Thinking | 16 March 2020

New AFS licensing framework for foreign financial services providers

In this article, we outline briefly the new regulatory framework in respect of the Australian financial services (AFS) licensing regime as it will apply to foreign financial services providers (FFSP) providing financial services to wholesale clients in Australia.  This new framework will replace the existing AFS licensing exemptions for FFSPs which rely on either the ‘sufficient equivalence’ class order regime or the ‘limited connection to Australia’ class order.  For a background to the new regime, see our earlier article.

Key points

  • On and from 1 April 2020, a new foreign AFS licensing regime will replace the ‘sufficient equivalence’ class order relief for FFSPs, subject to a 24-month transition period ending on 31 March 2022 for those FFSPs that rely on existing sufficient equivalence class order relief. Those FFSPs relying on the sufficient equivalence relief should apply for a foreign AFSL (or a standard AFSL) as soon as possible when the regime commences, and should not lodge an application at the end of the transition period.  New entrants will need to apply when the regime commences, unless another exemption applies.
  • On and from 1 April 2022, a new ‘funds management’ relief will replace the ‘limited connection to Australia’ class order relief for FFSPs. The current limited connection class order relief expires on 31 March 2022.
  • Under the new foreign AFS licensing regime, foreign AFS licensees will be subject to the ordinary AFS licensing obligations, with the exception of certain specified obligations. Eligible applicants must be regulated by the regulators in jurisdictions under recognised under the former ‘sufficient equivalence’ relief regime, however, in addition ASIC has extended this relief to those entities regulated under the regimes in Denmark, France, Sweden and Ontario (Canada).  Brazil has not been assessed as a sufficiently equivalent regime for this purpose.
  • The new funds management relief is limited to conduct by FFSPs that induces (or is likely to induce) Australian investors to use its financial services, where that conduct is limited to certain ‘funds management financial services’ to certain professional investors.

Background

On 10 March 2020, ASIC released a suite of legislative instruments and an updated Regulatory Guide, which will replace the existing legislative framework, and which replaces the current guidance, applicable to FFSPs providing financial services in Australia to wholesale clients.

In particular, on that date ASIC:

Overview of the new regime

The new foreign AFS licensing regime under the Foreign AFSL Instrument commences on 1 April 2020.  The sufficient equivalence relief continues until 31 March 2022.  However, during the 24-month transition period from 1 April 2020 to 31 March 2022, only FFSPs relying on the sufficient equivalence relief as of 31 March 2020 may continue to do so.  Therefore, those FFSPs which do not rely on the sufficient equivalence relief on 31 March 2020 will need to apply for a foreign AFSL if they provide wholesale financial services from 1 April 2020, unless other relief or exemptions applies.

The new funds management relief under the Funds Management Instrument commences on 1 April 2022.  The limited connection class order relief is extended to 31 March 2022.

ASIC states that it will withdraw Information Sheet 157 Foreign financial services providers: practical guidance on 1 April 2022, and that it will update Regulatory Guide 1 AFS Licensing Kit: Part 1 – Applying for and varying an AFS licence and Regulatory Guide 2 AFS Licensing Kit: Part 2 – Preparing your AFS licence application to include guidance on foreign AFS licensing applications.

New foreign AFS licensing regime

The foreign AFS licensing regime is a modified AFS licensing regime that applies to bodies corporate or partnerships (with one exception) incorporated or formed in a relevant foreign jurisdiction that:

  • carries on business in their relevant foreign jurisdiction;
  • holds a relevant authorisation under a sufficiently equivalent overseas regulatory regime to provide relevant financial services to wholesale clients; and
  • provides those financial services to wholesale clients in Australia.

The new foreign AFS licensing regime will replace the sufficient equivalence relief.  Under the current sufficient equivalence relief regime, FFSPs regulated in certain jurisdictions are exempt from the requirement to hold an AFSL where they provide certain financial services to wholesale clients in Australia, subject to satisfying certain conditions.

Overview of the new regime

This table sets out an overview of the key elements of the new foreign AFSL regime.

Feature Description
Eligible FFSPs Jurisdiction Wholesale financial services permitted under foreign AFS licensing regime
Danish FSA-regulated financial service provider Denmark Financial advice, dealing, making a market or providing a custodial or depository service in relation to certain financial products.
French AMF-regulated financial service provider

French ACPR-regulated financial service provider

France Financial advice and dealing in respect of certain financial products.

The FFSP may also provide market-making services or custodial or depository services in respect of certain financial products, depending on the relevant French regulator with supervisory authority.

German BaFin-regulated financial service provider Germany Financial advice, dealing, making a market or providing a custodial or depository service in relation to certain financial products.
Hong Kong SFC-regulated financial service provider Hong Kong Financial advice, dealing or making a market in respect of certain financial products.
Luxembourg CSSF-regulated financial services provider Luxembourg Financial advice, dealing, making a market or providing a custodial or depository service in relation to certain financial products.
Ontario OSC regulated financial service provider Ontario, Canada Financial advice and dealing in respect of certain financial products.
Singapore MAS-regulated financial service provider Singapore Financial advice, dealing, making a market or providing a custodial or depository service in relation to certain financial products.
Swedish FI-regulated financial service provider Sweden Financial advice, dealing, making a market or providing a custodial or depository service in relation to certain financial products.
UK-regulated financial service provider United Kingdom Financial advice, dealing, making a market or providing a custodial or depository service in relation to certain financial products.
US SEC-regulated financial service provider

US Federal Reserve and OCC-regulated financial service provider

US CFTC-regulated financial services provider

United States Financial advice, dealing, making a market or providing a custodial or depository service in relation to certain financial products - depending on the relevant US regulator with supervisory authority.
What AFS licensing obligations do not apply to foreign AFS licensees? Notify ASIC of events that may cause a material adverse change to financial position (reg 7.6.04(1)(a)).
Maintaining records of training for representatives (reg 7.6.04(1)(d)).
Have adequate resources (s 912A(1)(d)).
Maintain the competence to provide financial services (s 912A(1)(e)).
Ensure that representatives are appropriately trained (s 912A(1)(f)).
Meet minimum standards for custodial or depository service providers (s 912AAC).
Have a written agreement with sub-custodians to hold custodial property (s 912AAD).
Have adequate financial resources for custodial or depository service providers (s 912AC).
Obligations in relation to handling client money and property (Divisions 2 and 3 Part 7.8).
Obligations to disclose or not to charge fees if acting on the FFSP’s on behalf, in transactions with non-licensees (s  991E).
Obligations in relation to dealings involving employees of AFS licensees (s 991F).
Obligations in relation to money that is received for a financial product before the product is issued (s 1017E).
What main obligations are applicable to foreign AFS licensees? All other AFS licensing obligations, such as the obligations to:

  • provide financial services efficiently, honestly and fairly;
  • have in place adequate arrangements for the management of conflicts of interest; and
  • have adequate risk management systems.

Foreign AFS licensees will similarly be subject to supervisory and enforcement obligations including breach reporting requirements.

Any conditions imposed on the foreign AFSL.
Additional conditions prescribed under the Foreign AFSL Instrument.  These are requirements on the foreign AFS licensee to:

  • carry on business in the relevant foreign jurisdiction;
  • have an agent appointed at the time it purports to rely on a foreign AFSL and to not lack an agent for ten days consecutively (unless the FFSP is a company);
  • reasonably believe that it would not contravene any financial services laws of its home jurisdiction if it were to provide the relevant wholesale financial service in its home jurisdiction; and
  • notify ASIC within 15 business days after becoming aware (or should reasonably have been aware) of any significant change to the FFSP’s foreign authorisation, any significant regulatory exemption that the FFSP obtains in its home jurisdiction, and any significant investigation, enforcement, or disciplinary action undertaken against it by the foreign regulator.

 

Comparison with earlier proposals by ASIC

The new framework is not identical to the proposed foreign AFS licensing framework as outlined in CP 301.  Under the new framework, notable differences include:

  • the removal of the obligation to notify ASIC of events that may cause a material adverse change to financial position (reg 7.6.04(1)(a));
  • the removal of a condition prohibiting foreign AFS licensees from appointing persons other than the following as their authorised representatives:
    • employees or directors of the licensee;
    • wholly owned bodies corporate of the licensee; or
    • employees or directors of wholly owned bodies corporate of the licensee;
  • the removal of Brazil as a sufficiently equivalent regime for foreign AFS licensing purposes;
  • the addition of Ontario, Canada, as a sufficiently equivalent regime for foreign AFS licensing purposes; and
  • a 24-month transition period (compared to the 12-month period initially proposed under CP 301, although CP 315 has subsequently proposed a 24-month transition period).

Applying for a licence under the new regime

According to RG 176, applicants for the foreign AFSL will not be required to submit proofs relating to the provisions that will not apply to foreign AFS licensee, however they may be required by ASIC to provide additional proofs similarly to other AFSL applicants.  ASIC states that it will update the AFS Licensing Kits to include new guidance for eligible FFSP applicants.

Where an FFSP is unable to rely on the existing foreign AFS licensing regime, ASIC may consider extending the relief to cover other overseas regulatory regimes for particular financial services in certain circumstances and issue relief on a ‘class’ basis.  Where this is not appropriate, ASIC may grant relief on an individual basis to the FFSP, however ASIC considers that individual relief will be granted only on a rare and exceptional basis.

ASIC’s policy in respect of extending the foreign AFS licensee relief to cover other overseas regulatory regimes has remained largely the same - namely, the financial services are regulated by an overseas regulator, there are effective cooperation arrangements between the regulator and ASIC, and the overseas regulatory regime is sufficiently equivalent to the Australian regulatory regime.  Relevantly, however, the test for sufficient equivalence is that the overseas regulatory regime produces similar regulatory outcomes as the provisions from which a foreign AFS licensee is exempt (rather than all the regulatory outcomes in Chapter 7 of the Corporations Act 2001).

New funds management relief

Under the current limited connection class order relief, a FFSP is not required to hold an AFSL where they provide financial services to wholesale clients and they are carrying on a financial services business only because they are engaging in conduct that is intended to induce people in Australia to use the financial services they provide or is likely to have that effect.  This means that it does not apply to FFSPs that would otherwise be considered to be carrying on a financial services business in Australia.

The new funds management relief, which will replace the limited connection class order relief after 31 March 2022, is a narrower form of relief because (among other things) the new relief is:

  • limited to inducing conduct in relation to a ‘funds management financial service’;
  • applies only in relation to where these services are provided to ‘eligible Australian users’ (compared to the limited connection class order relief, which is limited to wholesale clients); and
  • subject to conditions.

Overview of the new regime

This table sets out an overview of the Funds Management Instrument.

Overview of new funds management relief
Under the terms of the new relief, an FFSP that satisfies each of the following …
(a)     The FFSP does not have a place of business in Australia.

(b)     The FFSP has given ASIC written confirmation:

(i)      that the FFSP intends to rely on the relief for the provision of funds management financial services to eligible Australian users;

(ii)     of the FFSP’s home jurisdiction and that it would not contravene any laws of its home jurisdiction relating to the provision of financial services if the FFSP were to provide the funds management financial services (see activities below) in its home jurisdiction;

(iii)    that there is an overseas regulator of the FFSP in its home jurisdiction and that overseas regulator is a signatory to the IOSCO Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information;

(iv)    that on the written request of ASIC or the home regulator, the FFSP will give or vary written consent and take all other practicable steps to enable and assist the disclosure of information between ASIC and the home regulator;

(v)     that the FFSP will comply with a written notice issued by ASIC directing the FFSP to give to ASIC a written statement containing specific information on the financial services provided by the FFSP in Australia;

(vi)    that the FFSP will give such assistance to ASIC as ASIC reasonably requests in relation to whether the FFSP is complying with the financial services laws, and in relation to the performance of ASIC’s other functions; and

(vii)   that the FFSP has an agent for service appointed and includes the name and address of the agent for service that is current as at the day the written confirmation is given.

(c)     The FFSP notifies ASIC within 30 days if its home jurisdiction changes.

and engages in conduct that is intended to (or is likely to) induce people to use any one of the following ‘funds management financial services’ provided by the FFSP …
(a)     Dealing, providing financial product advice in relation to, making a market as a result of redeeming or buying back, or providing a custodial or depository service in relation to ‘offshore fund financial products’.

(b)     Any of the following financial services under an agreement or arrangement to provide these ‘portfolio management services’:

(i)      dealing in financial products;

(ii)     providing financial product advice in relation to financial products;

(iii)    making a market for financial products in or issued by a managed investment scheme as a result of redeeming or buying back those financial products.

(c)     Providing a custodial or depository service under, or in relation to, an agreement or arrangement to provide portfolio management services.

and provides those services in relation to any one of the following persons in Australia (ie eligible Australian users) …
(a)     A responsible entity of a registered scheme.

(b)     A trustee of:

(i)      a superannuation fund;

(ii)     an approved deposit fund;

(iii)    a pooled superannuation trust; or

(iv)    a public sector superannuation fund,

with net assets of at least A$10 million.

(c)     A trustee of a wholesale trust who holds an AFS licence or would be required to hold an AFS licence but for ASIC Corporations (Wholesale Equity Scheme Trustees) Instrument 2017/849.

(d)     A body regulated by APRA other than a trustee referred to in paragraphs (b) and (c).

(e)     An exempt public authority, as defined in section 9 of the Corporations Act, other than a local council.

is not required to hold an AFSL, merely because it engages in the inducing activities above.

 

Comparison with earlier proposals by ASIC

The new framework is not identical to the proposed funds management relief as outlined in CP 315.  Notable changes include:

  • the removal of the revenue cap of 10%, which as initially proposed, limited the relief to FFSPs where less than 10% of its annual aggregated consolidated gross revenue, including the aggregated consolidated gross revenue of entities within its corporate group (for each of the previous and current financial years), is generated from the provision of funds management financial services in Australia;
  • the removal of the requirement for the FFSP to enter into a deed submitting to the non-exclusive jurisdiction of Australian courts; and
  • changing the category of recipients of the relevant financial services to a new list of ‘eligible Australian users’; and
  • a 24-month commencement period (compared to the 6-month period initially proposed).

General observations

These changes to the regulatory landscape are significant.

The foreign AFS licensing regime is effective from 1 April 2020, and therefore FFSPs who currently rely on sufficient equivalence relief should consider whether they intend to apply under the foreign AFS licensing regime, apply for a standard AFS licence, or take another course of action.  FFSPs who do not currently provide financial services in Australia (but intend to do so in the future) should also familiarise themselves with requirements under the new regime.  In the revised RG 176, ASIC expects these FFSPs (which wish to continue providing financial services) to apply for a foreign AFSL (or a standard AFSL) as soon as possible following commencement of the new regime to allow ASIC time to process the application.  Further, ASIC says it will grant an extension of the transitional relief only in rare and exceptional circumstances and will not grant an extension if it is solely due to delays with lodgement by an applicant.

FFSPs will also need to consider their contractual obligations to Australian counterparties, where they have under contracts enforceable in Australia given representations and warranties to the effect that they have all licences or other authorisations to provide financial services to Australian clients.

ASIC’s decision to replace the sufficient equivalence relief with a new foreign AFS licensing regime reflects an increased focus on investor protection.  In REP 656, ASIC states that, while acknowledging that the majority of respondents disagreed with the proposal, it considers that the potential detriment associated with the risk of FFSPs exiting the Australian market is outweighed by the market integrity and investor protection benefits of the new regime.  In comparison, in the superseded RG 179, ASIC stated that ‘investor protection outcomes’ are not relevant to the question of whether an overseas regime is sufficiently equivalent (as the relief applies only to wholesale financial services).

FFSPs which intend to rely on the new foreign AFS licensing regime will also be subject to ASIC’s strengthened powers under the Financial Sector Reform (Hayne Royal Commission Response--Stronger Regulators (2019 Measures)) Act 2020 (Cth), which received Royal Assent on 17 February 2020.  A suite of exposure draft legislation was also subject to recent public consultation by the Treasury, including proposals to significantly increase breach reporting obligations (including obligations to report on other AFS licensees).  Under the new foreign AFS licensing regime, FFSPs are subject to breach reporting requirements.  FFSPs should consider the potential effect of these requirements should this draft legislation be passed into law.

If you are a foreign financial services provider who is currently relying on the sufficient equivalence relief or the limited connection class order relief, or is considering providing financial services in Australia, we would be pleased to assist you in relation to the transition to the new regime.

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