The Australian Government has released Exposure Draft legislation (FFSP Bill), which seeks to codify licensing exemptions for foreign financial service providers (FFSPs). The explanatory memorandum (EM) to the FFSP Bill states that it will ‘facilitate cross-border financial services while balancing the need to ensure regulatory oversight of foreign financial services provider activity in Australia’. The FFSP Bill aims to achieve this objective by replacing the existing licensing relief for FFSPs with the following four exemptions for FFSPs:
- professional investor exemption
- comparable regulator exemption
- market maker exemption, and
- fit and proper person test exemption.
The FFSP Bill draws heavily on the previous Bill that lapsed with the calling of the May 2022 Federal election. However, there are several changes as we have set out in our previous Alert: The FFSP logjam breaks
This Alert provides a full summary of the regime proposed in the FFSP Bill.
Professional investor exemption
The FFSP Bill includes a new professional investor exemption from the requirement to hold an Australian financial services licence (AFSL), which will apply to any type of financial service or product (the current exemption is limited to derivatives, foreign exchange contracts and carbon units).
However, unlike the current professional investor exemption and the current 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:
- a FFSP provides a financial service to a 'professional investor'
- the service is provided from outside Australia or during a permitted 'marketing visit'
- the service does not involve a dealing in certain financial products tradeable on certain licensed markets, and
- the FFSP reasonably believes that providing the same or similar service would not contravene any laws in the location where it is provided from or where the FFSP's head office and principal place of business are located.
Marketing visits
Marketing visits are permitted for up to 28 calendar days per financial year. There is no restriction on the kind of financial services an FFSP may provide during a marketing visit, and the 28 day limit may be met across multiple visits by multiple representatives. Having two or more representatives in the country on the same day will only count as one day towards the 28 day total.
Professional investors
Professional investors include large financial institutions (e.g. banks, insurance companies and superannuation funds > A$10 million), Australian financial services licensees, government bodies, listed companies and anyone who has or controls A$10 million.
However, ‘professional investors’ are only a sub-set of wholesale clients. This means that 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, potentially family offices or low high net worths. Such FFSPs will either need to obtain a licence or rely on the comparable regulator exemption or another licensing exemption.
Dealing in certain financial products tradeable on certain licensed markets
The regulations will prescribe the products and markets to which this exclusion applies. The EM states that FFSPs that trade in financial products that may have significant retail investor participation on licensed markets will be required to hold an AFSL. It is not clear why this is the case. The FFSP Bill also enables regulations to be made to exclude financial services or products or certain professional investors from the exemption.
Comparable regulator exemption
The FFSP Bill will introduce a new exemption similar to ASIC's current sufficient equivalence relief. However, it is broader as it will apply to all types of regulated financial services and products and (unlike the professional investor exemption) it applies to services provided to all wholesale clients.
The exemption will apply to FFSPs regulated by regulators approved by the Government (and not ASIC as is currently the case). It is expected that that the following regulators (currently or proposed to be approved by ASIC) 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 need to:
- have and maintain all authorisations, registrations or licences necessary to provide the relevant financial services in its home jurisdiction, and
- provide the financial service from within from Australia or their home jurisdiction. The EM states that if a service is provided from elsewhere the FFSP would have to hold an AFSL or rely on another exemption.
Market maker exemption
The market maker exemption is a new exemption proposed for the first time in the FFSP Bill. It will apply where:
- an FFSP is making a market for derivatives that are able to be traded on a licensed market prescribed by the regulations from outside Australia – the intention is for the exemption to apply to exchange traded futures only, and
- the FFSP reasonably believes that making a market in derivatives would not contravene any laws in the location where it is provided from or where the FFSP's head office and principal place of business are located.
Which exemption should I choose?
The key requirements of, and differences between, the FFSP exemptions are set out in the following table.
Download FFSP exemptions
Fit and proper person exemption
Licence applicants are normally required to satisfy the fit and proper person test in respect of their directors and officers and those of their holding companies. The FFSP Bill proposes to exempt FFSPs who apply for an AFSL (i.e. where they do not rely on one of the above exemptions) from this requirement where:
- they are authorised to provide substantially the same financial services by a comparable regulator (i.e. one of those listed above), and
- they are only applying for an AFSL to provide those services to wholesale clients.
The fit and proper person requirement does not apply to any of the new proposed FFSP exemptions.
Transitional period
On 4 August 2023, ASIC released an instrument to extend the existing relief for FFSPs until 31 March 2025. Accordingly, FFSPs may continue to rely on the sufficient equivalence and limited connection exemptions for a further year.
The FFSP Bill currently has a proposed commencement date of 1 April 2024. This signals the Government's intention that FFSPs would have 12 months to switch from relying on one of the existing exemptions to the new exemptions proposed in the FFSP Bill.
Conclusion
The re-introduction of the FFSP Bill is a welcome development. While there are some elements which are curious or may prove difficult for FFSPs, there is some prospect of these issues being ironed out in the consultation process. The Bill does however provide certainty and a generally workable regime for FFSPs.
Please contact any member of our licensing team if you have any questions about the application of the new FFSP regime to your business.
Links to relevant material
