatory regimes will be taken to be comparable regulators (subject to the Minister's final decision) – this would include the following list of comparable regulators:

• North America: US SEC, US OCC, US CFTC, Ontario OSC
• Europe: German BaFin, Luxembourg CSSF, UK FCA or PRA, Danish FSA, Swedish FI, French AMF, French ACPR
• Asia: Singapore MAS, Hong Kong SFC

Location requirements

A FFSP will be able to provide financial services in reliance on the Comparable Regulator Exemption, either in Australia or from the jurisdiction of the Comparable Regulator (i.e. it is limited to those two jurisdictions only). This means that a FFSP could not provide financial services from a third jurisdiction in which it is also licensed to provide financial services, or in circumstances where some of its representatives reside in a third jurisdiction. This may create difficulties, depending on the FFSP's business model and the location of its staff.

Conditions apply

Finally, similar to the 'Sufficient Equivalence Relief', the Comparable Regulator Exemption is subject to a number of conditions, including notification requirements, as set out in section [4] below.

Conditions of relief

As noted above, an FFSP that wishes to rely on either the New Professional Investor Exemption or the Comparable Regulator Exemption will be required to comply with certain conditions on an ongoing basis. These conditions are summarised below, with additional conditions applying to the Comparable Regulator Exemption:

Condition	New Professional Investor Exemption	Comparable Regulator Exemption
Notify ASIC The FFSP must notify ASIC, in the approved form, that it has used, or intends to use, the exemption within the 'notification period' (being 15 business days before and after the FFSP starts relying on the exemption). This requirement will also apply to any FFSPs that have previously given ASIC notice of its intention to rely on the 'Sufficient Equivalence Relief'
Notify clients The FFSP must provide written notice to clients that it is exempt from the requirement to hold an AFS licence, and the exemption it is relying on.
Breach notification requirements If the FFSP breaches any of the conditions of the exemptions, it must notify ASIC as soon as practicable, and before the 15th business day after it became aware of the contravention (or would reasonably be expected to have become aware).
Provide reasonable assistance to ASIC In relation to the performance of ASIC's functions or the exercise of ASIC's powers
Submit to the non-exclusive jurisdiction of Australian Courts
Comply with an ASIC direction to provide information In relation to an FFSP's provision of financial services, or financial services business.
Notify changes to contact details
Consent to information sharing The FFSP must consent to ASIC and each comparable regulator sharing information about the FFSP.
Notification of investigation or enforcement The FFSP must notify ASIC of any significant enforcement action, disciplinary action or investigation undertaken against it outside Australia.
Agents and representative oversight The FFSP must have an agent in Australia.  The FFSP must maintain 'adequate oversight' over its representatives providing financial services in reliance on the exemption, and ensure they are adequately trained and competent to provide the service.

If a FFSP fails to comply with one or more conditions attaching to its licensing exemption, ASIC may:

• apply to court for a civil penalty or pecuniary penalty order;
• cancel the FFSP's exemption; or
• impose additional conditions on the FFSP's future use of the exemption.

Fit and proper exemption

The Bill also introduces an exemption from the requirement to satisfy the 'fit and proper' person test when an FFSP applies for an standard AFS licence (or a variation to it). The test generally requires obtaining solvency checks and criminal history checks for officers of the FFSP.

The exemption will apply where:

• the applicant is a foreign company or partnership formed outside this jurisdiction (i.e. effectively Australia);
• the licence, if granted, would be restricted to the provision of financial services to wholesale clients; and
• the applicant holds any authorisations, registrations or licences necessary to provide the same or substantially the same financial service in a place outside this jurisdiction, issued by a 'comparable regulator'.

The exemption is designed to reduce the administrative burden and fast-track the AFS licensing process, and is proposed to apply to applications made on or after 1 April 2023. Any applications made prior to that date will be subject to the existing requirements.

While the exemption would apply at the time of an application, ASIC can suspend or cancel a licence if it has reason to believe that a relevant person is not a fit and proper person to provide the financial service.

Next steps?

The new licensing relief will commence from 1 April 2023. This aligns with the end of the transitional arrangements in place for FFSPs currently relying on the ‘Sufficient Equivalence Relief’ and ‘Limited Connection Relief’, which are due to expire on 31 March 2023.  Therefore, any FFSPs currently relying on the transitional relief will be able to continue doing so until the new licensing regime comes into effect. Notably, there is no transitional relief available for FFSPs who are currently relying on the Existing Professional Investor Exemption, although such entities can continue to rely on that relief until the commencement of the new licensing regime on 1 April 2023. 

What are my options?

We encourage FFSPs to start considering their licensing options early, so that they have sufficient time to prepare for the new regime, which will require notifications to both ASIC and clients, as well as changes to existing arrangements to ensure compliance with the new conditions attaching to the relief. 

Allens is well-placed to assist you in assessing your licensing needs.