Foreign licensing exemption regime released

2 minute read + PDF download  24.01.2022 Richard Batten

Discussion and overview of the proposed new regime for Foreign Financial Service Providers

Over the Christmas break, the Government completed a short consultation on its plans for the new regime for Foreign Financial Service Providers (FFSPs) in the form of the Exposure Draft legislation.  Submissions closed on 12 January 2022. 

A brief discussion of the proposed reforms is below.  

Exposure draft legislation: Relief for FFSPs

The Government proposes to:

  • Incorporate the current 'sufficient equivalence' relief into the Corporations Act 
  • Expand the list of foreign regimes which are treated as comparable to the Australian regime
  • Replace the 'limited connection’ relief with an extended professional investor exemption but require FFSPs to notify ASIC before relying on it, and
  • Waive the fit and proper requirements for foreign companies applying for an Australian financial services licence.

Overall, the Government’s proposals are welcome, particularly the retention of the sufficient equivalence regime, now to be call the ‘comparable regulator’ exemption. 

However, narrowing the ‘limited connection’ relief and requiring prior notification is unfortunate and not consistent approaches taken in other jurisdictions.

Comparable regulator exemption

The new exemption is similar to the sufficient equivalence relief – it provides relief for FFSPs that provide financial services to wholesale clients.  However, in a welcome change, the exemption will apply to all types of regulated financial services and products provided to wholesale clients, unless excluded by regulation.  At this stage, there is no indication whether any such exclusions will be made.

The exemption will apply to regulators approved by the Government (and not ASIC as is currently the case).  It is expected that that the following regulators will be approved initially:

  • US: SEC, OCC, CFTC
  • UK: FCA, PRA
  • Singapore: MAS
  • HK: SFC
  • Germany: BaFin
  • France: AMF, ACPR
  • Luxembourg: CSSF
  • Denmark: FSA
  • Sweden: FI
  • Ontario: OSC

The FFSP will be required to:

  • Notify ASIC that it is relying on the exemption.  However, that notice will be able to be given within 15 business days after the FFSP first starts to provide the financial service under the exemption.
  • Have and maintain all authorisations, registrations or licences necessary to provide the same financial services in its home jurisdiction.  

FFSPs relying on the sufficient equivalence relief currently will need to notify ASIC of reliance on the new comparable regulator exemption within 15 business days after the new regime commences.  As this will be the day after the legislation receives Royal Assent, we cannot say when the new regime will commence or when therefore this notice will be required.

Professional investor exemption

The Government has proposed to introduce a new professional investor exemption which will apply to any type of financial service or product (the current exemption is limited to derivatives and foreign exchange contracts), subject to any exclusions made by regulation. 

However, unlike the current professional investor exemption and the limited connection relief (which the new exemption will replace), FFSPs must notify ASIC within 15 business days after first relying on the exemption.

The new exemption will only be available where:

  • the FFSP provides the financial service from outside Australia
  • the FFSP’s head office and principal place of business is outside Australia, and
  • the FFSP reasonably believes that providing the financial service does not contravene any laws in its relevant home jurisdiction. 

This is intended to mean that the FFSP can have local representatives and can make infrequent marketing visits to Australia.  However, it is important to note that the financial services must still be provided from outside Australia which will limit the nature of activities that can be undertaken in Australia.

As ‘professional investors’ are a sub-set of wholesale clients, the exemption will not be available in all circumstances where the limited connection relief is currently available.  This will not have any real impact where the FFSP is targeting institutional clients.  However, it will affect those with smaller clients.  They will either need to obtain a licence or rely on the comparable regulator exemption or another licensing exemption.

Other requirements

FFSPs that rely on the professional investor or comparable regulator exemption will need to comply with some other requirements as well:

  • Notify clients and prospective clients that the FFSP is operating under a licensing exemption
  • Notify ASIC of certain changes of details
  • Submit to the jurisdiction of Australian courts 
  • Comply with reasonable requests for assistance and information requests from ASIC
  • If a FFSP fails to comply with any relevant requirements, ASIC may cancel their ability to rely on the exemption or impose additional conditions such as: 
    • strengthening disclosure obligations to investors, or 
    • requiring the FFSP to provide regular reports (e.g. quarterly) to ASIC on the financial services provided under the exemption. 

FFSPs relying on the comparable regulator exemption must also:

  • Notify ASIC of significant enforcement action or investigations or any disciplinary action taken outside Australia
  • Have an agent in Australia
  • Maintain sufficient oversight of representatives.

Fit and proper exemption

FFSPs who decide to apply for a wholesale licence will be exempt from the relatively new and difficult fit and proper person requirements where regulated by an approved comparable regulator (see above).

The purpose of the exemption is to fast-track the licensing process and reduce the administrative burden for persons that hold a relevant authorisation, registration or licence from a comparable regulator and applies to applications made on or after the commencement of the Bill. 

Unfortunately the exemption will not apply to subsidiaries of foreign companies which will significantly limit its usefulness.

[Source: Treasury Consultation]

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https://www.minterellison.com/articles/exposure-draft-legislation-foreign-licensing-exemption-regime