What do ASIC’s proposals mean for foreign financial services providers?

Introduction

As noted in our earlier update, ASIC has released its updated proposals for the licensing relief available to foreign financial services providers (FFSPs) servicing wholesale clients in Australia, with the release of Consultation Paper 315.

In summary, ASIC has proposed to:

• extend the expiry of the sufficient equivalence relief and limited connection relief until 31 March 2020, with a transition period to apply following the repeal of the relief;
• implement the previously proposed foreign licensing regime; and
• introduce new funds management relief.

Current relief available to FFSPs

ASIC previously offered two types of relief from holding an Australian financial services licence (AFSL) to FFSPs who provide financial services to wholesale clients in Australia:

• ‘sufficient equivalence relief’, provided under various class orders for certain FFSPs regulated by an overseas regulatory regime deemed sufficiently equivalent to Australia’s regulatory regime (Sufficient Equivalence Relief), which currently includes the United Kingdom, the United States of America, Hong Kong, Singapore, Germany and Luxembourg; and
• ‘limited connection relief’, for a FFSP deemed to be carrying on a financial services business in Australia only because it induces persons in Australia to use its financial services (Limited Connection Relief).

Transition periods

ASIC has proposed a transition period of 24 months (from 1 April 2020 until 31 March 2022) for FFSPs relying on the Sufficient Equivalence Relief as at 31 March 2020. The transition period is designed to enable such FFSPs to:

• apply for a foreign AFSL;
• apply for a standard AFSL;
• cease carrying on a financial services business in Australia; or
• limit their services in Australia so they are exempt from the requirement to hold an AFSL.

Eligible FFSPs considering providing services to wholesale clients in Australia should consider applying for the Sufficient Equivalence Relief prior to 31 March 2020.

ASIC has proposed a transition period of 6 months until 30 September 2020 for FFSPs relying on the Limited Connection Relief as at 31 March 2020.

Foreign AFSL

ASIC proposes to repeal the Sufficient Equivalence Relief and implement a foreign AFSL regime for eligible FFSPs authorised in a sufficiently equivalent overseas regime. This would include the jurisdictions currently covered by the Sufficient Equivalence Relief. It is expected that the foreign AFSL regime will apply from 1 April 2020.

A number of conditions would apply to the holder of a foreign AFSL, including a requirement to carry on a business in the relevant foreign jurisdiction and to notify ASIC of any significant change to their relevant registration or authorisation in the home jurisdiction as well as any significant investigation, enforcement or disciplinary action undertaken by the overseas regulatory authority against the licensee.

Applying for a foreign AFSL

A streamlined application process is proposed for a foreign AFSL, compared to a standard AFSL. The applicant would need to lodge supporting documentation (known as ‘proofs’) including an overview of the applicant’s financial services business and an organisation chart as well as relevant criminal history and bankruptcy checks for its responsible officers. ASIC would also require information similar to the current requirements for the Sufficient Equivalence Relief, including evidence of incorporation and authorisation in the home jurisdiction.

This is a significantly more streamlined process than a standard AFSL application, which requires documentation supporting the organisational competence of the applicant as well as financial information. ASIC may ask for additional proof documentation throughout the application process.

Ongoing obligations of a foreign AFSL holder

Foreign AFSL holders would be exempt from a number of the obligations applying to a standard AFSL, including the obligation to have adequate resources (such as financial resources) and to maintain competence, on the basis they are subject to sufficiently equivalent overseas regulatory requirements.

Obligations which would apply in the same way as a standard AFSL include (but are not limited to) requirements for conflicts arrangements, compliance with applicable financial services laws and having adequate risk management systems. Foreign AFSL holders would also be subject to supervisory and enforcement provisions such as breach reporting and potential regulator surveillance checks.

Proposed new funds management relief

ASIC has proposed a new funds management financial services relief instrument, in response to concerns about the impact of the repeal of the Limited Connection Relief on the offer of offshore funds and portfolio management services to Australian clients.

In its current form, the new relief will be available to foreign companies that provide ‘funds management financial services’ to professional investors in Australia, subject to:

• a cap on the scale of the activities provided in Australia; and
• certain conditions being complied with prior to the relief being relied on and on an ongoing basis.

The benefit of the proposed funds management relief, like the Limited Connection Relief, is that it is not restricted to regulated FFSPs in certain jurisdictions. However, it is only aimed at services provided from offshore and contains a number of conditions discussed below which may pose challenges.

Funds management financial services

Under the proposed relief, a person engages in funds management financial services; if they provide:

• any of the following financial services to a professional investor in Australia:
  • dealing in interests in, or securities issued by, an offshore fund;
  • providing financial product advice in relation to those interests in, or securities of, the offshore fund; or
  • making a market in relation to the offshore fund; and
• portfolio management services (being management of assets located outside Australia) to eligible Australian users.

The proposed definition of funds management financial services is limited to certain fund vehicles that are established outside of and are not operated in Australia. Further, at least 50% of the offshore fund (by value of assets that are not cash or cash equivalents) must be located outside of Australia and the offshore fund cannot be a resident for Australian tax purposes.

In addition, the scope of advice that would be able to be provided in relation to the offshore fund would be limited, as the current drafting does not permit advice in relation to the underlying investments of the offshore fund.

A professional investor is a subset of the existing wholesale client concept. This limitation of the possible investor base is consistent with other exemptions in relation to derivative and foreign exchange contracts. Broadly, professional investors include:

• a financial services licensee;
•  the trustee of a super fund, an approved deposit fund, a pooled superannuation trust or a public sector super scheme within the meaning of the Superannuation Industry (Supervision) Act 1993 (Cth) where the fund, scheme or trust has net assets of at least A$10 million;
• a listed entity or related body corporate of a listed entity;
• an exempt public authority; or
• a person that has or controls gross assets of at least A$10 million, including any assets held by an associate or under a trust that the person manages.

The proposed relief limits the provision of portfolio management services to certain eligible Australian users, which is a new concept and is limited to:

• an Australian trustee of certain superannuation funds with net assets of at least A$10 million;
• a person in Australia that operates a managed investment scheme with net assets of at least A$10 million;
• a life company operated in Australia; and
• an exempt public authority.

Importantly, the above restriction may significantly restrict (or eliminate) sub-investment management delegations to FFSPs, as only the operators of these vehicles may appoint FFSPs under the proposed relief.

Cap on scale of activities

As noted above, ASIC has proposed a cap on the scale of activities that may be provided under the funds management relief. A FFSP will only be able to rely on the relief if less than 10% of its annual aggregated consolidated gross revenue (including the aggregated consolidated gross revenue of entities within the FFSP's corporate group) is generated from the provision of the funds management financial services in Australia. There are also proposed conditions in relation to the documentation and monitoring of this cap.

The purpose of the cap is to ensure that a FFSP does not provide a substantial part of its business activities in reliance on this relief. ASIC sets out alternative forms of this cap, including a cap on the number of clients in Australia (it suggests three clients would be appropriate) or implementing service-specific caps, for example, for FFSPs providing advice, less than 10 % of its gross revenue may be derived from the provision of advice to investors in Australia.

ASIC states it would expect FFSPs that are close to exceeding the proposed cap to consider whether it needs to apply for and hold an AFSL or reduce its activities so that it can maintain the benefit of the relief. The practical implications of how a FFSP would reduce its activities or revenue derived from Australia will need to be considered in light of the final form of this cap.

Conditions on the funds management relief

Similar to the Sufficient Equivalence Relief, FFSPs that seek to rely on this new relief will need to:

• have a local agent;
• enter into a deed submitting to the non-exclusive jurisdiction of the Australian courts with respect to action by ASIC and other Australian government entities; and
• provide written consent to the disclosure by the relevant overseas regulator to ASIC and by ASIC to the overseas regulator of any information in relation to the FFSP.

In addition, FFSPs will also be required to:

• not be registered as a foreign company (and therefore must not be carrying on a business in Australia);
• notify ASIC that they intend to rely on the relief and the types of services they intend to provide in Australia;
• comply with directions from ASIC to provide information and reasonable assistance during surveillance checks; and
• comply with the proposed cap on the scale of services.

Industry feedback

Consultation Paper 315 raises a number of questions and issues, with feedback and comments due to ASIC by 9 August 2019. 

Norton Rose Fulbright will participate in the consultation. If you have any comments or would like further information or assistance on how ASIC’s proposed changes to the licensing relief for FFSPs impacts you, please do not hesitate to contact us.