Authors: Nikki Bentley and Matthew Farnsworth
ASIC proposes to end the licensing exemption for Foreign Financial Service Providers and introduce a modified licensing regime
The Australian Securities and Investments Commission (ASIC) has recently released Consultation Paper 301 – Foreign financial services providers (CP 301) which outlines its proposals to
- Repeal the Australian financial services (AFS) licence exemption currently available to foreign financial service providers (FFSPs) in certain jurisdictions for provision of financial services to Australian wholesale clients;
- Introduce a modified AFS licence regime for FFSPs in its place (foreign AFS licence).
- Repeal the “limited connection relief” currently available to persons in any jurisdiction for provision of financial services from outside of Australia to wholesale clients.
The proposals will have significant impacts for foreign funds and managers dealing with Australian investors. Foreign managers wishing to market their products and services to Australian investors will be faced with a decision about whether they invest in becoming licensed in Australia (for eligible FFSPs), find other distribution routes via locally licensed entities for their products and services or potentially retreat from the Australian market.
In 2003, ASIC issued class order relief that conditionally exempted FFSPs regulated by sufficiently equivalent regulatory regimes from the requirement to hold an AFS licence when providing financial services to wholesale clients in Australia. The relief, commonly known as “passporting relief”, is only available to FFSPs upon application to ASIC and is currently available to regulated FFSPs in the United Kingdom, the United States, Singapore. Hong Kong, Germany and Luxembourg.
Foreign managers typically rely on the passporting relief to market foreign funds and provide investment management services to Australian institutional investors. The passporting relief is quick to obtain, does not have onerous conditions and has expedited entry into the Australian market for foreign managers.
The passporting relief is not restricted to provision of services from offshore but FFSPs carrying on business in Australia would need to register as a foreign company. In our experience, managers relying on the passporting relief usually provide their services mainly from offshore but may engage in marketing visits to Australia.
ASIC review and timing for repeal of passporting relief
After conducting a review of the relief granted to FFSPs, ASIC identified supervisory and regulatory concerns about the current operation of the passporting relief, as well as changes in international regulation which suggest that the policy reflected in the passporting relief may no longer be appropriate.
As a result, ASIC will extend the current passporting relief for 12 months (until September 30, 2019) to allow time for industry to engage with the proposals in CP 301. ASIC has proposed a further 12 month transition period for FFSPs wishing to apply for a foreign AFS licence.
Given the time and cost in applying for a foreign AFS licence, we consider it is likely many offshore investment managers that are not licensed in Australia will retreat from the Australian market. This would likely restrict the choices available to Australian institutional clients, such as super funds, in accessing global investment management expertise.
As an alternative proposal, we have made a submission to ASIC that an AFS licence exemption for FFSPs should be retained at the very least in the case of the provision of financial services and products to “professional investors” (which is a subset of wholesale clients).
In our experience, FFSPs providing investment management services and products to investors in Australia tend to provide these services predominantly to “professional investors”, such as superannuation funds, responsible entities of registered schemes and other licensees. By comparison, a similar exemption covering “professional investors” is currently available for derivative counterparties entering into derivatives while outside of Australia.
Proposed new foreign AFS licence
The proposed foreign AFS licence regime appears only to be available to regulated FFSPs from jurisdictions currently covered by the passporting relief or those FFPSs in jurisdictions that currently have the benefit of individual relief granted to them. The introduction of the new regime would impose significant compliance costs on FFSPs. The costs associated with an application for an AFS licence can often be in excess of A$50,000, and this does not include the ongoing compliance costs.
This is particularly problematic because providers of financial services who induce persons to use their services are covered by the AFS licence regime, even where the services are provided entirely from outside of Australia. This means FFSPs will be required to make significant upfront investment before they know whether they will be appointed by any Australian based clients.
The introduction of a foreign AFS licence will also impose significant time delays on entry into the Australian market for FFSPs. At present, the time frame for processing a licence application can be up to 12 months. In this regard, we also consider the current proposed transition period of 12 months is unlikely to be sufficient, and should be lengthened to at least 24 months to provide sufficient time for FFSPs to obtain an AFS licence once ASIC has implemented the regulatory framework.
Whilst certain licensing obligations will not apply to FFSPs where there is a sufficient equivalent obligation in their home jurisdiction, many conduct obligations will still apply. FFSPs will need to implement compliance measures to meet these obligations.
Repeal of limited connection relief
In addition to the passporting relief, in 2003 ASIC issued an exemption for the provision of financial services to wholesale clients for providers with a limited connection to Australia that would otherwise be caught by the wide reach of the AFS licence regime.
A person is deemed to carry on a financial services business in Australia if they engage in conduct intended to induce people in Australia to use the financial services they provide or is likely to have that effect (Deeming Provision), even from outside of Australia.
Where a person is providing financial services from outside Australia and is only carrying on a financial services business in Australia because of the Deeming Provision, there is an exemption for the provision of financial services to “wholesale clients” only (Limited Connection Relief)1.
The Limited Connection Relief is intended only to be relied upon infrequently and therefore for a limited number of Australian investors. It has been a useful exemption because it is available to persons from any jurisdiction including where the passporting relief is not available.The Limited Connection Relief is currently due to expire on 27 September 2018. Under CP 301 ASIC has proposed to roll over the Limited Connection Relief until 30 September 2019 and then to repeal it. ASIC’s concerns in relation to the Limited Connection Relief included lack of visibility of entities relying on the relief and having limited powers to adequately supervise their activities.
There are a number of limited AFS licence exemptions which are currently in place and which will not be affected by the proposals to repeal the passporting relief and limited connection relief, including a “reverse inquiry” exemption.
An AFS licence exemption is available for the provision of financial services by a person not in Australia to investors in Australia, on a “reverse inquiry” basis but
- It is generally limited to a service relating to a financial product issued by the person following an inquiry.
- The person must not actively solicit investors in Australia in relation to that financial product.
The “reverse inquiry” exemption is therefore limited in its utility because it only applies to a product issuer. Typically, the foreign investment manager or a distributor in its group (rather than the fund which is the product issuer) would deal directly with an Australian investor, including in relation to marketing activities.
There are other limited AFS licence exemptions, such as provision of financial services by a person not in this jurisdiction to an AFS licence holder which is not acting as a trustee or responsible entity or on behalf of someone else. This means the exemption doesn’t generally extend to provision of products or services to Australian domiciled collective investment vehicles or superannuation funds.
It remains to be seen whether ASIC refines its current proposals, based on the consultation it is undertaking. However, it is clear that there will be significant regulatory changes ahead for offshore managers dealing with Australian investors which will likely require an assessment of their strategy for the Australian market.