Passport relief back from the dead?

In a surprising – but potentially welcome – addition to the 2021-2022 budget, the Federal Government is promising to consult on options to “restore previously well-established regulatory relief for foreign financial service providers”.

What did the Budget say about foreign financial service providers (FFSPs)?

After 5 years of consultation, proposals, repeals and deferrals, the Federal Government appears to be unexpectedly changing course in relation to relief from licensing requirements for foreign financial service providers.

In Budget papers released yesterday, the Federal Government has announced that it “will consult on options to restore previously well-established regulatory relief for FFSPs who are licensed and regulated in jurisdictions with comparable financial services rules and obligations, or have limited connection to Australia, from holding an Australian financial services licence, in order to reduce duplicate regulatory requirements. The relief is limited to FFSPs that deal with wholesale clients and professional investors”.

The Budget is also promising to consult on options to create a “fast-track” licensing process for FFSPs who wish to establish more permanent operations in Australia.

So far, ASIC has not made any comment or announcement in relation to the changes. However, the measures have certainly caught our attention.

How did we get here?

As a refresher, FFSPs must hold an Australian financial services licence (AFSL) in order to provide financial services in Australia, or be able to rely on an exemption. In 2018, ASIC began taking steps to repeal two exemptions available to FFSPs, being:

1. “Sufficient equivalence relief” (colloquially referred to as “passport relief”), which was available to certain FFSPs providing financial services to wholesale clients only, where such FFSPs are regulated by a foreign regime considered by ASIC to be “sufficiently equivalent” to the Australian regime.
2. “Limited connection relief”, being relief available to an FFSP that is not carrying on a business in Australia under the ordinary tests but is deemed to be carrying on a financial services business in Australia only because it is inducing, or intending to induce, a person in Australia to use its financial services, and where such services are provided to wholesale clients only.

In June 2018, ASIC commenced a consultation process proposing to repeal passport relief and limited connection relief on the basis that ASIC had concerns regarding its ability to exercise effective regulatory oversight over entities relying on the relief. In its place, ASIC proposed a new “foreign AFSL” regime, which would require foreign financial service providers to apply to ASIC for a licence in order to provide financial services in Australia and comply with a subset of Australia’s financial services laws, and a new (and very limited) “funds management relief” that would be available to providers of very limited funds management services to eligible Australian clients. Affected providers and the broader industry were justifiably concerned about the onerous duplicated regulatory requirements under the FAFSL regime and the narrow scope of funds management relief, and the impact this may have on the willingness of FFSPs to carry on a financial services business in Australia.

Despite the concerns, passport relief and limited connection relief were both repealed, effective from 31 March 2022.

With 1 April 2022 looming (and noting ASIC’s licence processing times are commonly in excess of 5 months), FFSPs have begun making preparations to obtain a foreign AFSL, determine whether funds management relief is available, or are making the difficult decision to exit the Australian market altogether.

However, the Budget announcement has completely disrupted and confused what this means for FFSPs.

What should you do?

Given this development, we are recommending affected clients get in contact with our Financial Services Regulation lawyers to discuss their options and – if possible – pause any plans to apply for a foreign AFSL and certainly any plans to exit the Australian market, until further information is known.