New licensing exemptions for foreign firms but questions remain on transition

In a welcome development, on 20 December 2021 Federal Treasury released exposure draft legislation implementing exemptions from Australian financial services (AFS) licensing requirements for foreign financial service providers (FFSPs). This follows through on the Federal Government’s intention (announced in last year’s Budget) to restore previously well-established relief for FFSPs and create a fast-tracked licensing process for those that wish to establish a more permanent operation in Australia. It also leverages the feedback provided through Treasury’s consultation paper on possible options for how to address the relief. Please refer to our previous updates here and here.

The approach taken with the draft legislation strikes a balance between facilitating the exemptions and ensuring ASIC has greater oversight. However, questions remain as to how transition will work and how practically ASIC will administer the exemption process.

The exposure draft Bill and Explanatory Memorandum can be found here.

What is proposed under the new exemptions?

By way of recap, the licensing exemption regime for FFSPs offering financial services into Australia has undergone significant change in the last couple of years. The Australian Federal Government announced in its 2021-22 budget that it would consult on options for providing certain regulatory relief to FFSPs from holding an AFS licence and reduce barriers to entering the Australian market where relief is not available. As a consequence of the consultation, in June 2021, ASIC extended the transitional period for those FFSPs relying on the sufficient equivalence Class Order relief and limited connection relief until 31 March 2023. In addition, ASIC put a pause on assessing foreign AFS licence applications lodged to that point, pending the outcome of the Federal Government’s reforms.

Which brings us to the new exemptions proposed under the draft Bill. The proposals broadly break down into 3 parts, comprising a revamped professional investor exemption, a new comparable regulator exemption (replacement for the current sufficient equivalence relief) and relief from the fit and proper requirements for certain foreign firms:

• Professional investor exemption: this exemption would replace the existing professional investor exemption under the Corporations Regulations. While it has a narrower scope than the limited connection relief (only applying to professional investors rather than the broader category of wholesale clients), the new exemption expands the scope of its predecessor in that it is not limited to specific products and services unless the Corporations Regulations prescribe otherwise. The exemption is though subject to additional conditions, which include that FFSPs must notify ASIC of the intention to rely on the exemption and comply with ASIC’s reasonable requests for assistance.
  
  This exemption applies where:

• the financial service is provided only to professional investors;
• the FFSP provides the financial service from a place outside Australia;
• the FFSP’s head office and principal place of business are located at one or more places outside Australia; and
• the FFSP reasonably believes that providing the financial service does not contravene any law applying in the FFSP’s principal place of business, head office or the place from which the financial services are provided.

• Comparable regulator exemption: foreign companies authorised, registered or licensed to provide the same financial service by an approved regulator in a foreign jurisdiction and which provide those financial services to wholesale clients, would be exempt from holding an AFS licence. FFSPs must also comply with additional conditions, which include that FFSPs must notify ASIC of the intention to rely on the exemption and agree to information sharing between ASIC and the foreign company’s home regulator. Approval of regulators for the purposes of the exemption is to be given by the Minister. However, it has been proposed that the initial list of approved regulators will be the same as those recognised by ASIC for the foreign AFS licence. This includes the US SEC, Singapore MAS, UK FCA and Ontario OSC.
• Fit and proper person test exemption: foreign companies authorised, registered or licensed to provide financial services by a comparable regulator and which only provide financial services to wholesale clients, would be exempt from the fit and proper person test. This test applies at the time of applying for or seeking any variation to an AFS licence. This exemption removes certain administrative requirements for applicants, such as obtaining criminal background history and solvency checks and would serve to streamline the licensing process.

Notably, the exemptions do not contemplate a reintroduction of the limited connection relief after it expires – currently scheduled to be at the end of March 2023, with no proposed transition arrangements.

What is left unresolved?

While the news of the draft Bill is overall very positive, there are number of unanswered questions as to how the new regime will function.

Importantly, details of transitional arrangements are yet to come although we may expect to see these in ASIC guidance once the Bill is passed. In particular, FFSPs currently relying on the sufficient equivalence Class Order or individual relief and those operating on the basis of the current professional investor exemption are facing the prospect of a mandatory notification to ASIC in order to move onto the new exemptions. The timing of this notification process and when ASIC will be able to process notices will be critical particularly for FFSPs for whom the current relief is scheduled to expire at the end of March 2023.

A related administrative issue concerns the detail around the notification and documentation process. Some documentation required for the comparable regulator exemption is likely to have already been given to ASIC by FFSPs when they previously notified under the Class Order relief. ASIC may therefore need to consider concessions for FFSPs where this is the case.

In addition, a key issue in the Treasury consultation process concerned which regulators would be recognised for the purposes of the exemptions. As noted above, it appears that existing overseas regulators recognised by ASIC would also be approved under the new regime. However, it has been proposed that further regulators also be added to the list. How likely this will be and what the timing may look like will be a question for those FFSPs seeking to take advantage of the relevant exemptions.

What should FFSPs do now?

FFSPs providing or who are planning to provide services into Australia will need to plan ahead for the required ASIC notification. For these purposes, they should give careful consideration to the proposed scope and conditions applying under the professional investor and comparable regulator exemptions. Based on our experience with the foreign AFS licensing regime, FFSPs would also be well-served to prepare for the compliance requirements that attach to those conditions.

More generally, FFSPs should stay tuned for further updates and any changes to the draft legislation.