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Global rules on foreign direct investment (FDI)
Cross-border acquisitions and investments increasingly trigger foreign direct investment (FDI) screening requirements.
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Australia | Publication | March 2020
On 10 March 2020, following extensive consultation with industry, the Australian Securities and Investments Commission (ASIC) released its new regulatory framework for foreign financial services providers (FFSPs). These new rules are critically important for foreign firms (including asset managers and funds, brokers, foreign banks and other offshore institutions) undertaking wholesale financial services business into Australia.
The new rules comprise:
The new foreign AFS licence and funds management relief replace ASIC’s previous AFS licensing exemptions for FFSPs. Under the transition arrangements, FFSPs currently relying on the pre-existing sufficient equivalence relief will have a two-year transition period until 31 March 2022 to make arrangements to continue their operations in Australia, which may include applying for a foreign AFS licence. The limited connection relief will continue to be available until 31 March 2022.
FFSPs will be able to apply for a foreign AFS licence from 1 April 2020, however, ASIC has recommended in its updated Regulatory Guide 176 that if an FFSP intends to apply for a foreign AFS licence or a standard AFS licence to continue providing financial services in Australia, it should lodge its licence application as soon as possible following commencement of the new regime to allow ASIC time to process the application.
Further details on the foreign AFS licensing regime and funds management relief are below. However, we note that key aspects of the two regimes and transition arrangements have changed since ASIC’s last round of consultation (see our previous article here).
Key changes since the last round of consultation are:
Of the above changes, a number will be welcomed by industry as a positive development in order to make the new regime and transition arrangement more workable. We commented on some of the issues with the previous rules in our submission on CP 315 (see here).
A more detailed run down on the current position and the new rules is set out below.
ASIC has offered two types of relief from holding an AFS licence to FFSPs who provide financial services to wholesale clients in Australia:
ASIC has implemented a transition period of 24 months (from 1 April 2020 until 31 March 2022) for FFSPs able to rely on the Sufficient Equivalence Relief on 31 March 2020. The Limited Connection Relief has been extended until 31 March 2022. The transition period is designed to enable FFSPs to:
FFSPs won’t be able to apply for the Sufficient Equivalence Relief after 31 March 2020. Eligible FFSPs considering providing services to wholesale clients in Australia should therefore consider applying for the Sufficient Equivalence Relief prior to 31 March 2020.
From 1 April 2020, new FFSPs may apply to obtain a foreign AFS licence to provide financial services in Australia to wholesale clients. To be eligible, the FFSP must be authorised under an overseas regulatory regime that ASIC has assessed as sufficiently equivalent to the Australian regulatory regime.
Foreign AFS licence holders will be exempt from a number of the obligations applying to a standard AFS licence, 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.
A number of conditions will apply to the holder of a foreign AFS licence, 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.
Obligations which will apply in the same way as a standard AFS licence include (but are not limited to) requirements for conflicts arrangements, compliance with applicable financial services laws and having adequate risk management systems. Foreign AFS licence holders will also be subject to supervisory and enforcement provisions such as breach reporting and potential regulator surveillance checks.
A streamlined application process will apply for a foreign AFS licence, compared to a standard AFS licence. The applicant will 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 will 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 AFS licence 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.
Funds management licensing relief will commence on 1 April 2022. The relief is available to FFSPs inducing certain types of Australian professional investors to use the funds management financial services it provides. Under the relief, an AFS licence is not needed for that inducing conduct. ASIC has noted that inducing conduct includes attempts to persuade, influence or encourage a particular person to become a client, for example, mass marketing campaigns.
FFSPs will need to separately consider if they need to hold an AFS licence to actually provide financial services.
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.
Under the proposed relief, a person engages in funds management financial services if they provide:
(a) any of the following financial services to an ‘eligible Australian user’:
(i) dealing in financial products in, or issued by, an offshore fund; or
(ii) providing financial product advice in relation to financial products in, or issued by, an offshore fund; or
(iii) redeeming or buying back financial products in, or issued by, an offshore fund, to the extent that those activities constitute making a market in relation to those financial products; or
(iv) providing a custodial or depository service in relation to the financial products listed in paragraphs (i)–(iii); and
(b) any of the following financial services to an eligible Australian user under an agreement or arrangement with the eligible Australian user to provide portfolio management services to the eligible Australian user:
(i) dealing in financial products; or
(ii) providing financial product advice in relation to financial products; or
(iii) redeeming or buying back financial products in, or issued by, a managed investment scheme, to the extent that those activities constitute making a market in relation to those financial products; or
(iv) providing a custodial or depository service under or in relation to the agreement or arrangement to provide portfolio management services listed in paragraphs (i)–(iii).
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.
The proposed relief limits the provision of funds management financial services to certain eligible Australian users, which is a new concept and is limited to:
(a) a responsible entity of a registered scheme;
(b) a trustee of any of the following: (i) a superannuation fund, within the meaning of the Superannuation Industry (Supervision) Act 1993 (SIS Act), with net assets of atleast A$10 million; (ii) an approved deposit fund, within the meaning of the SIS Act, with net assets of at least A$10 million; (iii) a pooled superannuation trust, within the meaning of the SIS Act, with net assets of at least A$10 million; or (iv) a public sector superannuation fund, within the meaning of the SIS Act, 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); and
(e) an exempt public authority, as defined in s9 of the Corporations Act, other than a local council.
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:
Immediate steps for FFSPs should include undertaking a health check on any existing reliance on the expiring relief and considering if they need to revisit or reorganise their licencing arrangements or operating model. In particular, plans and strategic thinking around making a foreign AFS licence application should not be delayed given potential processing times. Norton Rose Fulbright has participated throughout the consultation process and in actively advising FFSPs on their options. If you would like further information or assistance on how ASIC’s new rules for FFSPs impacts you, please do not hesitate to contact us.
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