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First published in the 1LoD Global Benchmarking Survey & Annual Report 2019
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:
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:
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:
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.
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.
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:
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:
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:
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.
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:
In addition, FFSPs will also be required to:
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.
First published in the 1LoD Global Benchmarking Survey & Annual Report 2019
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