Treasury releases licence relief options for foreign financial service providers

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Written by Jim Boynton, Damien Richard and Mark McFarlane

Federal Treasury has released exposure draft legislation implementing Australian financial services (AFS) licence relief options for foreign financial service providers (FFSPs). 

The exposure draft Explanatory Memorandum and Bill can be found here.

This release by Treasury is very welcome news.  The outcome provides useful options that would not be available had the Australian Securities and Investments Commission (ASIC) proceeded with its strategy to significantly wind back FFSP exemptions and replace them with a foreign AFS licence regime.

As submissions are only open for a short exposure period ending on 12 January 2022, it might be possible to resolve the current licensing uncertainty faced by FFSPs before the 2022 Federal election.  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.

Which relief options have been selected?

The release of the draft legislation is the outcome of a consultation process.  In July 2021, Treasury released a Consultation Paper setting out a number of licensing relief options for FFSPs and fast-tracking the licensing process for FFSPs.  Our article on the Consultation Paper can be found here.

The exposure draft legislation seeks to introduce:

  • 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 and some additional foreign regimes approved;
  • a professional investor AFS licence exemption, which exempts FFSPs that provide financial services from outside Australia to professional investors. While this option was not specifically included in the Consultation Paper, it was advocated during the consultation process.  The exemption replaces and expands the scope of an existing professional investor exemption, while imposing a range of new conditions; and
  • 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 from the need to provide bankruptcy and police checks for potentially numerous officers of the applicant and its ultimate controller.

Notably, Treasury does not propose to continue the limited connection relief, which is applicable to FFSPs that service wholesale clients and have a limited connection to Australia.  The limited connection relief is currently due to expire on 31 March 2023.

Some notable features of the exemptions are summarised below.

The comparable regulator exemption

The comparable regulator exemption is available to FFSPs that are foreign companies and regulated by a foreign regulator that has been approved as a comparable regulator by the Minister.  It is proposed that initially the approved regulators will be the same as those currently approved under the eligibility criteria for a foreign AFS licence.  The list includes some European regulators, and a Canadian regulator, which are not covered by the expiring Class Order sufficient equivalence AFS licence exemptions.

The draft legislation does not specifically limit the financial services or financial products covered by the exemption.  The FFSP must, however maintain all licences etc necessary to legally provide the financial service in its home jurisdiction.

The requirement to hold a foreign licence, authorisation or registration may represent a challenge for some foreign investment fund structures, where the manager of the fund may be licensed but the fund vehicle itself is not.

Professional investor exemption

Unlike the existing professional investor exemption inserted by the Corporations Regulations, the new professional investor exemption will not be restricted to certain financial services or financial products unless regulations are introduced to do so.

The exemption can apply where:

  • the financial service is provided only to professional investors;
  • the FFSP provides the financial services from a place outside Australia;
  • the FFSP’s head office and principal place of business are located at one or more places outside Australia; and
  • 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 requirements of the exemption relating to location are much clearer than the uncertain phrase “the [FFSP] is not in this jurisdiction” that appears in the current professional investor exemption.  While the exposure Explanatory Memorandum clarifies that the conditions do not prevent appointment of local representatives or making infrequent marketing visits to Australia, the exemption would not cover any financial services provided by such persons in Australia.

Because the exemption only covers financial services provided to professional investors, FFSPs wishing to service broader categories of wholesale clients will need to implement the comparable regulator exemption or another exemption, or apply for an AFS licence.

Other exemption conditions apply

A range of other conditions apply to the comparable regulator exemption and professional investor exemption.  Some conditions are common to both exemptions.  As the conditions are quite significant, an FFSP would need to implement a documented compliance process to meet these conditions.

In order to rely on either exemption, an FFSP must lodge a notification with the ASIC that includes prescribed information.  Other conditions include those relating to assisting ASIC in its functions, and ASIC filing and client notification requirements.

The comparable regulator exemption will include a new conduct obligation.  The FFSP must maintain sufficient oversight over representatives (this would include staff) who provide the financial service and take reasonable steps to ensure that those representatives comply with Australian financial services laws.  An appropriate compliance process is therefore mandatory.

An FFSP that relies on either exemption but does not comply with the exemption conditions may be liable for a civil penalty or other regulatory action by ASIC.

FFSPs should act now

FFSPs that service the Australian market, or wish to do so, should assess if the comparable regulator exemption or professional investor exemption will provide a suitable exemption for their business.  This includes FFSPs that:

  • currently rely on the limited connection relief, which will expire on 31 March 2023 and will not be replaced (no transitional relief is proposed);
  • currently rely on an expiring sufficient equivalence Class Order or individual relief;
  • currently rely on the current professional investor exemption for financial services relating to FX, derivatives or carbon credits, as this will be replaced with the new professional investor exemption and its significant new conditions; or
  • are in the course of applying for, or have been granted, a foreign AFS licence.

The exposure Explanatory Memorandum does not foreshadow any transitional relief for FFSPs currently relying on the professional investor exemption for FX, derivatives or carbon credit services.  This is something we believe needs to be addressed.

Submissions on the exposure draft legislation are due by 12 January 2022.

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