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In July 2019, the Australian Securities and Investments Commission (ASIC) 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 (CP 315).
The consultation period for these proposals has closed and industry is now awaiting the finalization of the new regime pending the upcoming expiry of existing exemptions on March 31, 2020 and the proposed implementation of transition periods for those exemptions for existing users. This update reflects the proposals under CP 315.
In summary, ASIC has:
ASIC previously provided two types of relief to FFSPs providing financial services to wholesale clients in Australia from holding an Australian financial services licence (AFSL):
ASIC has proposed a transition period of 24 months (from April 1, 2020 until March 31, 2022) for FFSPs relying on the Sufficient Equivalence Relief as at March 31, 2020. The transition period is designed to enable such FFSPs to:
ASIC has proposed a transition period of 6 months until September 30, 2020 for FFSPs relying on the Limited Connection Relief as at March 31, 2020.
ASIC proposes to repeal the Sufficient Equivalence Relief and implement a foreign AFSL regime for eligible FFSPs authorized 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 April 1, 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 authorization in the home jurisdiction as well as any significant investigation, enforcement or disciplinary action undertaken by the overseas regulatory authority against the licensee.
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 organization 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 authorization in the home jurisdiction.
This is a significantly more streamlined process than a standard AFSL application, which requires documentation supporting the organizational competence of the applicant as well as financial information. ASIC may ask for additional proof documentation throughout the application process.
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.
Under CP 315, ASIC 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:
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.
Under the proposed relief, a person engages in ‘funds management financial services’ if they provide:
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 percent 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’. This limitation of the possible investor base is consistent with other exemptions in relation to derivative and foreign exchange contracts. Broadly, ‘professional investors’ include:
The proposed relief limits the provision of ‘portfolio management services’ to certain ‘eligible Australian users,’ which is a new concept and is limited to:
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.
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 percent 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 percent 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.
Similar to the Sufficient Equivalence Relief, FFSPs that seek to rely on this new relief will need to:
In addition, FFSPs will also be required to:
It is hoped that the details of the new regime will be finalized in early 2020, given the current proposed expiry date for the Sufficient Equivalence Relief and Limited Connection Relief.
Eligible FFSPs considering providing services to wholesale clients in Australia should consider applying for the Sufficient Equivalence Relief prior to March 31, 2020.
FFSPs relying on the Sufficient Equivalence Relief or Limited Connection Relief should be considering the effects of the proposed new regime on the way they service Australian wholesale clients going forward and engage early once the new regime is finalized to take advantage of the proposed transition periods.
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