The Treasury has released its consultation paper on options to restore regulatory relief for foreign financial services providers (FFSPs) as well as options to create a fast track licensing process for FFSPs.
FFSPs: A brief background
Under the old regime, FFSPs could rely on one of the two following exemptions from the requirement to hold an Australian financial services licence (AFSL) to provide financial services in Australia:
- “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.
- “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.
Since 2018, ASIC has taken steps to repeal the exemptions above, instead introducing a “foreign AFSL” regime, requiring FFSPs apply to ASIC for a licence 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.
The response from FFSPs has been varied, with much consideration undertaken as to the appropriate steps to begin or continue providing financial services in Australia (which, in some cases, has included a view to stepping back from the Australian market).
Under the extended transitional arrangements, FFSPs already relying on passport relief can continue to do so, and FFSPs entering the market may be able to rely on limited connection relief, tailored relief, a foreign AFSL or AFSL depending on the proposed scope of activities. Funds management relief is not available until 6 April 2023.
Options - regulatory regime for FFSPs
In its consultation, the Treasury emphasises the benefits of FFSPs providing Australian investors with access to global investment opportunities and overseas markets, and attracting reciprocal investment and liquidity into Australia.
The Treasury has proposed the following three options to regulate FFSPs entering Australia, hoping to reduce duplicate regulation and barriers to entering the Australian market.
Option 1A – undo the repeal of passport relief and limited connection relief
This option restores the previous passport relief and limited connection relief. As a reminder, passport relief is only available to FFSPs regulated in the United Kingdom, United States, Hong Kong, Singapore, Germany and Luxembourg.
This option would remove the foreign AFSL and funds management relief regimes (and it is not known from the consultation paper what would happen to FFSPs already relying on a foreign AFSL or in the process of applying for a foreign AFSL).
Option 1B – replace limited connection relief with funds management relief
This option restores the previous passport relief but replaces limited connection relief with funds management relief. Funds management relief requires notification be made to ASIC while limited connection relief does not have any associated notification or application.
This option provides relief to certain FFSPs providing certain financial services to wholesale clients in Australia (as defined under the Corporations Act 2001 (Cth)), so long as the FFSP is licensed to provide those services in its home jurisdiction. The relief captures FFSPs that would be eligible to rely on the foreign AFSL regime but pares back the application requirement to a notification to ASIC requirement.
Only FFSPs regulated by the authorities in the following jurisdictions would be permitted to rely on this relief:
- Denmark (regulated by the Danish Financial Supervisory Authority);
- France (regulated by the Autorité des marchés financiers of France or the Autorité de contrôle prudentiel et de resolution of France);
- Germany (regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin);
- Hong Kong (regulated by the Securities and Futures Commission);
- Luxembourg (regulated by the Commission de Surveillance du Secteur Financier);
- Canada (regulated by the Ontario Securities Commission);
- Singapore (regulated by the Monetary Authority of Singapore);
- Sweden (regulated by the Finansinspektionen);
- United Kingdom (regulated by the Financial Conduct Authority);
- United States (regulated by the Commodity Futures Trading Commission, the Federal Reserve and the Office of the Comptroller of the Currency or the US Securities Exchange Commission).
This is the broadest proposed option for relief and would grant FFSPs regulated in certain jurisdictions the ability to provide all financial services to wholesale clients. The relevant jurisdictions are the same as those set out above under Option 2.
The Treasury has proposed attached possible conditions to Options 2 or 3 including:
- notification or application requirements;
- consent to information sharing between ASIC and the FFSP’s home jurisdiction regulator;
- certain undertakings by the FFSP
- notifying ASIC when the FFSP is relying on the relief or ceases to use the relief;
- limitations on dealing with unauthorised or unlicensed entities;
- complying with auditing and reporting requirements;
- complying with some Australian financial services laws, like ensuring that financial services are provided efficiently, honestly and fairly, complying with client money requirements and training requirements for representatives, and having adequate conflict of interest arrangements and risk management systems in place;
- local agent requirement;
- providing periodical information to ASIC on the FFSP’s business activities, clients, constitution or other articles of association, investment strategy, financial statements, assets under management and liquidity; and
- breach reporting obligations.
The Treasury has also proposed empowering ASIC to restrict a FFSP from relying on relief where the FFSP is not fit to provide financial services to Australian clients or where a provider is using relief in a manner not intended.
Options - fast track licensing for FFSPs
The Treasury recognises that FFSP entry into Australia diversifies investment opportunities for Australian clients and facilitating this entry may encourage high-yield international business and the relocation of talent to Australia. As a result, the Treasury is consulting on the following three proposed options for fast tracking AFSL applications for FFSPs that are considering stepping more fully into the Australian regulatory framework. Via these options, the Treasury hopes to reduce timelines for assessments and administrative burden, with a view to increasing FFSP engagement in Australia.
This option would empower ASIC to determine at its discretion whether a fit and proper person test is required for every relevant fit and proper person. ASIC may also rely on similar assessments by other regulators rather than be required by law to form their own assessment.
This option would retain the existing licensing arrangements but recognises, as part of the licensing process, that some jurisdictions do not require fit and proper assessments or impose different requirements for FFSPs providing financial services to Australian wholesale clients.
This option appears similar to the foreign AFSL regime in that it is proposed that a modified licensing regime apply to FFSPs who are regulated by an overseas regulatory authority that is a signatory to the IOSCO multilateral memorandum of understanding and provide financial services to wholesale clients in Australia.
It is intended that FFSPs relying on the modified licensing regime be exempt from some licensing application requirements and obligations of AFSL holders on the basis that it would be duplicative for such FFSPs to comply. However this option is conditional and may include requirements in relation to needing a local agent, carrying on a business and notification requirements (similar to the conditions already imposed on foreign AFSL applicants and holders).
The proposal is broader than the foreign AFSL regime in which FFSPs are eligible to apply.
This option would grant an AFSL to FFSPs that provide appropriate evidence to demonstrate that the FFSP:
- is regulated by an overseas regulatory authority that is an IOSCO board member;
- holds an existing licence and is specifically authorised to provide the financial services intended to be provided in Australia; and
- will just provide financial services to wholesale clients in Australia.
FFSPs would be subject to all obligations that apply to a holder of a standard AFSL and be subject to the following conditions:
- the FFSP must carry on a business in the relevant foreign jurisdiction;
- unless the FFSP is a body corporate, it must have an agent appointed at the time it purports to rely on the relief and not fail to have an agent for any consecutive period of 10 business days;
- the FFSP must reasonably believe that it would 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;
- the FFSP must notify ASIC, as soon as practicable and in any event within 15 business days after it becomes aware or should reasonably have become aware, and in such form if any as ASIC may from time to time specify in writing, of the details of:
- each significant change to, including the termination of, the FFSP’s relevant registration or authorisation in the FFSP’s home jurisdiction;
- each significant exemption or other relief that the FFSP 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 FFSP in a foreign jurisdiction in relation to financial services provided by the FFSP in that jurisdiction.
While this option reduces the application burden for FFSPs, it does not reduce the compliance burden (given such FFSPs must comply with all obligations relevant to AFSL holders).
The Treasury has set out a number of consultation questions for discussion in connection with the options for the FFSP regulatory regime and fast track licensing.
If you would like to discuss the options, preparing a submission to the Treasury or what your next steps should be as a FFSP looking to enter the Australian market, please contact our Financial Services Regulatory team.