Reforms to the foreign financial services provider regime

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By Matthew Farnsworth, Partner

In August 2023, the Australian Government released for consultation exposure draft legislation to implement a new foreign financial services provider (FFSP) regime providing various exemptions to FFSPs from the requirement to hold an Australian financial services licence (AFSL).

This was welcome news for FFSPs and follows a prolonged period of uncertainty and transitional arrangements, which have now been extended until 31 March 2025.

The proposals affect a range of foreign firms dealing with the Australian wholesale and institutional markets, including fund managers, brokers and banks.

A brief background

In March 2020, the Australian Securities & Investments Commission (ASIC) introduced a new FFSP regime, comprising:

  • a foreign AFSL option available since April 2020, for FFSPs regulated in certain jurisdictions, providing an exemption from a number of obligations applying to a standard AFSL such as financial requirements; and
  • an AFSL exemption for providers of funds management financial services seeking to induce certain types of professional investors in Australia (funds management relief), which is currently scheduled to be available from 1 April 2025.

ASIC provided a transitional period for the following relief from the requirement to hold an AFSL for FFSPs providing financial services to wholesale clients in Australia:

  • ‘sufficient equivalence relief’, available to certain FFSPs regulated by an overseas regulatory regime deemed sufficiently equivalent to Australia’s regulatory regime, namely the United Kingdom, the United States of America, Hong Kong, Singapore, Germany and Luxembourg; and
  • ‘limited connection relief’, aimed at a FFSP deemed to be carrying on a financial services business in Australia only because it induces persons in Australia to use its financial services, where such services are provided only to wholesale clients in Australia.

ASIC implemented an initial two-year transitional period (now extended to 31 March 2025) for FFSPs able to rely on the sufficient equivalence relief on 31 March 2020. ASIC initially extended the limited connection relief for 2 years (now extended to 31 March 2025).

During the extended transitional period, ASIC will consider applications for individual temporary licensing relief or new or standard foreign AFSL applications, from FFSPs unable to rely on the transitional relief.

Following the introduction of the new regime, the Australian Government announced in the 2021-22 Federal Budget an intention to consult on options to restore previously well-established regulatory relief for FFSPs. This led to a consultation on draft legislation followed by a Bill being introduced to Parliament which ultimately lapsed due to the calling of the Australian Federal election in 2022 and to this latest consultation.

The transitional period has been extended, and the commencement date for the funds management relief has been deferred, multiple times as a result.

Proposed licensing exemptions

The proposal in the latest draft legislation is to introduce the following licensing exemptions:

  • a professional investor exemption;
  • a comparable regulator exemption, which would replace the sufficient equivalence relief; and
  • a market maker exemption.

An exemption from the fit and proper person assessment is also proposed for certain FFSPs applying for an AFSL or a variation to an AFSL.

Professional investor exemption

The professional investor exemption is proposed to apply where:

  • the financial service is provided only to professional investors, which is one category of wholesale client;
  • the financial service does not involve a dealing in certain financial products of a kind prescribed by regulation and tradeable on certain licensed markets;
  • the FFSP provides the financial service from outside Australia (except during limited marketing visits);
  • the FFSP’s head office and principal place of business are located at one or more places outside Australia; and
  • the FFSP reasonably believes that providing the same or substantially the same financial service would not contravene any law applying in the places where its principal place of business or head office are located or the place from where the financial services are provided.

The exemption allows the FFSP to provide financial services during one or more marketing visits to Australia undertaken by one or more representatives of the FFSP, for up to 28 days per financial year (including days not spent with clients).

The professional investor exemption would replace an existing exemption available where the FFSP is not in Australia and provides financial services to professional investors limited to advising on, dealing in or making a market in, derivatives, foreign exchange contracts, carbon units, Australian carbon credit units or eligible international emission units.

Comparable regulator exemption

This comparable regulator exemption is proposed to apply where:

  • the financial service is provided to wholesale clients only;
  • the FFSP is a foreign company or partnership formed outside Australia;
  • the FFSP is authorised, registered or licensed by a comparable regulator to legally provide the same or substantially the same service in a place outside Australia (comparable jurisdiction); and
  • the FFSP provides the financial service from Australia or the comparable jurisdiction.

The proposed initial comparable regulators are:

  • 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)

Market maker exemption

The market maker exemption is proposed to apply where:

  • the financial service involves making a market for derivatives able to be traded on a prescribed licensed market;
  • the FFSP provides the financial service from outside Australia;
  • the FFSP’s head office and principal place of business are located at one or more places outside Australia; and
  • the FFSP reasonably believes that providing the same or substantially the same financial service would not contravene any law applying in the places where its principal place of business or head office are located or the place from where the financial services are provided.

Conditions applicable to proposed exemptions

Various conditions are proposed to apply to the professional investor exemption, the  comparable regulator exemption and the market maker exemption.

In summary, the conditions are as follows:

  • to notify ASIC of reliance on the exemption;
  • to give ASIC such assistance as it reasonably requests in relation to the performance of its functions or the exercise of its powers;
  • to submit to the non-exclusive jurisdiction of Australian courts;
  • to comply with ASIC directions to provide information about the provision of financial services or the relevant financial services business;
  • to notify clients of the exemption (except for the market maker exemption);
  • to notify ASIC of changes to the FFSP’s contact details;
  • to do all things necessary to ensure the financial services are provided efficiently, honestly and fairly;
  • to consent to ASIC and the comparable regulator sharing information about the FFSP (comparable regulator exemption only);
  • to notify ASIC of significant enforcement action, disciplinary action or investigation against the FFSP outside Australia (comparable regulator exemption only);
  • to have an agent in Australia (comparable regulator exemption only); and
  • to maintain adequate oversight over representatives providing financial services in reliance on the exemption and are adequately trained and competent to provide that kind of financial service (comparable regulator exemption only).

A FFSP would be required to notify ASIC about a contravention of the conditions.

Fit and proper person test exemption

It is proposed that a foreign company or partnership that is regulated by a comparable regulator and provides financial services only to wholesale clients will be exempt from the fit and proper person test when applying for an AFSL or a variation to an AFSL. This exemption only applies at the time of the application.

Next steps

The draft legislation proposed a commencement date of 1 April 2024 for the new regime and the consultation process has completed.

The current transitional arrangements for the sufficient equivalence relief and limited connection relief have been extended until 31 March 2025. Unless ASIC determines to repeal or amend it, the funds management relief introduced by ASIC is scheduled to be available from 1 April 2025 and the foreign AFSL currently remains available.

FFSPs providing financial services to clients in Australia, or who are looking at doing so, should consider the impact of the proposed new regime and assess the options available.

For further information, please do not hesitate to contact us.

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    Financial Services

    RegTracker 30 August 2021