Thinking | 5 June 2018

Foreign financial services providers may require an AFSL under ASIC’s proposals

Foreign financial services providers providing unlicensed financial services to wholesale clients in Australia may be required to hold a modified AFSL under ASIC’s proposals.

Key points

On 1 June 2018, ASIC released a consultation paper proposing to repeal the Australian financial services (AFS) licensing relief it has granted under legislative instruments to foreign financial services providers (FFSPs) and to develop a modified licensing regime for FFSPs carrying on a financial services business in Australia with wholesale clients.
The proposed foreign AFS licensing regime begins 1 October 2020.
FFSPs may require an AFS licence (whether a ‘full’ licence or a modified licence), and should consider factoring this into their business planning. Affected foreign firms should also consider whether there is any benefit in making a submission to ASIC on the proposals, given the extensive obligations imposed on holders of a modified licence.
Limited connection FFSPs and new FFSPs that are licensed or authorised (as applicable) and operating in a jurisdiction that ASIC has recognised as ‘sufficiently equivalent’ to Australia’s financial services regime will be eligible to apply for a foreign AFS licence during the transitional period commencing on 1 October 2019. These sufficiently equivalent jurisdictions are Germany, Hong Kong, Luxembourg, the United Kingdom, Singapore and the United States of America, and also Sweden, France and Brazil.

Summary of ASIC’s proposals 1

Under Consultation Paper 301 Foreign financial services providers (CP 301), ASIC is consulting on the following proposals:

a proposal to repeal the ‘sufficient equivalence relief’ (as defined below) on 30 September 2019, as well as any individual relief issued on similar terms (with a 12-month transitional period from 1 October 2019 to 30 September 2020)
a proposal to repeal the ‘limited connection relief’ (as defined below) on 30 September 2019 (with a 12-month transitional period from 1 October 2019 to 30 September 2020) and
a proposal to implement a modified AFS licensing regime for sufficient equivalence FFSPs, such that eligible FFSPs can apply for and maintain a modified form of AFS licence (foreign AFS licence). A holder of a foreign AFS licence would have modified obligations, including exemptions from certain general licensing obligations and other obligations under Chapter 7 of the Corporations Act 2001 (Corporations Act), but with additional obligations tailored to a foreign AFS licensee.

ASIC is proposing a 12-month transitional period to 30 September 2020 for the implementation of the proposed new foreign AFS licensing regime for FFSPs, in addition to rolling over current relief to 30 September 2019. ASIC considers this is sufficient time for FFSPs to ensure they comply with the applicable Corporations Act requirements and the foreign AFS licence conditions.

Commentary

These proposals are relevant not just to those that rely on current relief from the AFS licensing regime under the sufficient equivalence relief or the limited connection relief, but also to those FFSPs that currently do not have the benefit of either the sufficient equivalence relief or the limited connection relief and who would like to offer financial services to Australian wholesale clients in the future.

Therefore, global financial services providers who currently conduct a financial services business in Australia in reliance on such relief should prepare themselves for the possibility of requiring a foreign AFS licence to continue to operate their businesses in Australia. This will include having compliance arrangements and risk management systems that meet a number of existing obligations of holders of ‘full’ AFS licences, including being subject to ASIC surveillance and supervision. In addition, as foreign AFS licensees, such financial services firms would need to comply with the proposed tailored conditions of a foreign AFS licence.

As an alternative to compliance with the proposed licensing regime, FFSPs may wish to consider their business arrangements to determine if they could rely on the existing licensing exemptions under the Corporations Act or, if required, whether they could properly restructure their global business operations.

If the proposed foreign AFS licence regime proceeds, there may be a delay in obtaining a foreign AFS licence (in addition to the current timeframes for obtaining a licence) which foreign financial services firms should take into account in their business planning. This is not only because the regime would be new to ASIC’s officers, but also because foreign financial services firms would need to prepare the necessary documentation for ASIC’s consideration as part of the licence application process.

Limited connection FFSPs and new FFSPs that are licensed or authorised (as applicable) and operating in a jurisdiction that ASIC has recognised as ‘sufficiently equivalent’ to Australia’s financial services regime will be eligible to apply for a foreign AFS licence during the transitional period. These sufficiently equivalent jurisdictions are Germany, Hong Kong, Luxembourg, the United Kingdom, Singapore and the United States of America, and also Sweden, France and Brazil. In CP 301, ASIC states that it is not proposing to undertake a further ‘sufficient equivalence assessment’ of the foreign regimes that ASIC has already assessed under its current sufficient equivalence relief; for other regimes, the applicant needs to engage with ASIC about ASIC undertaking a sufficient equivalence assessment.

Further, given the extensive regulatory obligations imposed under a foreign AFS licence, global financial services providers who currently conduct a financial services business in Australia in reliance on ASIC licensing relief should consider whether to make a submission to ASIC on the proposed reforms.

Licensed FFSPs under the new regime may also need to pay levies to ASIC under the ASIC fee-for-service regime, the details of which will need to be worked out.

We would be pleased to assist any foreign financial services providers to navigate these licensing and related arrangements.

Background

Under section 911A(2)(h) of the Corporations Act, ASIC can exempt an FFSP from the requirement to hold an AFS licence if it meets certain requirements.

Pursuant to this and other powers, ASIC has given two types of relief to foreign financial services providers that provide financial services to wholesale clients in Australia:

1. Sufficient equivalence relief

In 2003 and 2004, ASIC made seven class orders that conditionally exempted foreign providers from the requirement to hold an AFS licence where they are regulated under overseas regulatory regimes that ASIC has assessed as sufficiently equivalent to the Australian financial services regimes. These instruments exempted persons regulated by either:

- the UK’s Financial Conduct Authority or both the FCA and the UK’s Prudential Regulation Authority
- the US’s Securities Exchange Commission, the Federal Reserve, the Office of the Comptroller of Currency or the Commodity Futures Trading Commission
- Germany’s Bundesansatalt für Finanzdienstleistungsaufsicht
- Hong Kong’s Securities and Futures Commission
- Luxembourg’s Commission de Surveillance du Secteur Financier or
- the Monetary Authority of Singapore.

In September 2016, ASIC made ASIC Corporations (Repeal and Transitional) Instrument 2016/396, which temporarily extended the sufficient equivalence relief for FFSPs for a further two years (until 27 September 2018) to allow ASIC time to review the policy settings underlying the relief.

In addition to the legislative instruments described above, ASIC has granted sufficient equivalence relief on a case-by-case basis to individual applicants on similar terms to the legislative instruments.

2. Limited connection relief

In 2003, ASIC issued Class Order [CO 03/824] Licensing relief for financial services providers with limited connection to Australia dealing with wholesale clients, which provides licensing relief to foreign providers with a limited connection to Australia providing financial services to wholesale clients. The relief covers a foreign provider inducing an Australian wholesale client to use the relevant financial services provided by the foreign provider. Under ASIC Corporations (Foreign Financial Services Providers — Limited Connection) Instrument 2017/182, ASIC temporarily extended the effect of [CO 03/824] to 27 September 2018.

ASIC’s proposed foreign AFS licence would replace the above two types of current relief.

Policy rationale

In CP 301, ASIC states that its comprehensive review of its relief for FFSPs has identified supervisory and regulatory concerns about the current operation of the FFSP relief, as well as some changes in international regulation that apply to wholesale financial services providers that suggest that the policy reflected in the FFSP relief may no longer be appropriate.

In particular, ASIC’s policy rationale for its proposals as set out in CP 301 appears to be as follows:

ASIC is now concerned that the current relief framework for FFSPs no longer strikes the appropriate balance between cross-border investment facilitation, market integrity and investor protection. In this regard, ASIC has taken into account such factors as:
- the non-compliance by FFSPs with the conditions of relief, in particular, the ‘sufficient equivalence relief’ legislative instruments
- supervisory and enforcement concerns
- how foreign regulators, including in ‘sufficiently equivalent’ jurisdictions, deal with equivalent policy settings, noting that in major peer jurisdictions the licensing relief is not as broad as that currently provided by ASIC
- developments in cross-border financial regulation and
- the ongoing availability of other AFS licensing exemptions and relief to FFSPs providing financial services to wholesale clients in Australia
in relation to the limited connection relief, ASIC states:
- it has seen that some FFSPs have taken a broad interpretation of the operation of this relief, particularly in circumstances where other exemptions from the AFS licensing requirements (e.g. under notional sections 911A(2A), 911A(2B), 911A(2C), 911A(2D) and 911A(2E)) were unavailable to them and
- that FFSPs that rely on the limited connection relief are not required to have the kind of oversight required under the sufficient equivalence relief, namely the requirements to notify ASIC of their reliance on the relief, submit to the non-exclusive jurisdiction of the Australian courts in legal proceedings or comply with a written notice from ASIC directing the FFSP to provide ASIC with specific information about the financial services business operated by the person in Australia. Therefore, under the limited connection relief, ASIC is concerned that it has little to no visibility of the entities relying on the limited connection relief, as well as having very limited powers to adequately supervise the activities of such persons when engaging with clients in Australia.