Proposed reforms to FFSP regime announced 12 min read
In exciting news for foreign financial service providers (FFSPs), the Australian Government has announced new proposals to reform the foreign financial services licensing regime following a lengthy period of uncertainty and ongoing transitional arrangements which, until now, were set to expire on 31 March 2024.
The exposure draft of the Treasury Laws Amendment (Measures for Future Bills) Bill 2023: Licensing exemptions for foreign financial services providers (the Draft Bill) was released on 7 August 2023 and proposes amendments to the Corporations Act 2001 (Cth) (Corporations Act) to establish four key exemptions to the existing licensing regime which, if passed, will take effect on 1 April 2024. ASIC has also extended the current transitional relief for the sufficient equivalence relief and the limited connection relief to 31 March 2025.
In this Insight, we take a high-level look at:
- key events over the last eight years leading up to the current proposal for reform
- what the proposed licensing regime for FFSPs under the Draft Bill will look like
- the key differences between the Draft Bill and the previous bill that lapsed before the last federal election, the Treasury Laws Amendment (Streamlining and Improving Economic Outcomes for Australians) Bill 2022 (the 2022 Bill).
Key takeaways
- The Federal Government has released exposure draft legislation amending the current licensing regime for FFSPs.
- Stakeholder views on the Draft Bill are being sought, with the consultation period to close on 8 September 2023.
- The Draft Bill proposes four exemptions for FFSPs: a comparable regulator exemption (replacing the transitional sufficient equivalence relief); a professional investor exemption (replacing the transitional limited connection relief); a new market maker exemption; and an exemption from the fit-and-proper person assessment for new foreign Australian Financial Services Licence (AFSL) applications, which aims to streamline the application process for FFSPs.
- If passed, the proposed reforms will come into effect on 1 April 2024.
- ASIC has also delayed the cessation of the transitional period for sufficient equivalence and limited connection relief until 31 March 2025 (previously 31 March 2024) and the commencement of the funds management relief until 1 April 2025 (previously 1 April 2024) to provide industry with greater certainty in the interim.
FFSP recap: timeline of events
The last decade has seen a number of reform proposals with very little change, leaving FFSPs in a state of regulatory limbo. Given the number of 'false starts', you would not be alone if you found yourself wondering what has led to this point. As a refresher, we have set out below a timeline of the key events since 2016 leading up to the release of the Draft Bill:
| Date | Event |
|---|---|
| September 2016 |
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| June 2018 |
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| July 2019 |
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| September 2019 |
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| March 2020 |
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| May 2021 |
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| February 2022 |
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| April 2022 |
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| August 2022 |
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| August 2023 |
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If the Draft Bill is passed, what will the new FFSP licensing regime look like?
If the Draft Bill is passed, the following new exemptions will be available:
Professional investor exemption (s911A(2)(eo))
- This new professional investor exemption will replace the existing professional investor exemption in s911A(2E) of the Corporations Act.
- Under this new professional investor exemption, FFSPs that provide financial services from outside of Australia (except during limited marketing visits and except in relation to certain financial products tradeable on licensed markets—see more on this below) to professional investors will, subject to eligibility, be exempt from the requirement to hold an AFSL.
- The professional investor exemption also applies to financial services provided during one or more marketing visits in Australia by representatives of the FFSP. A 'marketing visit' includes a visit by any representative of the FFSP that includes time spent with any client (or prospective client) of the FFSP in relation to any financial service. These 'marketing visits' are to be limited to 28 calendar days in each financial year, to be calculated on the following basis:
- a day on which two or more of the FFSP's representatives are making a visit constitutes a single day;
- each day of the visit is to be counted, regardless of whether time is spent with a client or prospective client on all of the days; and
- any part of the day at the start or end of the visit counts as a whole day.
- An FFSP must notify ASIC of its intention to rely on this exemption, and in relying on this exemption, must comply with certain conditions, including ensuring the financial services are provided efficiently, honestly and fairly.
Comparable regulator exemption (s911A(2)(ep))
- This licensing exemption will replace the existing sufficient equivalence relief.
- The comparable regulator exemption exempts FFSPs that are foreign companies or partnerships formed outside of Australia that provide financial services to wholesale clients, provided the FFSP is authorised, registered or licensed by a comparable regulator to legally provide the same or substantially the same financial service in a comparable jurisdiction. The financial services can be provided from within Australia or from the comparable jurisdiction.
- An FFSP must notify ASIC of its intention to rely on this exemption, and in relying on this exemption, must comply with certain conditions, including consenting to information sharing between ASIC and the comparable regulator.
- Comparable regulators are:
- (US) the Securities and Exchange Commission, the US Federal Reserve and Office of the Comptroller of the Currency, and the Commodity Futures Trading Commission;
- (Singapore) Monetary Authority of Singapore;
- (Hong Kong) Securities and Futures Commission;
- (Germany) Bundesanstalt für Finanzdienstleistungsaufsicht of Germany;
- (Luxembourg) Luxembourg Commission de Surveillance du Secteur Financier;
- (UK) UK Financial Conduct Authority and the Prudential Regulatory Authority;
- (Denmark) Danish Financial Supervisory Authority;
- (Sweden) Finansinspektionen;
- (France) Autorité des Marches Financiers of France and Autorité de contrôle prudentiel et de resolution of France; and
- (Ontario) Ontario Securities Commission.
- The Minister may, by legislative instrument, determine regulators that administer broadly comparable regulatory regimes.
Market maker exemption (s911A(2)(eq))
- New or existing FFSPs that carry on a financial services business of making a market for derivatives that are able to be traded on (yet to be) prescribed licensed markets may, subject to eligibility, rely on the market maker exemption from the requirement to hold an AFSL.
- An FFSP must notify ASIC of its intention to rely on this exemption, and in relying on this exemption, must also comply with the conditions that are applicable to the professional investor exemption.
Fit and proper person test exemption (s913B(2A))
- FFSPs that are authorised, registered or licensed to legally provide the same or substantially the same financial services by a comparable regulator and that only provide financial services to wholesale clients may apply for an AFSL without having to comply with the fit-and-proper person assessment. The fit and proper person test exemption also applies to variations of such AFSLs.
- However, the fit and proper test exemption only applies at the time an application for an AFSL or application to vary an AFSL is made by the FFSP. At all other times, ASIC may take enforcement action if it believes a relevant person is not a fit and proper person to provide the financial services covered by the AFSL.
In addition to the new licensing relief set out above, the following forms of existing relief will also continue to be available, at least for a transitional period:
Sufficient equivalence relief
- The existing sufficient equivalence relief applies where an FFSP provides certain financial services only to wholesale clients, and is regulated by an overseas regulatory regime that is sufficiently equivalent to the Australian regime.
- This relief will continue to be available to FFSPs that were already relying on the exemption on 31 March 2020 until the transitional period for the relief ends on 31 March 2025.
Limited connection relief
- The existing limited connection relief applies where an FFSP is deemed to be carrying on a financial services business in Australia only because it 'engages in inducing, or intending to induce, a person in Australia to use its financial services', and provides financial services only to wholesale clients in Australia.
- This relief will continue to be available to FFSPs until the transitional period for the relief ends on 31 March 2025.
Funds management relief
- Unless it is repealed or amended by ASIC, the funds management relief (as set out in ASIC Corporations (Foreign Financial Services Providers – Funds Management Financial Services) Instrument 2020/199) will come into effect on 1 April 2025, providing relief to eligible FFSPs from the requirement to hold an AFSL if the FFSP is only carrying on a financial services business in Australia as a result of the operation of s911D of the Corporations Act 2001 (Cth) in relation to the provision of 'funds management financial services' to eligible Australian users.
Any other existing licensing exemption
An FFSP may be able to qualify under another licensing exemption that already exists under the Corporations Act or the regulations.
Key changes compared to the 2022 Bill
The Draft Bill is broadly based on the 2022 Bill, but with some salient differences, including the following:
- Market maker exemption: as noted above, the Draft Bill introduces a new 'market maker' licensing exemption for FFSPs that make a market for derivatives that are able to be traded on prescribed licensed markets. The intention is for this exemption to apply to exchange traded futures.
- Narrowing of professional investor exemption: the new professional investor exemption proposed under the Draft Bill is narrower than the professional investor exemption that was proposed under the 2022 Bill. The new professional investor exemption will not be available for dealings in financial products that are able to be traded on certain licensed markets. According to the explanatory memorandum to the Draft Bill, the rationale for this change is to protect markets that may have significant retail investor involvement against potential impacts from activities by entities that are not subject to the AFSL regime.
- Efficiently, honestly and fairly: the Draft Bill includes a new condition for an FFSP relying on the professional investor, comparable regulator or market maker exemptions to do all things necessary to ensure that financial services are provided efficiently, honestly and fairly. This condition is subject to certain exclusions—eg if the financial service is a custodial or depository service involving holding financial products that were both issued and are being held outside of Australia. ASIC will have the power to cancel a professional investor, comparable regulator or market maker exemption that applies to an FFSP if it reasonably believes the FFSP has contravened the condition to provide the financial services efficiently, honestly and fairly.
What are my options?
Below are the options that new and existing FFSPs will have if the Draft Bill is passed.
| If you are an FFSP… | You have the following options… |
|---|---|
| that is currently relying on the limited connection relief |
Until 31 March 2025:
From 1 April 2024:
From 1 April 2025:
|
| that is currently relying on the sufficient equivalence relief |
Until 31 March 2025:
Following 1 April 2024:
From 1 April 2025: Subject to eligibility, rely on the funds management relief (unless it is repealed by ASIC). |
| that wishes to start providing financial services to wholesale investors in Australia and is not able to rely on either the limited connection relief or the sufficient equivalence relief |
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What's next?
Consultation on the Draft Bill is open until 8 September 2023. If it is then passed, the changes will take effect on 1 April 2024, meaning that:
- the professional investor, market maker and comparable regulator exemptions will be available to financial services provided on and after 1 April 2024
- the fit and proper test exemption will be available for FFSPs that apply for an AFSL on or after 1 April 2024
- applications to impose, vary or revoke AFSL conditions for AFSLs on foot as at 1 April 2024 will continue to be subject to the fit and proper person requirements that were in force at the time the application was made.
During the extended transitional period for the sufficient equivalence and the limited connection relief (ending 31 March 2025), ASIC has stated it will consider new applications for individual temporary licensing relief, or new standard or foreign AFSL applications, from FFSPs that cannot rely on the transitional relief.