• Tue. May 28th, 2024

AFSL exemptions for foreign financial services providers

In a highly anticipated announcement, Treasury has released its consultation on Australian financial services licence (AFSL) exemptions for foreign financial services providers (FFSPs). The consultation proposes replacing the previous exemptions with four new options, highlighting the Government’s commitment to provide FFSPs with clarity around their regulatory status in Australia and proportionate pathways to enter Australia without holding a full AFSL.

In parallel with the consultation, the Australian Securities and Investments Commission (ASIC) has announced a twelve month extension to the expiry date of the transitional period for sufficient equivalence relief or ‘passport’ relief and limited connection relief. See our previous explanation of such relief here.

The consultation has come off the back of a previous consultation in 2021 with the associated legislation lapsing following the change in Government in 2022. To continue providing financial services in Australia, FFSPs have since been relying on passport relief, limited connection relief, stepping into the regulatory framework by relying on traditional exemptions or applying for bespoke relief or a full AFSL.

Passport relief and limited connection relief are now due to expire on 31 March 2025. The proposed legislation under consultation is intended to commence 1 April 2024.

During the extended transitional period, ASIC will consider new applications for individual temporary licensing relief, or new standard or foreign AFSL applications. FFSPs that have been, or are granted a foreign AFSL will be able to continue to operate their financial services business in Australia under this licence.

Proposed options for foreign financial service providers under consultation

The consultation sets out four options for FFSPs, which have been designed to:

  • allow Australian professional and wholesale investors to diversify their investment opportunities particularly with respect to superannuation;
  • reduce barriers to entering the Australian market for FFSPs; and
  • provide access to global financial markets and attract additional investment and liquidity to Australian markets,

while ensuring appropriate regulatory oversight.

We have set out an overview of each option below.

Professional investor exemption

The new professional investor exemption provides an exemption from the requirement to hold an AFSL for FFSPs that comply with the following:

  • provide financial services from outside Australia (except during limited marketing visits);
  • only provide financial services to professional investors, being a subset of wholesale clients under the the Corporations Act 2001 (Cth) (Corporations Act);
  • the financial service does not involve a dealing in certain financial products tradeable on certain licensed markets;
  • the FFSP’s head office and principal place of business are located at one or more places outside Australia;
  • the FFSP reasonably believes that providing the same or substantially the same financial service would not contravene any law applying in the FFSP’s principal place of business, head office or the place from where the financial services are provided; and
  • certain other conditions such as the requirement to do all things necessary to ensure that financial services are provided efficiently, honestly, and fairly (see below table).

This exemption is intended to replace the current exemption relevant to professional investors under s911A(2E) of the Corporations Act.

The consultation proposes an exception to the requirement that the financial service be provided from a place outside Australia where the financial service is provided by a representative of the FFSP during one or more limited marketing visits. Representatives are employees, directors, employees or directors of related bodies corporate or any other person acting on behalf of the FFSP. For the purposes of this exception, the total length of marketing visits that the FFSP may make in any financial year is no more than 28 calendar days. This includes public holidays and weekends. Marketing visits are not required to be undertaken in a single visit or by a single representative of the FFSP however the 28 day limit for marketing visits includes each full or partial day on which the representative is in Australia, whether or not a financial service is provided on that day.

Comparable regulator exemption

The comparable regulator exemption provides an exemption from the AFSL requirement for foreign companies and partnerships formed offshore that provide financial services to wholesale clients and are authorised, registered or licensed (as necessary) by a comparable regulator to legally provide the same or substantially the same financial service in a comparable jurisdiction. A financial service provided under the comparable regulator exemption may be provided from within Australia or from the comparable jurisdiction. For example, an FFSP providing a financial service for which the comparable regulator is the United Kingdom Financial Conduct Authority, the FFSP may only provide that financial service from the United Kingdom or from Australia.

FFSPs seeking to rely on the comparable regulator exemption must comply with certain conditions including the following:

  • consent to information sharing between ASIC and each comparable regulator;
  • notify ASIC of any significant enforcement action, disciplinary action or investigation undertaken against the FFSP by any regulator, government authority, or relevant financial market operator in any place outside Australia;
  • have an agent in Australia;
  • maintain adequate oversight over its representatives and take reasonable steps to ensure that its representatives are adequately trained and competent to provide the financial services; and
  • a requirement to do all things necessary to ensure that financial services are provided efficiently, honestly, and fairly (see below table).

The comparable regulator exemption is designed to replace the current sufficient equivalence / passport relief regime. There is no list of comparable jurisdictions however the consultation paper notes that the Minister who is responsible for determining comparable jurisdictions must have regard to the following (among other matters):

  • whether the regulatory regime is clear, transparent, certain, and adequately enforced;
  • whether the regulatory regime is broadly consistent with the Objectives and Principles of Securities Regulation, developed by the International Organization of Securities Commissions;
  • whether the regulator is either a signatory to the Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information, developed by the International Organization of Securities Commissions or is otherwise a party to any other effective cooperation arrangement with ASIC; and
  • advice from ASIC.

Market maker exemption

The market maker exemption provides an exemption from the requirement to hold an Australian financial services licence for an FFSP making a market for derivatives in the following circumstances:

  • the FFSP is making a market for derivatives that are able to be traded on a licensed market that is prescribed by the regulations;
  • the FFSP provides the financial service from outside Australia and the FFSP’s head office and principal place of business are located at one or more places outside this jurisdiction; and
  • the FFSP reasonably believes that providing the same or substantially the same financial service would not contravene any law applying in any of the places referred to in the above dot points (being the place where the FFSP’s head office and principal place of business is located or location where the FFSP provides the financial service).

An FFSP that uses the market maker exemption must comply with certain other conditions such as the requirement to do all things necessary to ensure that financial services are provided efficiently, honestly, and fairly (see below table).

The consultation paper notes that this exemption is intended to apply to exchange traded futures.

Fit and proper person test exemption

This option isn’t a licensing exemption but simplifies the AFSL application process for certain FFSPs by reducing associated administrative burden. Currently, all AFSL applicants must satisfy the ‘fit and proper’ person test under s 913A of the Corporations Act and this is typically evidenced by providing criminal history and bankruptcy checks for each fit and proper person (eg, officers of the applicant and all controllers). However, under this exemption, certain FFSPs do not need to comply with this requirement when making an application for an AFSL or the imposition, variation or revocation of conditions on an existing AFSL.

The conditions for such FFSPs are:

  • only providing financial services to wholesale clients;
  • being a foreign company or partnership formed outside Australia; and
  • being regulated by a comparable regulator. It is expected that the list of comparable regulators will include the following (being the list of regulatory authorities specified in the ASIC Corporations (Foreign Financial Services Providers—Foreign AFS Licensees) Instrument 2020/198:
    • US Securities and Exchange Commission (US SEC);
    • US Federal Reserve and Office of the Comptroller of the Currency (OCC);
    • US Commodity Futures Trading Commission (US CFTC);
    • Monetary Authority of Singapore (Singapore MAS);
    • Hong Kong Securities and Futures Commission (Hong Kong SFC);
    • Bundesanstalt für Finanzdienstleistungsaufsicht of Germany (German BaFin);
    • Luxembourg Commission de Surveillance du Secteur Financier (CSSF);
    • UK Financial Conduct Authority or Prudential Regulatory Authority (UK FCA or PRA);
    • Danish Financial Supervisory Authority (Danish FSA);
    • Finansinspektionen (Swedish FI);
    • Autorité des Marches Financiers of France (French AMF);
    • Autorité de contrôle prudentiel et de resolution of France (French ACPR); and
    • Ontario Securities Commission (Ontario OSC).

There are also other associated obligations for the professional investor, comparable regulator and market maker exemptions as follows.

Other key considerations for FFSPs

Further information to come

There may be additional changes introduced by the regulations with respect to particular types of financial services, financial products or classes of investors relevant to the exemptions.

Penalties for non compliance

Non compliance with the conditions of the professional investor, comparable regulator and market maker exemptions may result in ASIC taking the following actions:

  • cancelling or partly cancelling the FFSP’s exemption;
  • applying to the court for a declaration of contravention of a civil penalty provision and a pecuniary penalty order (for which there are significant financial and non financial penalties); and
  • imposing additional conditions on the FFSP’s future use of an exemption in relation to some or all of the kinds of financial services provided under the exemption.

What’s next for FFSPs entering the market?

Treasury has provided draft legislation for consultation. Submissions close 8 September 2023.

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