Further revised Treasury proposals for Foreign Financial Services Providers

Treasury has released revised draft legislation for Australian financial services (AFS) licence relief options for foreign financial service providers (FFSPs). The exposure draft Explanatory Memorandum and Bill can be found here.

The announcement by Treasury is a welcome development. This indicates the possible end of a period of regulatory uncertainty for FFSPs already providing, or considering providing, financial services in Australia. ASIC has also announced that the current transitional relief arrangements for FFSPs relying on the existing sufficient equivalence relief and limited connection relief have been extended until 31 March 2025.

The revised draft legislation is based on Schedule 1 to the Treasury Laws Amendment (Streamlining and Improving Economic Outcomes for Australians) Bill 2022, which was introduced in February 2022 but lapsed in April 2022 (2022 FFSP Bill). Our Alert on the exposure draft of that Bill can be found here. Treasury has made a number of targeted changes in the revised draft legislation.

Treasury is seeking stakeholder feedback on the revised draft legislation. The exposure period ends on 8 September 2023. Once the exposure period ends and any changes are made, the proposed legislation will be introduced into Parliament and may be passed with or without amendment.

What has changed under the revised draft legislation?

The key changes made to the 2022 FFSP Bill in the revised draft legislation are:

1. Certain financial products excluded from the professional investor exemption. An FFSP cannot rely on the professional investor exemption to trade in prescribed financial products that are able to be traded on prescribed licensed markets.
2. New market maker exemption. The revised draft legislation proposes a new exemption for FFSPs that make a market for derivatives that are able to be traded on prescribed licensed markets.
3. Additional condition for FFSPs relying on exemption to provide services efficiently, honestly and fairly. An FFSP relying on any of the exemptions proposed by the revised draft legislation must comply with the obligation to do all things necessary to ensure financial services are provided efficiently, honestly and fairly in relation to Australian financial products and markets.

What relief options are provided by the revised draft legislation?

The objective of the revised draft legislation is to replace the existing licensing relief for FFSPs with a clear and comprehensive licensing exemption regime for FFSPs. The revised draft legislation achieves this by amending the Corporations Act 2001 (Cth) to provide four exemptions for FFSPs.

The revised draft legislation seeks to introduce:

1. a comparable regulator AFS licence exemption, which exempts FFSPs authorised to provide financial services in a comparable regime when providing financial services to wholesale clients. This option is based on the previous “sufficient equivalence” Class Order exemptions, with modified conditions;
2. a professional investor AFS licence exemption, which exempts FFSPs that provide financial services from outside Australia to professional investors. The exemption replaces and expands the scope of an existing professional investor exemption, while imposing a range of new conditions;
3. a market marker AFS licence exemption, which exempts FFSPs that make a market for derivatives that are able to be traded on prescribed licensed markets. This is a new exemption that was not proposed by the 2022 FFSP Bill; and
4. an exemption from the fit and proper person assessment, to fast track the licensing process for FFSPs authorised to provide financial services in a comparable regulatory regime. This should make the foreign AFS licence application process much more workable, dispensing with the need to provide bankruptcy and police checks for potentially numerous officers of the applicant and its ultimate controller.

As was the case with the 2022 FFSP Bill, the Treasury does not propose to continue the limited connection relief. The limited connection relief allows FFSPs to service wholesale clients in Australia where the FFSP is deemed to be carrying on a financial services business in Australia due to the expanded test in section 911D. This relief will expire on 31 March 2025. ASIC will continue the limited connection relief in a much narrower form with ASIC Corporations (Foreign Financial Services Providers—Funds Management Financial Services) Instrument 2020/199) which is now expected to commence on 1 April 2025.

A closer look at the revised draft legislation

Notable features of these exemptions, and the changes made from the 2022 FFSP Bill are outlined below.

The comparable regulator exemption

The comparable regulator exemption is available to FFSPs regulated by a foreign regulator that has been approved as a comparable regulator by the Minister.

The comparable regulator exemption has not changed from its expression in the 2022 FFSP Bill. Importantly, the revised draft legislation does not limit the financial services or financial products covered by the comparable regulator exemption. The FFSP must maintain all licences, authorisations or registrations necessary to provide the same, or substantially the same, financial services in the relevant comparable jurisdiction. The financial services must be provided from the comparable jurisdiction or Australia.

The exposure draft Explanatory Memorandum anticipates that the regulators which have already been assessed by ASIC as having comparable regulatory regimes will be taken to be comparable regulators for the purposes of the first legislation instrument made by the Minister for the purposes of this exemption. The exposure draft Explanatory Memorandum lists the following foreign regulators that are expected to be deemed comparable regulators:

• US Securities and Exchange Commission (US SEC);
• US Federal Reserve and Office of the Comptroller of the Currency (OCC);
• US Commodity Futures Trading Commission (US CFTC);
• Monetary Authority of Singapore (Singapore MAS);
• Hong Kong Securities and Futures Commission (Hong Kong SFC);
• Bundesanstalt für Finanzdienstleistungsaufsicht of Germany (German BaFin);
• Luxembourg Commission de Surveillance du Secteur Financier (CSSF);
• UK Financial Conduct Authority or Prudential Regulatory Authority (UK FCA or PRA);
• Danish Financial Supervisory Authority (Danish FSA);
• Finansinspektionen (Swedish FI);
• Autorité des Marches Financiers of France (French AMF);
• Autorité de contrôle prudentiel et de resolution of France (French ACPR); and
• Ontario Securities Commission (Ontario OSC).

The professional investor exemption

The existing professional investor exemption inserted by the Corporations Regulations 2001 (Cth) is proposed to be replaced by a new professional investor exemption that is wider than the existing exemption, which only applies to financial services in relation to derivatives, foreign exchange contracts, carbon units, Australian carbon credit units or eligible international emissions units.

An FFSP will be able to rely on the professional investor exemption where.

1. the financial service is provided only to professional investors;
2. the financial service does not involve dealing in certain financial products tradeable on certain licensed markets;
3. the financial services are provided from outside Australia unless they are provided during limited marketing visits to Australia;
4. the FFSP’s head office and principal place of business are located at one or more places outside Australia; and
5. the FFSP reasonably believes that providing the financial service does not contravene any law applying in the places where its head office and principal place of business are located, or the place from which the financial service is provided.

In the revised draft legislation, the professional investor exemption does not allow the FFSP to deal in certain financial products that are able to be traded on certain licensed markets. These excluded financial products and licensed markets will be prescribed by the regulations. The draft exposure Explanatory Memorandum foreshadows that these will be largely equity market products.

Importantly, the revised draft legislation has carried over provisions allowing a representative of an FFSP to make marketing visits to Australia, subject to certain limits, without causing the FFSP to be ineligible to rely on the professional investor exemption.

The market maker exemption

The revised draft legislation proposes a new licensing exemption for FFSPs from any jurisdiction covering making a market for derivatives that are able to be traded on a prescribed licensed market.

An FFSP will be able to rely on the new market maker exemption where:

1. the financial service involves making a market for derivatives that are able to be traded on a prescribed licensed market;
2. the financial services are provided from outside Australia;
3. the FFSP’s head office and principal place of business are located at one or more places outside Australia; and
4. the FFSP reasonably believes that providing the financial service does not contravene any law applying in the places where its head office and principal place of business are located, or the place from which the financial service is provided.

The exemption from the fit and proper person assessment

The exemption from the fit and proper person assessment has not changed from its expression in the 2022 FFSP Bill.

New exemption conditions will apply

The revised draft legislation proposes the same conditions that were proposed to apply to the comparable regulator exemption and the professional investor exemption in the 2022 FFSP Bill. The revised draft legislation proposes to apply these to the new market maker exemption. These conditions are set out in Table 1 below.

By way of recap, those conditions that are now proposed by the revised draft legislation to apply to the comparable regulator exemption, the professional investor exemption and the market maker exemption include:

• the FFSP notifying ASIC of its reliance on the relevant exemption;
• the FFSP complying with ASIC directions to provide ASIC information about the financial services provided by the FFSP; and
• the FFSP notifying ASIC of changes to the FFSPs contact details.

1. Client notification requirements
   FFSPs who rely on the comparable regulator exemption, or the professional investor exemption will also be required to comply with client notification requirements.
   
   
2. Efficiently, honestly and fairly
   The revised draft legislation includes a new condition for FFSPs relying on any of the three licensing exemptions to do all things necessary to ensure their financial services are provided efficiently, honestly and fairly in relation to Australian financial products and markets.
   
   
3. Conduct obligations
   Further, there are specific conduct obligations that will apply to FFSPs relying on the comparable regulator exemptions. These include appointing a local agent in Australia, maintaining adequate oversight over representatives who provide the financial services and ensuring that those
   representatives are adequately trained and competent to provide the financial services.

Some of the conditions are quite significant, particularly the newly included efficient, honest and fair obligation and the additional conduct obligations that will apply to FFSPs relying on the comparable regulator exemption. An FFSP would need to implement a documented compliance process to meet these conditions, particularly to ensure that the FFSP is able to notify ASIC of any breach of conditions within the required timeframe.

Contravention of any of the conditions may cause ASIC to cancel the FFSP’s reliance on any of the three licensing exemptions or cause the FFSP to be liable for a civil penalty or other regulatory action by ASIC.

Table 1: Summary of conditions applying to FFSP licensing exemptions

Next steps for FFSPs

FFSPs that provide financial services in Australia, or wish to do so, should consider how the revised draft legislation will impact their current licensing arrangements.

FFSPs that may be at high risk of being impacted include:

1. FFSPs relying on the limited connection relief, as this relief will not be available after it expires on 31 March 2025 and the revised draft legislation does not provide any transitional or grandfathering relief (however these FFSPs should consider whether they may rely on the ASIC Corporations (Foreign Financial Services Providers—Funds Management Financial Services) Instrument 2020/199);
2. FFSPs relying on an expiring sufficient equivalence Class Order, or individual relief granted on similar terms, expiring on 31 March 2025, as these FFSPs may need to transition to either the new comparable regulator exemption or to the new professional investor exemption;
3. FFSPs relying on the existing professional investor exemption for financial services relating to derivatives, foreign exchange contracts, carbon units, Australian carbon credit units or eligible international emissions units, as these FFSPs may need to transition to the new professional investor exemption and comply with the new conditions; and
4. FFSPs who are in the course of applying for, or have been granted, a foreign AFS licence.

As was the case with the 2022 FFSP Bill, the revised draft legislation does not indicate that transitional or grandfathering relief will be available, particularly in respect of FFSPs relying on the limited connection relief or the current professional investor exemption to provide financial services in respect of FX contracts, derivatives or carbon credit services.

Stakeholders can provide feedback to Treasury on the revised draft legislation until 8 September 2023.