04 July 2019

New Australian licensing regime and more limited exemptions for foreign financial service providers

This article was written by Jim Boynton and Damien Richard.

The Australian financial services (AFS) licensing exemptions for foreign financial service providers (FFSPs) have been radically narrowed by the Australian Securities and Investments Commission (ASIC).  Banks, asset managers, brokers, financial product issuers, distributors and advisers and other FFSPs with clients or businesses in Australia should consider their future activities.  They should determine whether they wish to apply for a foreign AFS licence, full AFS licence, can rely on other exemptions or should cease servicing the Australian wholesale market.

On 3 July ASIC released a new consultation paper 315 (CP 315).

Passport and limited connection relief will cease

The new regime will replace the current sufficient equivalence or ‘passport’ exemptions, and the limited connection relief, which expire on 30 September 2019 but are now proposed to be extended to 31 March 2020.  It is also proposed that there will be further transitional periods for the passport relief until 31 March 2022 and for the limited connection relief until 30 September 2020. 

Our earlier alert contains more detail on those exemptions before they were extended to 30 September 2019 and on the proposed new foreign AFS licence. 

Foreign AFS licence

Draft updated Regulatory Guide 176 contains more information about foreign AFS licences.  It proposes a streamlined application process compared to an application for a standard licence.  Applications will need to provide some but not all of the standard licensing proofs.

It is not clear when an FFSP must have implemented a passport exemption in order to be eligible for the further 2 year transition period expiring on 31 March 2022.

Proposed new AFS licence exemption for limited scale funds management services

ASIC is consulting on a new AFS licensing exemption.  It proposes to exempt an FFSP from the requirement to hold an AFS licence to provide ‘funds management financial services’ in Australia, subject to a cap on the scale of those services and conditions that apply to the operation of the relief.  The cap is proposed to be based on no more than 10% of annual aggregated consolidated revenue being generated from the provision of funds management financial services in Australia.

A person engages in a ‘funds management financial service’ if they provide:

  • any of the following financial services to a professional investor in Australia, directed at offering foreign funds:
    • dealing in interests of a managed investment scheme established outside Australia (scheme) or securities of a body that carries on a business of investment that is not incorporated in Australia (body);
    • providing financial product advice in relation to the interests or securities of the scheme or body; and/or
    • making a market in relation to the interests or securities of the scheme or body; and
  • portfolio management services to a limited category of professional investors.

ASIC currently proposes that the foreign funds exemption will not cover “custodial or depository services”.  We think this is a deficiency in the proposals that should be addressed in submissions to ASIC.

ASIC has indicated it may reconsider its decision to not grant relief based on reverse solicitation, however adequate submissions will be required.

What should FFSPs do?

Take a stocktake of each entity that has or intends to have an Australian connection.  This not only includes marketing entities but also booking entities and investment funds with any Australian clients.

  • Identify what financial services it provides in relation to what financial products
  • Identify which exemption(s) currently apply and if it will be able to rely on transitional relief
  • Determine whether the entity should apply for a foreign AFS licence or a full AFS licence, can rely on other exemptions or should cease servicing the Australian wholesale market
  • Allow sufficient time to obtain a foreign or full AFS licence
  • Review all rules of the road and other business rules and training materials
  • Review all disclaimers in offer documents, marketing and other materials

FFSPs should also consider making submissions to ASIC on CP 315, either directly or through an adviser or industry association.  Submissions are due by 9 August 2019.

We have been active in making submissions on the proposals up to this point and will continue to be so.  We would be delighted to assist you in making submissions or assessing how the proposals will impact your business.

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