ASIC has finally released its proposals in relation to current exemptions for foreign financial service providers (FFSPs). Unfortunately, ASIC proposes to repeal the existing exemptions and to require FFSPs to obtain a ‘foreign AFS licence’ instead. This licence would only be available to FFSPs who provide services to wholesale clients and who are regulated by a foreign regulatory regime which ASIC has determined is equivalent to Australian regulation. Foreign regulators previously assessed by ASIC do not need to be reassessed, e.g. the US SEC, the UK FCA, the Singapore MAS and the HK SFC.
ASIC’s proposals can be found in Consultation Paper 301 Foreign financial services providers (CP 301). A copy is attached to this alert.
ASIC proposes the following transitional arrangements for implementing the new regime:
- from 27 September 2018 to 30 September 2019, ASIC will extend the existing FFSP class order relief
- from 30 September 2019 to 30 September 2020, ASIC will implement a transitional period during which FFSPs can apply for a foreign AFS licence, and
- from 1 October 2020, the foreign AFS licensing regime will begin.
CP 301 sets out ASIC's proposal to:
Proposed foreign AFS licence regime
Under the proposal for the new regime, a foreign AFS licensee would:
- be required to apply for a foreign AFS licence and provide similar documentation in support of their licence application as that required for an ordinary AFS licence;
- need to comply with the certain general obligations under s912A of the Corporations Act (such as to provide financial services 'efficiently, honestly and fairly', have adequate systems for managing risk and conflicts of interest, comply with financial services laws and take reasonable steps to ensure representatives comply with financial services laws);
- not need to comply with other general obligations in s912A of the Corporations Act (such as having adequate resources, maintaining competence and ensuring representatives are trained) – there are strong suggestions that financial requirements will not apply, however this is not clear;
- be exempt from the application of particular provisions of Chapter 7 of the Corporations Act and the Corporations Regulations, which are the principal laws in Australia regulating the provision of financial services and providers of those service. However the exemption will apply only where ASIC considers that the overseas regulatory requirements achieve similar regulatory outcomes to the Australian requirements – it is not clear how this will be assessed;
- conditionally exempt foreign AFS licensees from complying with the Australian client money requirements in Pt 7.8 of the Corporations Act, provided the client money under the overseas regulatory regime apply to client money paid to, and client property held by, the foreign AFS licensee from a wholesale client in Australia relating to the exempt financial service; and
- be subject to certain tailored requirements including: restriction on appointing representatives – only related companies and group employees, directors will be able to appointed; and
- continuing existing requirements to notify ASIC of significant changes to the FFSP’s foreign authorisation, significant exemptions and significant enforcement action, etc.
There are suggestions that a foreign AFS licence holder would not necessarily need to be a registered foreign company in Australia. However, CP 301 does not address this specifically or the fact that a company normally needs to be registered to lodge an electronic AFS licence application.
Rationale
ASIC has provided the following explanation for the proposed foreign AFS regime:
- concerns about non-compliance with the existing relief by FFSPs, citing non-compliance by a couple of investment banks – there is no suggestion of general non-compliance
- supervisory and enforcement concerns with the activities of FFSPs providing financial services to wholesale clients in Australia – ASIC is concerned about the ability of overseas regulators to monitor and supervise Australian activities of FFSPs in Australia and an expectation that ASIC would do so, but ASIC is concerned about its abilities under the existing exemptions
- how the current Australian approach compares with the approaches taken by key overseas regulators, including the lack of passporting relief for Australian licensees in equivalent jurisdictions – ASIC states that it recognises that some jurisdictions may not require a licence for inducing wholesale clients to use their services as is the case in Australia without the current exemptions, but ASIC does not seem to give this any particular weight
- developments in cross-border financial regulation and the recent focus by IOSCO on misconduct in wholesale financial markets, and
- the availability of other AFS licensing exemptions – it is important to note that other exemptions are quite limited and may require the involvement of an AFS licence holder.
In relation to entities relying on the limited connection exemption, ASIC is concerned that there is no requirement to notify ASIC of reliance on the relief or the business activities being conducted, to submit to the jurisdiction of Australian courts or to comply with information requests from ASIC. ASIC has asked for feedback whether imposing these requirements would be a suitable alternative to repealing the exemption. ASIC has repeated concerns that it has not received any detailed information from industry in response to its request for information about the type of entities that rely on the limited connection relief, the type of activities they engage in or the volume of business for entities that rely on the relief.
Submissions
Submissions on ASIC's consultation paper close on 31 July 2018.
ASIC has encouraged any parties relying on the current relief to make submissions in the consultation period. It is expected, given the substantive changes to the current relief and the new requirement to obtain a foreign AFS licence, that foreign providers will have strong views about the nature of the changes and the additional regulation that will be imposed on them.
