Changes ahead for foreign financial services providers

August 2019

The funds industry is currently awaiting the green light on ASIC's proposed changes to the regulation of foreign financial services providers (FFSPs) wishing to provide financial services in Australia.

Introduction

In the February 2019 edition of Fundamental, we wrote about ASIC extending licensing relief for FFSPs. ASIC released an update to its proposed changes in Consultation Paper 315: Foreign financial services providers, and we are now awaiting the outcome of the consultation process and the implementation of the proposed changes.

ASIC has stated it intends to—

  • extend and then repeal the existing "limited connection" and "sufficient equivalent" relief (current relief) which is currently relied on by FFSPs to provide limited financial services in Australia without an AFSL
  • introduce a new foreign AFS licensing regime for FFSPs
  • introduce new AFS licensing relief for FFSPs.

ASIC also proposes to update Regulatory Guide 176 Foreign financial services providers to reflect the proposed changes.

Here, senior associate Elliott Stumm and lawyer Sandhya Susindar highlight the key dates and changes proposed by ASIC..

Key dates 

If ASIC's proposed changes are implemented, the following are the key dates you need to be aware of:

  • 30 September 2019 – current relief extended until 31 March 2020
  • 1 April 2020—
    • New foreign AFS licensing regime and new "funds management financial services" relief for FFSPs commences
    • Transitional period for the current relief commences
  • 30 September 2020 – "limited connection" relief transitional period ends
  • 31 March 2022 – "sufficient equivalence" relief transitional period ends

Changes to current relief

The current relief is due to expire on 30 September 2019. ASIC intends to extend the life of the current relief to 31 March 2020. FFSPs relying on the current relief will then have a transitional period to adjust to the new regime, as follows:

  • Sufficient equivalence relief—Two-year transitional period (from 1 April 2020 to 31 March 2022).
  • Limited connection relief—Six-month transitional period (from 1 April 2020 to 30 September 2020).

A person will only be able to rely on the current relief during the relevant transitional period if the person provided financial services relying on the relief immediately prior to 1 April 2020.

New foreign AFS licensing regime

ASIC is proceeding with a new foreign AFS licensing regime for FFSPs that currently rely on the sufficient equivalence relief.

The new foreign AFS licensing regime is a modified form of the standard AFSL regime, and those licensees will be exempt from specified provisions of the Corporations Act on the basis they are subject to—

  • sufficiently equivalent overseas regulatory requirements, and
  • supervision and, where required, enforcement action by an overseas regulatory authority.

For example, foreign AFS licensees will be exempt from the obligation to have adequate resources, maintain the competence to provide financial services, and to ensure its representatives are appropriately trained.

Otherwise, a foreign AFS licensee will have the same obligations as a standard AFS licensee, such as the obligation to have systems and processes in place to ensure compliance with the relevant obligations.

To be eligible to apply for a foreign AFSL, an FFSP must be authorised in a specified overseas regulatory regime and also authorised to provide substantially the same financial services as those sought to be provided in Australia under the foreign AFSL.

The following table summarises the "sufficiently equivalent jurisdictions" and the relevant regulator for these purposes:

Sufficiently equivalent jurisdiction

Regulator

Germany Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin)
Hong Kong Securities and Futures Commission
Luxembourg Commission de Surveillance du Secteur Financier
United Kingdom Financial Conduct Authority
Singapore Monetary Authority of Singapore
United States Securities Exchange Commission
Federal Reserve
Office of the Comptroller of Currency
Commodity Futures Trading Commission

Applicants for a foreign AFSL will be able to apply using a "streamlined" application process. Before commencing an application for a foreign AFSL, the applicant will need to ensure they are eligible to apply for a foreign AFSL and are registered as a foreign company under the Corporations Act (if required to do so).

A foreign AFSL will be subject to the standard AFSL conditions imposed on all AFS licensees, as well as conditions requiring the holder to notify ASIC in writing of the details of certain matters.

New "funds management financial services" relief

ASIC intends to introduce new "funds management financial services relief" commencing 1 April 2020. The relief will replace the old "limited connection" relief and will enable a foreign company to provide funds management financial services in Australia without holding an AFSL.

The exemption from the need to hold an AFSL will only be available where the foreign company is carrying on a financial services business in Australia by virtue of engaging in conduct intended (or likely) to induce people in Australia to use the financial services they provide. The relief will not be available to a foreign company registered under the

Corporations Act. Generally, a foreign company will need to be registered if it carries on a business in Australia, including where it is deemed to be carrying on a business, such as by having a place of business in Australia.

For the purposes of the relief, the provision of any of the following services by a person constitutes the provision of a "funds management financial service":

  • Any of the following financial services to 'professional investors' in Australia:
    • Dealing in interests in, or securities issued by, an offshore fund (such as managed investment schemes or companies established or operated outside of Australia).
    • Providing financial product advice in relation to interests in, or securities issued by, an offshore fund.
    • Making a market in relation to interests in, or securities issued by, an offshore fund.
    A professional investor is a defined sub-category of "wholesale client" that includes AFS licensees, listed entities, and persons who control at least $10 million, among other things.
  • Portfolio management services, being the management of assets located outside of Australia, in respect of certain 'eligible Australian users' (such as operators of a managed investment scheme that has net assets of at least $10 million).

If a foreign company wishes to rely on the relief, the company must apply to ASIC and demonstrate it meets the eligibility criteria. It is proposed one of the criteria will be a cap on the scale of activities conducted by the FFSP. That is, less than 10 percent of its gross revenue (or consolidated gross revenue) can be derived from the provision of funds management financial services.

Those having the benefit of the new relief will also be subject to a number of conditions, including the following:

  • The FFSP must appoint a local agent who is authorised to accept, on the FFSP's behalf, service of process and notices.
  • The FFSP must enter into a deed submitting to the non-exclusive jurisdiction of the Australian courts in relation to action by ASIC and other Australian government entities, and lodge it with ASIC.
  • The FFSP must maintain adequate proof of its compliance with the 10 percent revenue cap.
  • The FFSP must provide reasonable assistance to ASIC during surveillance checks.

Next steps

We will keep you up to date with the next steps and implementation of the new regime.