18/03/2020

Following its consultation in July 2019, the Australian Securities and Investments Commission (ASIC) has unveiled its highly anticipated regulatory framework for foreign financial services providers (FFSPs). The introduction of the announced foreign Australian financial services licence (FAFSL) regime and funds management relief replaces the existing passport relief and limited connection relief for FFSPs and is likely to impact the funds landscape in Australia.


  FAFSL regime

Under ASIC Corporations (Foreign Financial Services Providers – Foreign AFS Licensees) Instrument 2020/198 (FAFSL Instrument), FFSPs regulated overseas by specified sufficiently equivalent regulatory regimes are eligible to apply for a FAFSL to provide certain financial services to wholesale clients in Australia.

The FAFSL regime has expanded the list of sufficiently equivalent regulatory regimes under passport relief to include regulators in Denmark, Sweden, France and Ontario in Canada. ASIC has stated that it is willing to consider applications to extend the FAFSL regime to cover other overseas regulatory regimes.

Eligibility

The FAFSL Instrument sets out the following regulatory regimes as being sufficiently equivalent and lists certain financial services and/or products covered by a FAFSL as applicable to entities regulated under each regime.

Country

Regulatory regime

Certain financial services in respect of certain financial products

Denmark

Danish Financial Supervisory Authority

–    Financial services: providing financial advice, dealing, making a market or providing a custodial or depository service

–    Financial products: derivatives; foreign exchange contracts; securities; debentures, stock or bonds issued by or proposed to be issued by a government; managed investment products; or interests in a managed investment scheme that is not required to be registered

France

Autorité des marchés financiers of France

–    Financial services: providing financial advice and dealing

–    Financial products: securities; managed investment products; or interests in a managed investment scheme that is not required to be registered

Autorité de contrôle prudentiel et de resolution of France

–    Financial services: providing financial advice, dealing, making a market or providing a custodial or depository service

–    Financial products: eligible deposit products; derivatives; foreign exchange contracts; securities; debentures, stocks or bonds issued or proposed to be issued by a government; managed investment products; interests in a managed investment scheme that is not required to be registered; or facilities through which a person makes non-cash payments

Germany

Bundesanstalt für Finanzdienstleistungsaufsicht

–    Financial services: providing financial advice, making a market or providing a custodial or depository service

–    Financial products: derivatives; foreign exchange contracts; securities; debentures, stocks or bonds issued or proposed to be issued by a government; managed investment products; interests in a managed investment scheme that is not required to be registered; deposit-taking facilities that are not deposit products (if the FFSP holds a German Banking Licence); or facilities through which a person makes non-cash payments (if the FFSP holds a German Banking Licence)

Hong Kong

Securities and Futures Commission

–    Financial services: providing financial advice, dealing or making a market

–    Financial products: derivatives; foreign exchange contracts; securities; debentures, stocks or bonds issued or proposed to be issued by a government; managed investment products; or interests in a managed investment scheme that is not required to be registered

Luxembourg

Commission de Surveillance du Secteur Financier

–    Financial services: providing financial advice, dealing, making a market or providing a custodial or depository service

–    Financial products: eligible deposit products; derivatives; foreign exchange contracts; securities; debentures, stocks or bonds issued or proposed to be issued by a government; managed investment products; interests in a managed investment scheme that is not required to be registered; or facilities through which a person makes non-cash payments (if the FFSP is a credit institution)

Ontario, Canada

Ontario Securities Commission

–    Financial services: providing financial advice and dealing

–    Financial products: derivatives; foreign exchange contracts; securities; debentures, stocks or bonds issued by or proposed to be issued by a government; managed investment products; or interests in a managed investment scheme that is not required to be registered

Singapore

Monetary Authority of Singapore

–    Financial services: providing financial advice, dealing, making a market or providing a custodial or depository service

–    Financial products: derivatives; foreign exchange contracts; securities; debentures, stocks or bonds issued or proposed to be issued by a government; managed investment products; or interests in a managed investment scheme that is not required to be registered

Sweden

Finansinspektionen

–    Financial services: providing financial advice, dealing, making a market or providing a custodial or depository service

–    Financial products: eligible deposit products; derivatives; foreign exchange contracts; securities; debentures, stocks or bonds issued by or proposed to be issued by a government; managed investment products; or interests in a managed investment scheme that is not required to be registered

United Kingdom

Financial Conduct Authority

–    Financial services: providing financial advice, dealing, making a market or providing a custodial or depository service

–    Financial products: eligible deposit products; derivatives; foreign exchange contracts; securities; debentures, stocks or bonds issued or proposed to be issued by a government; managed investment products; or interests in a managed investment scheme that is not required to be registered

United States (US)

Commodity Futures Trading Commission

–    Financial services: providing financial advice, making a market or providing a custodial or depository service

–    Financial products: derivatives; foreign exchange contracts; managed investment products; or interests in a managed investment scheme that is not required to be registered

The Federal Reserve and the Office of the Comptroller of the Currency

–    Financial services: providing financial advice, dealing, making a market or providing a custodial or depository service

–    Financial products: any deposit-taking facility, including a deposit product; derivatives; foreign exchange contracts; securities; facilities for making non-cash payments; debentures, stocks or bonds issued or proposed to be issued by a government; managed investment products; or interests in a managed investment scheme that is not required to be registered

US Securities and Exchange Commission

–    Financial services: providing financial advice, dealing, making a market or providing a custodial or depository service

–    Financial products: derivatives; foreign exchange contracts; securities; debentures, stocks or bonds issued or proposed to be issued by a government; managed investment products; or interests in a managed investment scheme that is not required to be registered

Application process

ASIC has noted the application process has been designed to be more streamlined than the AFSL application process on the basis that eligible FFSPs are authorised under a sufficiently equivalent overseas regulatory regime.

FFSPs must submit ‘proof’ documents as part of the FAFSL application, the type of which is dependent on the complexity of the financial services and products applies for and ASIC’s analysis of the FFSP’s business and market it will operate in. ASIC has indicated that its online application form will identify the proofs required as part of the FAFSL application but that generally, applicants will not be required to submit proofs that relate to provisions of the Corporations Act 2001 (Cth) (Corporations Act) that do not apply to FAFSL holders.

It appears that the regulatory intention is for the FAFSL application process to be less onerous than the AFSL application process however, in contrast to the previous passport relief, the process is clearly assessment based rather than being a notification of reliance.

FAFSL holder obligations

FAFSL holders will be subject to similar obligations as AFSL holders, including the obligation to provide financial services efficiently, honestly and fairly. FAFSL holders will also be subject to ASIC’s standard supervisory and enforcement powers and the pro forma AFSL conditions.

(a) FAFSL holders exempt from certain obligations

ASIC considers FAFSL holders to be subject to sufficiently equivalent overseas regulatory requirements and as a result, FAFSL holders will be exempt from the following provisions of the Corporations Act applicable to AFSL holders:

  • obligations about notifying ASIC of events that may cause a material adverse change to financial position and maintaining records of training for representatives;
  • obligation to have adequate resources;
  • maintaining the competence to provide the financial services;
  • ensuring that representatives are appropriately trained;
  • meeting minimum standards for custodial or depository service providers;
  • having agreements with sub-custodians to hold custodial property;
  • having adequate financial resources for custodial or depository service providers;
  • obligations about handling client money and client property in certain circumstances;
  • obligations of licensees in relation to dealings with non-licensees when financial product transactions are entered into or arranged outside Australia;
  • dealings involving employees of licensees where the FAFSL holder is only carrying on a financial services business in Australia because it carries on the business of providing eligible financial services under the FAFSL Instrument; and
  • obligations about dealing with money received for a financial product before the product is issued in certain circumstances.

(b) Additional obligations

FAFSL holders will need to comply with the following additional conditions that do not apply to AFSL holders:

  • carry on a business in the relevant foreign jurisdiction;
  • have an agent appointed at the time of relying on the FAFSL Instrument and not fail to have an agent for any consecutive period of 10 business days to the extent the FAFSL holder is not a company;
  • reasonably believe that the FAFSL holder will not contravene any laws of its home jurisdiction relating to the provision of financial services if it were to provide the wholesale financial service in its home jurisdiction; and
  • notify ASIC, as soon as practicable and in any event within 15 business days after it becomes aware or should reasonably have become aware, of the details of:
    • each significant change to, including the termination of, the FAFSL holder’s relevant registration or authorisation in its home jurisdiction;
    • each significant exemption or other relief that the FAFSL holder obtains from the regulatory requirements in its home jurisdiction; and
    • each significant investigation, enforcement or disciplinary action undertaken by any overseas regulatory authority against the FAFSL holder in a foreign jurisdiction in relation to financial services provided by the FAFSL holder in that jurisdiction.

Funds management relief

Overview

Under the ASIC Corporations (Foreign Financial Services Providers—Funds Management Financial Services) Instrument 2020/199 (Funds Management Relief Instrument), eligible FFSPs will not be required to hold an AFSL if the FFSP is carrying on a financial services business by engaging in ‘inducing’ conduct while providing certain funds management financial services to certain Australian investors. Conduct that amounts to inducing includes attempts to persuade, influence or encourage a particular person to become a client. FFSPs that are carrying on a financial services business other than because of inducing conduct will not be eligible to rely on the Funds Management Relief Instrument.

ASIC’s consultation proposed introducing a condition that FFSPs could only rely on funds management relief if less than 10% of annual aggregated consolidated gross revenue of corporate group entities was generated from providing funds management services in Australia. In the Funds Management Relief Instrument, ASIC has not imposed this revenue cap.

Services that may be provided under funds management relief

For the purposes of the Funds Management Relief Instrument, funds management financial services are provided when a person engages in the following financial services to an eligible Australian user:

  • dealing in financial products in, or issued by, an offshore fund;
  • providing financial product advice in relation to financial products in, or issued by, an offshore fund;
  • 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
  • providing a custodial or depository service in relation to the financial products listed in (a)–(c) above.

Funds management financial services are provided when a person engages in 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:

  • dealing in financial products; or
  • providing financial product advice in relation to financial products; or
  • 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
  • providing a custodial or depository service under or in relation to the agreement or arrangement to provide portfolio management services listed in paragraphs (e)–(g).

Eligible Australian users are as follows:

  • a responsible entity of a registered scheme;
  • a trustee of any of a superannuation fund, approved deposit fund, pooled superannuation fund or public sector superannuation fund (all as defined under the Superannuation Industry (Supervision) Act 1993 (SIS Act)) with net assets of at least A$10 million;
  • a trustee of a wholesale trust who holds an AFSL or is exempt under the ASIC Corporations (Wholesale Equity Scheme Trustees) Instrument 2017/849;
  • a body regulated by APRA other than a trustee referred to in paragraphs (j) and (k) above; and
  • an exempt public authority, being a public authority or instrumentality or agency of the Crown in right of the Commonwealth, in right of a state or in right of a territory, that is a body corporate incorporated in Australia or an external territory (excluding a local council).

ASIC has stated that it is willing to consider applications to extend the scope of Australian investors to whom FFSPs wish to induct. Such applications will be assessed on a case-by-case basis.

Notification process

FFSPs seeking to rely on funds management relief will be required to provide ASIC with written confirmation of the following:

  • that the FFSP intends to rely on the relief for the provision of funds management financial services to eligible Australian users;
  • the FFSP identifies its home jurisdiction and confirms it would not contravene any laws of its home jurisdiction relating to the provision of financial services if the FFSP were to provide those funds management financial services in its home jurisdiction;
  • there is an overseas regulator of the FFSP in its home jurisdiction and that overseas regulator is a signatory to the International Organisation of Securities Commissions Multilateral Memorandum of Understanding;
  • on the written request of ASIC or the home regulator, the FFSP will give or vary written consent and take all other practicable steps to enable and assist the disclosure of information between ASIC and the home regulator;
  • the FFSP will comply with a written notice issued by ASIC directing the FFSP to give to ASIC a written statement containing specific information on the financial services provided by the FFSP in Australia;
  • the FFSP will give such assistance to ASIC as ASIC reasonably requests in relation to whether the FFSP is complying with the financial services laws, and in relation to the performance of ASIC’s other functions; and
  • the FFSP has an agent for service appointed and includes the name and address of the agent for service that is current as at the day the written confirmation is given.

The documentation required is generally not more onerous that under the previous passport relief regime and has fewer requirements than what ASIC initially proposed in its consultation.

FFSPs seeking to rely on funds management relief must not fail to have an agent for service for any consecutive period of 10 business days and must not have a place of business in Australia.

Reverse solicitation

ASIC confirms its position that it will not give licensing relief to FFSPs providing financial services to Australian professional investors where the investor made the initial application or inquiry for financial services from the FFSP (ie, reverse solicitation). We note there are existing statutory exemptions for reverse solicitation that continue. The availability of this exemption is dependent on whether the FFSP is deemed to have engaged in conduct that is intended to induce people in Australia to use financial services provided by the FFSP or is likely to have had that effect.

Next steps

FFSPs currently relying on passport relief may continue relying on passport relief until 31 March 2022. ASIC has indicated that these entities are eligible to apply for a FAFSL. Entities wishing to apply for a FAFSL may do so from 1 April 2020.

FFSPs currently relying on limited connection relief may continue relying on such relief until 31 March 2022. Funds management licensing relief will commence on 1 April 2022.

For FFSPs, the options going forward are to consider their activities in Australia and decide whether to apply for an AFSL or FAFSL, cease carrying on a financial services business in Australia or rely on another exemption from the requirement to be licensed (whether by relying on funds management relief or otherwise). Please be in touch should you wish to discuss.

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