ASIC consults on new regime for foreign financial services providers

WHO SHOULD READ THIS

• Foreign financial service providers (FFSPs) who provide financial services to wholesale clients in Australia.

THINGS YOU NEED TO KNOW

• ASIC has released Consultation Paper 301 (CP 301) which provides an update on the results of ASIC’s comprehensive review of the current relief and exemptions granted to FFSPs from the requirement to hold an Australian financial services licence (AFSL) when providing financial services to wholesale clients in Australia.
• ASIC is proposing to extend the sunset date for the current FFSP relief and exemptions from 27 September 2018 to 30 September 2019, and then transition over a 12 month period to a modified AFSL regime commencing 1 October 2020.

WHAT YOU NEED TO DO

• If you are currently relying on a current FFSP exemption or relief to carry on a financial service business in Australia we recommend that you keep monitoring ASIC’s progress with its proposed new modified AFSL regime.

Background

Currently ASIC grants two types of relief to FFSPs that provide financial services to wholesale clients in Australia:

• (sufficient equivalence relief) relief granted to foreign entities who are governed by overseas regulation which achieve similar regulatory outcomes as the Australian regulatory requirements that apply to financial services providers in Australia. ASIC currently provides class relief to foreign FFSPs regulated by certain US, UK, Singapore, Hong Kong, Luxembourg and German regulators, with individual relief considered by ASIC for those FFSPs regulated in Denmark, Sweden, France and Brazil, and
• (limited connection relief) ASIC exempts FFSPs from the requirement to hold an AFSL when the FFSPs only connection to Australia is the inducement or likely inducement of wholesale clients in Australia to use its financial services.

Both the sufficient equivalence relief and the limited connection relief are due to sunset on 27 September 2018.

ASIC’s new regime proposals

ASIC has stated that the comprehensive review of the relief and exemptions granted to FFSPs have identified supervisory and regulatory concerns that suggest that the current regime is no longer appropriate to regulate these wholesale financial service providers in Australia. ASIC now proposes to:

• extend the sufficient equivalent relief and limited connection relief for a further 12 months, until 30 September 2019, to allow time for industry to engage with the proposals in CP 301, and
• implement a modified AFSL regime for FFSPs, with a further extended time frame to 30 September 2020 for these FFSPs to comply with the requirements of the modified AFSL regime.

Foreign AFSL regime requirements

CP 301 proposes a modified AFSL regime for FFSPs which, if implemented, would commence on 1 October 2020 (with applications accepted by ASIC from 1 October 2019). The modified AFSL regime would:

• require that certain general obligations under section 912A of the Corporations Act 2001 (Cth) (Corporations Act) would apply. These include to:
  • do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly
  • have adequate arrangements in place for managing conflicts of interests
  • comply with the conditions of the licence
  • comply with Australian financial services laws (as modified), and
  • take reasonable steps to ensure that representatives comply with Australian financial services law and have in place adequate risk management systems.
• exempt the FFSPs from certain provisions of the Corporations Act and the Corporations Regulations 2001 (Cth) where ASIC considers that the overseas regulatory regime achieves similar regulatory outcomes to the Corporations Act
• apply the same ASIC Pro Forma 209 AFSL conditions to the FFSPs which apply to AFSLs for wholesale clients, as well as additional conditions including in relation to appointment of representatives, notification of changes to home jurisdictions licence and notification of significant enforcement action disciplinary action and/or investigation by any overseas regulatory authority, and
• require the FFSP applicant to provide core and supporting proof documents to support their foreign AFSL application.

ASIC has advised the rationale behind the proposed modified AFSL regime is:

• to provide ASIC with a fuller range of supervisory and enforcement tools to address misconduct by FFSPs
• because many of the fundamental conduct obligations exist in the FFSP’s home jurisdiction and compliance would therefore easily translate to the activities of the FFSP in Australia, and
• to ensure that the foreign AFSL achieves an appropriate balance between cross-border investment facilitation, market integrity and investor protection in Australia.

How McCullough Robertson can assist

All FFSPs relying on the current relief and exemptions should assess whether they wish to remain operating in the Australian market and therefore look to transition to the proposed modified AFSL regime by 1 October 2020. We can assist with this assessment.

We will continue to monitor ASIC’s consultation process and the ultimate proposals and implementation of those proposals by ASIC, including by providing updated alerts on the new legislative instruments due to be released by ASIC in September 2019.

This publication covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. It is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.