Australia: Major AFS licensing change on horizon for foreign financial services providers

Last Updated: 2 October 2019
Article by Michael Bracken

In brief - From 1 April 2020 a new AFS licensing regime for foreign financial services providers (FFSPs) will be introduced

The new AFS licensing regime is a significant compliance event for financial institutions. It will replace current Class Orders (and other relief instruments) which provide regulatory relief for some FFSPs from the requirement to hold an AFS licence on the basis of:

  • 'Passport' or 'Sufficient Equivalence Relief' - where an FFSP provides financial services to Australian wholesale clients only and is regulated by an overseas regulatory regime that is sufficiently equivalent to the Australian regulatory regime;
  • 'Limited Connection Relief' - which provides an exemption for a FFSP that is 'only engaged in inducing, or intending to induce, a person in Australia to use its financial services'

We previously discussed the proposed changes in one of our recent articles.

Foreign Financial Services Licence

The new FFSP Licensing regime will require a FFSP to meet Australian financial services licensing requirements.

  • ASIC has proposed a special licence category being a Foreign AFS Licence for FFSPs from an assessed home regulatory jurisdiction.
  • Conventional exemptions under the law and licensing also apply, in which case the specific circumstances of the FFSP must be considered.

A Foreign AFS Licence will be a 'modified form' of a standard AFS licence and will provide relief from prescribed provisions in the Corporations Act on the basis that the FFSP is subject to equivalent regulation in its home jurisdiction and the home regulator will monitor and enforce an equivalent obligation in the foreign law.

Accordingly, to be eligible to apply for the new Foreign AFS Licence, the FFSP's home regulatory jurisdiction must be assessed by ASIC as being 'sufficiently equivalent' to Australia's regime. The current recognised jurisdictions for the purposes of the current Class Orders are UK, USA, Singapore, Hong Kong and Germany, as well as for Luxembourg under legislative instrument.

It is proposed that a FFSP which is currently the subject of regulatory relief under the relevant Class Orders for Passport, or Limited Connection relief, will be entitled to a transitional period in which to comply with the new FFSP Licensing regime, being:

  • until 31 March 2022 for passport relief
  • until 30 September 2020 for the limited connection relief

Presumably new FFSP entrants conducting activities onshore after 1 April will be required to hold a Foreign AFS Licence and not be entitled to take advantage of the transitional period.

ASIC Consultation Paper CP 301 indicates that there will be a streamlined process to obtain a Foreign AFS Licence compared to the process involved in applying for a standard full AFS licence.

New obligations for FFSPs under the AFS licensing regime

With the exception of FFSPs providing funds management services on a limited scale basis which is referred to below, the new FFSP Licensing regime will impact on all sectors of the financial services industry in which a FFSP operates including financial product issuers, distributors, advisers and intermediaries and will extend to FFSP onshore activities or a FFSP with clients in Australia or operations connected to Australia such as banks, insurers, brokers, derivative operators, fund and asset/portfolio/investment managers.

FFSPs currently taking advantage of the exemptions under the relevant Class Orders will, under the new FFSP Licensing regime, be subject to a range of Corporations Act requirements which they otherwise have not been previously required to comply.

These requirements are listed in Consultation Paper 301 and include:

  • to have adequate risk management systems
  • to comply with a ASIC direction to provide a statement
  • obligation to notify ASIC of certain matters including breach reporting
  • surveillance checks by ASIC
  • obligations and authorisation of an authorised representative
  • liability of licenses for representatives conduct
  • restrictions on use of terminology
  • banned remuneration
  • prohibition not to engage in unconscionable conduct
  • market misconduct and other prohibited conduct relating to financial services and products

FFSP checklist to prepare for the new regime

FFSPs currently present in Australia or intending to establish a connection in Australia or otherwise providing indirect services, marketing to or soliciting Australian clients will need to consider if they should apply for a Foreign AFS licence.

Some relevant considerations which FFSPs may undertake to assess the impact of and to prepare for the new FFSP Licensing regime are:

(i) For current exempt FFSPs - assess coverage under the current Class Order and whether such status will allow the FFSP to take advantage of the transitional compliance period

(ii) Assess activities and onshore connections to determine if there is a requirement to apply for a foreign AFS licence or a full AFS licence

(iii) Consider future financial services activities in Australia and assess if adequate and compliant arrangements are in place to service wholesale clients going forward

(iv) Consider marketing and sales processes to assess whether the FFSP will be captured under the new Foreign AFS Licensing regime and if so, how the FFSP will be regulated and what compliance modifications need to be undertaken

(v) Review and vetting marketing, product and disclosure documentation for compliance with the Foreign AFS licence regime including warnings and disclaimers

(vi) Review risk management systems and compliance processes to ensure structures are compliant with the new Foreign AFS licence requirements

(vii) Plan in advance to provide sufficient time to prepare for, restructure arrangements and obtain a foreign or full AFS licence

(viii) Start now. This represents a substantial change in the regulation of FFSP (foreign financial institutions).

Special licensing relief for limited scale funds management services

ASIC has released a separate consultation paper proposing licensing relief for FFSPs of funds management services in Australia to professional investors.

Under the proposed relief instrument, a FFSP will be exempt from the requirement to hold an AFS licence to provide services to professional investors in Australia subject to a cap on the scale of activities that may be undertaken in Australia and conditions that apply to the operation of the relief.

It is contemplated that notwithstanding the repeal of 'limited connection' licensing relief, FFSPs may still access the proposed new funds management relief and the licensing exemptions in the Corporations Act 2001 and Corporations Regulations 2001.

However:

  • ASIC decided against giving relief for a 'reverse solicitation' situation where an Australian professional client initiates an inquiry or request to a foreign service provider operating outside Australia; and
  • currently it appears that the proposed relief instrument will not extend to 'custodial or depository services'

The scope of the proposed relief instrument for limited scale funds management services is dealt with in a separate article which deals with ASIC Consultation Paper 315.

Australian FFSP

The information available from ASIC does not address whether equivalent regimes will be available for Australian financial services licensee providing services in a foreign jurisdiction. This is at the discretion of the foreign jurisdiction. Noting that the Asia Region Funds Passport does provide this for responsible entities under the passporting arrangements.

Michael Bracken
Banking and Financial Services Regulatory and Financial Services
Colin Biggers & Paisley

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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