The proposed new regime for foreign financial services providers dealing with Australian wholesale clients

Introduction

In July 2019, the Australian Securities and Investments Commission (ASIC) released its updated proposals for the licensing relief available to foreign financial services providers (FFSPs) servicing wholesale clients in Australia, with the release of Consultation Paper 315 (CP 315).

The consultation period for these proposals has closed and industry is now awaiting the finalization of the new regime pending the upcoming expiry of existing exemptions on March 31, 2020 and the proposed implementation of transition periods for those exemptions for existing users. This update reflects the proposals under CP 315.

In summary, ASIC has:

• Now extended the expiry of the sufficient equivalence relief and limited connection relief until March 31, 2020, with a transition period proposed to apply following the repeal of the relief.
• Proposed to implement the previously proposed foreign licensing regime.
• Proposed to introduce new funds management relief.

Current relief available to FFSPs

ASIC previously provided two types of relief to FFSPs providing financial services to wholesale clients in Australia from holding an Australian financial services licence (AFSL):

• 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, Hong Kong, Singapore, Germany and Luxembourg.
• Limited connection relief, for a 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 proposed a transition period of 24 months (from April 1, 2020 until March 31, 2022) for FFSPs relying on the Sufficient Equivalence Relief as at March 31, 2020. The transition period is designed to enable such FFSPs to:

• Apply for a foreign AFSL.
• Apply for a standard AFSL.
• Cease carrying on a financial services business in Australia.
• Limit their services in Australia so they are exempt from the requirement to hold an AFSL.

ASIC has proposed a transition period of 6 months until September 30, 2020 for FFSPs relying on the Limited Connection Relief as at March 31, 2020.

Foreign AFSL

ASIC proposes to repeal the Sufficient Equivalence Relief and implement a foreign AFSL regime for eligible FFSPs authorized in a sufficiently equivalent overseas regime. This would include the jurisdictions currently covered by the Sufficient Equivalence Relief. It is expected that the foreign AFSL regime will apply from April 1, 2020.

A number of conditions would 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 authorization in the home jurisdiction as well as any significant investigation, enforcement or disciplinary action undertaken by the overseas regulatory authority against the licensee.

Applying for a foreign AFSL

A streamlined application process is proposed for a foreign AFSL, compared to a standard AFSL. The applicant would need to lodge supporting documentation (known as ‘proofs’) including an overview of the applicant’s financial services business and an organization chart as well as relevant criminal history and bankruptcy checks for its responsible officers. ASIC would 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.

On-going obligations of a foreign AFSL

Foreign AFSL holders would 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 they are subject to sufficiently equivalent overseas regulatory requirements.

Obligations which would 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 would also be subject to supervisory and enforcement provisions such as breach reporting and potential regulator surveillance checks.

Proposed new funds management relief

Under CP 315, ASIC proposed a new ‘funds management financial services’ relief instrument, in response to concerns about the impact of the repeal of the Limited Connection Relief on the offer of offshore funds and portfolio management services to Australian clients.

In its current form, the new relief will be available to foreign companies that provide ‘funds management financial services’ to professional investors in Australia, subject to:

• A cap on the scale of the activities provided in Australia.
• Certain conditions being complied with prior to the relief being relied on and on an ongoing basis.

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 which may pose challenges.

Funds management financial services

Under the proposed relief, a person engages in ‘funds management financial services’ if they provide:

• Any of the following financialservices to a professional investor in Australia:

• Dealing in interests of a managed investment scheme (MIS) in, or securities issued by, an offshore fund.
• Providing financial product advice in relation to those interests in, or securities of, the offshore fund.
• Making a market in relation to the offshore fund. 
• Portfolio management services’ (being management of assets located outside Australia) to ‘eligible Australian users.’

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. Further, at least 50 percent of the offshore fund (by value of assets that are not cash or cash equivalents) must be located outside of Australia and the offshore fund cannot be a resident for Australian tax purposes.

In addition, the scope of advice that would be able to be provided in relation to the offshore fund would be limited, as the current drafting does not permit advice in relation to the underlying investments of the offshore fund.

A ‘professional investor’ is a subset of the existing ‘wholesale client’. This limitation of the possible investor base is consistent with other exemptions in relation to derivative and foreign exchange contracts. Broadly, ‘professional investors’ include:

• A financial services licensee.
• A trustee of a super fund, an approved deposit fund, a pooled superannuation trust or a public sector super scheme within the meaning of the Superannuation Industry (Supervision) Act 1993 (Cth) where the fund, scheme or trust has net assets of at least A$10 million.
• A listed entity or related body corporate of a listed entity.
• An exempt public authority.
• A person that has or controls gross assets of at least A$10 million, including any assets held by an associate or under a trust that the person manages.

The proposed relief limits the provision of ‘portfolio management services’ to certain ‘eligible Australian users,’ which is a new concept and is limited to:

• An Australian trustee of certain superannuation funds with net assets of at least A$10 million.
• A person in Australia that operates an MIS with net assets of at least A$10 million.
• A life company operated in Australia.
• An exempt public authority.

Importantly, the above restriction may significantly restrict (or eliminate) sub-investment management delegations to FFSPs, as only the operators of these vehicles may appoint FFSPs under the proposed relief.

Cap on scale of activities

As noted above, ASIC has proposed a cap on the scale of activities that may be provided under the funds management relief. A FFSP will only be able to rely on the relief if less than 10 percent of its annual aggregated consolidated gross revenue (including the aggregated consolidated gross revenue of entities within the FFSP’s corporate group) is generated from the provision of the funds management financial services in Australia. There are also proposed conditions in relation to the documentation and monitoring of this cap.

The purpose of the cap is to ensure that a FFSP does not provide a substantial part of its business activities in reliance on this relief. ASIC sets out alternative forms of this cap, including a cap on the number of clients in Australia (it suggests three clients would be appropriate) or implementing service-specific caps, for example, for FFSPs providing advice, less than 10 percent of its gross revenue may be derived from the provision of advice to investors in Australia.

ASIC states it would expect FFSPs that are close to exceeding the proposed cap to consider whether it needs to apply for and hold an AFSL or reduce its activities so that it can maintain the benefit of the relief. The practical implications of how a FFSP would reduce its activities or revenue derived from Australia will need to be considered in light of the final form of this cap.

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.
• Enter into a deed submitting to the non-exclusive jurisdiction of the Australia courts with respect to action by ASIC and other Australian government entities.
• 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 be registered as a foreign company (and therefore must not be carrying on a business in Australia).
• Notify ASIC that it intends to rely on the relief and the types of services it intends to provide in Australia.
• Comply with directions from ASIC to provide information and reasonable assistance during surveillance checks.
• Comply with the proposed cap on the scale of services.

Next steps

It is hoped that the details of the new regime will be finalized in early 2020, given the current proposed expiry date for the Sufficient Equivalence Relief and Limited Connection Relief.

Eligible FFSPs considering providing services to wholesale clients in Australia should consider applying for the Sufficient Equivalence Relief prior to March 31, 2020.

FFSPs relying on the Sufficient Equivalence Relief or Limited Connection Relief should be considering the effects of the proposed new regime on the way they service Australian wholesale clients going forward and engage early once the new regime is finalized to take advantage of the proposed transition periods.