ASIC finalizes new rules for foreign financial service providers

Introduction

On March 10, 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:

• a new foreign Australian financial services (AFS) licensing regime for FFSPs; and
• an exemption from AFS licensing for providers of funds management financial services to certain types of professional investors (funds management relief).

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 March 31, 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 March 31, 2022.

FFSPs will be able to apply for a foreign AFS licence from April 1, 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 set out 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 to the new rules

Key changes since the last round of consultation are:

• the limited connection relief has been extended until March 31, 2022;
• the start date for the funds management relief has been extended until April 1, 2022;
• the foreign AFS licence regime has been extended to other sufficiently equivalent jurisdictions, namely to certain FFSPs in Denmark, Sweden, France and Ontario in Canada;
• the revenue cap for the funds management relief has been removed;
• the requirement to enter into a deed for the funds management relief has been removed;
• changes to what comprised funds management financial services, and to whom they can be provided under the funds management relief; and
• FFSPs wanting to rely on the funds management relief will be required to confirm that the provision of the financial services in Australia would not contravene any laws of the FFSPs home jurisdiction, if those services were to be provided in the FFSPs home jurisdiction.

Of the above changes, a number will be welcomed by industry as positive developments 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.

Current relief available to FFSPs

ASIC has offered two types of relief from holding an Australian financial services licence (AFSL) to FFSPs who provide financial services to wholesale clients in Australia:

• ‘sufficient equivalence relief’, provided under various class orders for certain FFSPs regulated by an overseas regulatory regime deemed sufficiently equivalent to Australia’s regulatory regime (Sufficient Equivalence Relief), which currently includes the United Kingdom, the United States of America, Hong Kong, Singapore, Germany and Luxembourg; and
• ‘limited connection relief’ for an FFSP deemed to be carrying on a financial services business in Australia only because it induces persons in Australia to use its financial services (Limited Connection Relief).

Transition periods

ASIC has implemented a transition period of 24 months (from April 1, 2020 until March 31, 2022) for FFSPs able to rely on the Sufficient Equivalence Relief on March 31, 2020. The Limited Connection Relief has been extended until March 31, 2022. The transition period is designed to enable FFSPs to:

• apply for a foreign AFSL;
• apply for a standard AFSL;
• cease carrying on a financial services business in Australia; or
• limit their services in Australia so they are exempt from the requirement to hold an AFSL.

FFSPs won’t be able to apply for the Sufficient Equivalence Relief after March 31, 2022. Eligible FFSPs considering providing services to wholesale clients in Australia should therefore consider applying for the Sufficient Equivalence Relief prior to March 31, 2020.

04 Foreign AFS licensing regime

From April 1, 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 AFSL holders will 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 that they are subject to sufficiently equivalent overseas regulatory requirements.

A number of conditions will 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 licencee.

Obligations which will 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 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 AFSL, compared to a standard AFSL. 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 authorization in the home jurisdiction.

This is a significantly more streamlined process than a standard AFSL application, which requires documentation supporting the organizational competence of the applicant, as well as financial information. ASIC may ask for additional proof documentation throughout the application process.

Funds management licensing relief

Funds management licensing relief will commence on April 1, 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, a 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.

Separately, FFSPs will need to consider whether 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.

Funds management financial services

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.

Eligible Australian users

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 at least A$10m ; (ii) an approved deposit fund, within the meaning of the SIS Act, with net assets of at least A$10m; (iii) a pooled superannuation trust, within the meaning of the SIS Act, with net assets of at least A$10m; or (iv) a public sector superannuation fund, within the meaning of the SIS Act, with net assets of at least A$10m;

(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.

Conditions on the funds management relief

Similar to the Sufficient Equivalence Relief, FFSPs that seek to rely on this new relief will need to:

• have a local agent; and
• provide written consent to the disclosure by the relevant overseas regulator to ASIC, and by ASIC to the overseas regulator, of any information in relation to the FFSP.

In addition, FFSPs will also be required to:

• not have a place of business in Australia;
• notify ASIC that they intend to rely on the relief;
• comply with directions from ASIC to provide information and reasonable assistance during surveillance checks; and
• confirm that the provision of financial services would not contravene any laws of the FFSPs home jurisdiction, if those services were to be provided in the relevant home jurisdiction.

Next steps and what FFSPs need to do now

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 reorganize their licensing 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.