Australia: Will I need an AFS Licence to deal in Regulated Emissions Units? Updated draft legislation and new ASIC regulatory guide released


As readers may be aware from previous Norton Rose Australia alerts, it was proposed that "Australian carbon credit units" and "eligible international emissions units" be deemed as "financial products" under the Corporations Act 2001 (Cth) (Corporations Act). This was in line with the government's aim to "provide a strong regulatory regime to reduce the risk of market manipulation and misconduct" in relation to such carbon products.

On 22 November 2011, Treasury issued 'exposure draft' legislation (Previous Draft) that proposed to modify the application of the financial services regulatory regime under the Corporations Act to the above carbon products. The draft changes reflected the government's original undertaking to effect "appropriate amendments to the regime to fit the characteristics of units and avoid unnecessary compliance costs...". View our previous update - Will I need an AFS Licence to deal in Carbon Products? Exposure draft legislation released .

In February 2012, Treasury released an updated version of the Previous Draft (Updated Regulations). The Updated Regulations are based on the Previous Draft however there are some key differences, including the proposal to also regulate "carbon units" (the units issued by the government under the Carbon Pricing Mechanism) and clarification on the transitional arrangements. For the purposes of this article "Australian carbon credit units", "eligible international emissions units" and "carbon units" are together known as Regulated Emissions Units.

The Updated Regulations seek to apply existing aspects of the financial services regulatory regime under the Corporations Act to certain activities involving Regulated Emissions Units. In particular, the proposed characterisation of Regulated Emissions Units as "financial products" means that firms and intermediaries that are involved in transactions involving these products would need to assess whether such transactions would trigger the need for an Australian financial services licence (AFS Licence).

In March 2012 ASIC released ASIC Regulatory Guide 236: Do I need an AFS licence to participate in carbon markets (RG 236) which provides guidance on the AFS licensing issues regarding Regulated Emissions Units.

This alert provides an outline of some of the key changes proposed under the Updated Regulations (although several of these changes were already contained in the Previous Draft) and briefly examines the need for an AFS licence in relation to dealings in Regulated Emissions Units.

Activities requiring a license

Generally, a firm that undertakes any of the following activities (among others) in relation to financial products may be regarded as carrying on a financial services business and potentially require an AFS Licence:

  • Providing financial product advice
  • Dealing in a financial product
  • Providing a custodial or depository service
  • Making a market
  • Operating a registered managed investment scheme

Financial product advice?

However, communications about a Regulated Emissions Unit which consists only of factual information or advice of a technical nature about carbon offset projects (as opposed to emissions units emanating from the project) will generally not be regarded as financial product advice (although firms would need to ensure it is not presented in a manner that may reasonably be regarded as suggesting or implying a recommendation relating to a Regulated Emissions Unit).

Dealing in a financial product?

'Arranging' for a person to acquire or dispose of Regulated Emissions Units could constitute "dealing" and may require an AFS Licence.

Also, a person that acquires or disposes of Regulated Emissions Units may also need to hold an AFS Licence. An exemption would be available however if the person deals in Regulated Emissions Units 'on their own behalf' (whether directly or through an agent).

The Updated Regulations propose to supplement the 'on own behalf' exemption by introducing an exemption in respect of dealings in Regulated Emissions Units entered into on a person's own behalf or on behalf of a related body corporate or associate of the person in circumstances where the dealing is for the purpose of managing financial risk in relation to the surrender, cancellation or relinquishment of Regulated Emissions Units provided the person does not deal in Regulated Emissions Units as the principal purpose of the person's business (Hedging Exemption). The Hedging Exemption would not apply if the person is also involved in the making of a market in Regulated Emissions Units.

The existing "on own behalf" exemption and the proposed Hedging Exemption should enable many firms looking to deal in Regulated Emissions Units for compliance purposes to do so without needing an AFS Licence.

Separately, investment funds set up to invest in Regulated Emissions Units would need to be operated by a firm that holds an AFS Licence.

Making a market?

A person who "makes a market" in Regulated Emissions Units may also be regulated and require an AFS Licence. A person would make a market if they regularly state the price at which they propose to acquire or dispose of Regulated Emissions Units and other persons have a reasonable expectation that they will be able to regularly effect transactions at the stated prices.

Custodial service?

A person would require an AFS Licence in order to provide a custodial or depository service in respect of Regulated Emissions Units. This would arise if the person holds Regulated Emissions Units on trust for or on behalf of another person. There are limited scenarios that could fall within one of the carve outs provided by the Corporations Act as not constituting the provision of a custodial or depository service, including:

  • provision of such services to a related body corporate or associate of the provider, or
  • the provider and its associates have no more than 20 clients in aggregate for all such services they provide.

Operating a registered managed investment scheme?

Examples of arrangements in the carbon markets that may constitute managed investment schemes include:

  • schemes that pool investor money to trade Regulated Emissions Units and other emissions units for the purposes of providing returns to investors that may be in the form of money or in kind, and
  • schemes that pool Regulated Emissions Units or other emissions units contributed by investors for the purpose of providing returns to investors from the eventual sale of the Regulated Emissions Units and/or units.

Certain managed investment schemes will also need to be registered with ASIC.

Specific exemption for carbon units

Under the Updated Regulations, there is a specific dealing exemption for carbon units only. Briefly, a person is not taken to be dealing in a financial product:

  • where the product is a carbon unit
  • the service is dealing on behalf of a related body corporate or an associated entity, and
  • that related body corporate or associated entity is an entity that is a liable entity entered in the information database under section 183 of the Clean Energy Act 2011.

Exemption for foreign persons dealing with Australian persons

Overseas based firms looking to deal in Regulated Emissions Units with Australian clients need to also consider whether their activities require an AFS Licence. The Updated Regulations extend an existing exemption from the AFS licence requirement in the Corporations Act which is generally available to a person who is not in Australia and who provides certain financial services to a "professional investor" in Australia. The financial services (which only cover dealing in, providing advice or making a market) cover derivatives and foreign exchange contracts. Under the Updated Regulations, this exemption now extends to Regulated Emissions Units. The exemption would also apply to dealings in derivatives over Regulated Emissions Units.

Other implications

Characterisation as a financial product will have other implications that need to be considered by firms that deal in Regulated Emissions Units. We have not sought to address these in any detail, however briefly, these include:

  • the anti-hawking provisions, which restrict unsolicited calls or meetings with 'retail clients' in relation to dealings in Regulated Emissions Units
  • rules governing the handling of client monies ahead of the transfer of Regulated Emissions Units
  • rules aimed at preventing market misconduct, including insider trading and misleading or deceptive statements
  • compliance with anti money laundering requirements, and
  • disclosure requirements eg in respect of advertising, in particular, if distributed to 'retail clients'.

Also, firms that provide financial product advice to 'retail clients' will be subject to various disclosure and other compliance obligations of the kind that apply to financial planners. The Updated Regulations however seek to modify the disclosure obligations to replace the need for a product disclosure statement (issued in respect of typical managed funds) with a more tailored disclosure statement.

Effective date

There is some legislative inconsistency in the implementation of the new measures. In our view, although "Australian carbon credit units" and "eligible international emissions units" are currently regarded as regulated 'financial products' under the Corporations Act, the Updated Regulations should operate to regulate such products from 1 July 2012 and firms will effectively have until 1 July 2012 to have the right AFS licence.

Although ASIC may require some time to amend its licensing systems to cover Regulated Emissions Units, firms should commence any application for an AFS Licence (or licence variation) to specifically cover Regulated Emissions Units. ASIC will accept applications from May 2012.

Norton Rose Australia delivers the Advanced Diploma in Financial Licensing Management course offered by the Australian Financial Markets Association. Norton Rose Australia can assist with advice on the application of the new regime to firms that look to undertake transactions involving Regulated Emissions Units, and if necessary, assist with an application for an AFS Licence.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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