ASIC seeks your views on Australia's proposed licensing framework for foreign financial services providers

ASIC proposes to provide licensing relief to FFSPs for certain funds management services where they are provided only to professional investors in Australia.   

It would also proceed with the repeal of the licensing relief known as the "limited connection" relief as it previously proposed to do in Consultation Paper 301 Foreign financial services providers (CP 301). If this occurs, ASIC's view is that FFSPs may still access the proposed new funds management relief and the licensing exemptions in the Corporations Act 2001 and Corporations Regulations 2001.

ASIC has also shared a draft updated RG 176 to include guidance on its previously proposed foreign Australian Financial Services (AFS) licensing regime (which is broadly consistent with what was contemplated in CP 301) together with how it will apply the new proposed funds management relief.

To-do list for FFSPs:

• Note the proposed timing delays for the start of the new foreign AFS licensing regime from 30 September 2019 to 1 April 2020.
• If you're currently relying on the sufficient equivalence relief, the proposal is that you will now have two years from 1 April 2020 to obtain a foreign AFS licence (that is, by 1 April 2022).
• Test whether you can rely on the new proposed funds management relief.

Proposed timeline for FFSP reforms

• 9 August 2019: Comments due on CP 315
• By 30 September 2019: Current legislative instruments rolled over for a further six months until 31 March 2020 (ie. the "sufficient equivalence" relief and the "limited connection" relief)
• Before March 2020: Updated Regulatory Guide 176 to be released
• 1 April 2020:
  • Proposed commencement date of the foreign AFS licensing regime and transitional period for sufficient equivalence relief. FFSPs should apply for a licence where applicable.
  • Proposed commencement date of the funds management relief and transitional period for limited connection relief.
• 30 September 2020: Proposed end of transition period for FFSPs relying on limited connection relief.
• 31 March 2022: Proposed end of transitional period for FFSPs relying on sufficient equivalence relief.

Relief for funds management services in Australia to professional investors

ASIC is proposing to provide licensing relief for FFSPs for funds management services where those services are provided only to professional investors in Australia.

Under the proposed new relief, an FFSP will be exempt from the requirement to hold an AFS licence for the provision of "funds management financial services" in Australia, subject to a cap on the scale of those services (broadly, being 10% of an FFSP's annual aggregated consolidated gross revenue which is generated from the provision of: (a) the relevant financial services to professional investors in Australia; and (b) portfolio management services to eligible Australian users) – together with a number of other conditions discussed below.

A person engages in a "funds management financial service" if they provide any of the following financial services to a professional investor in Australia:

• dealing in interests of a managed investment scheme established outside Australia (scheme) or securities of a body that carries on a business of investment that is not incorporated in Australia (body);
• providing financial product advice in relation to the interests or securities of the scheme or body; and/or
• making a market in relation to the interests or securities of the scheme or body; or
• "portfolio management services" to a limited category of professional investors – that is, a financial service provided by a person that is the management of assets located outside this jurisdiction on behalf of "eligible Australian users", which are any of the following:
  • a person in this jurisdiction that is a trustee of any of the following: (i) a superannuation fund; (ii) an approved deposit fund; (iii) a pooled superannuation trust; (iv) a public sector superannuation scheme, (within the meaning of the Superannuation Industry (Supervision) Act 1993) and the fund, trust or scheme has net assets of at least $10 million;
  • a person in this jurisdiction that operates a managed investment scheme that has net assets of at least $10 million;
  • a life company (within the meaning of the Life Insurance Act 1995) in this jurisdiction; or
  • an exempt public authority.

FFSPs proposing to rely on the new funds management relief can only provide financial services to "professional investors". Professional investors are a subset of wholesale clients. Broadly, professional investors include AFS licensees, bodies regulated by APRA, superannuation trustees of funds with greater than AUD$10 million in assets, a listed entity or a related body corporate of a listed entity, a body corporate, or a person that controls at least AUD$10 million. 

The following conditions (some of which have been referred to above) also need to be satisfied by the relevant FFSP:

• the FFSP must not be carrying on a business in Australia. See ASIC RG 121 for further guidance on the meaning of "carrying on a business in Australia";
• the FFSP must have appointed a local agent;
• the FFSP must enter into a deed submitting to the non-exclusive jurisdiction of the Australian courts in relation to action by ASIC and other Australian government entities, and lodge it with ASIC;
• the FFSP must notify ASIC of the types of funds management financial services it intends to provide to professional investors in Australia;
• the FFSP must maintain adequate proof of its compliance with the 10% aggregated revenue cap (these records should be kept for a period of seven years;
• the FFSP must comply with directions from ASIC to provide a statement (similar to the requirement in section 912C of the Corporations Act);
• the FFSP must provide reasonable assistance to ASIC during surveillance checks (similar to section 912E of the Corporations Act);
• the financial services must be provided only to clients in Australia who meet the definition of professional investor, or, in the case of portfolio management services, only to clients who meet the definition of eligible Australian user; and
• the FFSP cannot rely on the relief if ASIC has notified the FFSP, or its agent, that the FFSP is excluded from relying on the relief, and ASIC has not withdrawn the notice.

While this proposed new relief is a welcome addition, it arguably does not practically extend the already available statutory exemptions having regard to the restrictive nature of the conditions (in particular, the requirement on the FFSP to not carry on a business in Australia).

Extension of limited connection relief while ASIC consults

The current "limited connection" relief (that is, the old CO 03/824 relief) is due to expire on 30 September 2019 and ASIC has proposed to extend that relief for a further six months until 31 March 2020 while it consults with stakeholders on the new proposed funds management relief and repeal of the "limited connection" relief. ASIC proposes a transition period of six months to 30 September 2020 should it proceed with the repeal of the ‘limited connection’ relief, enabling an FFSP to assess whether it wishes to apply for the funds management relief or seek a foreign AFS licence.

Implementation of foreign AFS licence and extension of sufficient equivalence relief

ASIC intends to implement the foreign AFS licensing regime for FFSPs currently relying on the licensing relief known as ‘sufficient equivalence’ relief (that is, the seven mutual recognition class orders ASIC made in 2003 and 2004 and the one made in 2016 for Luxembourg fund managers). This regime is broadly consistent with what was proposed in CP 301.

However, ASIC will extend the sufficient equivalence relief for a further six months until 31 March 2020. The new foreign AFS licensing regime will then commence on 1 April 2020. FFSPs currently relying on the sufficient equivalence relief will have a transition period of 24 months from 1 April 2020 to comply with the new regime, including for example to submit an application for a foreign AFS licence and have the application assessed by ASIC.

The draft updated RG 176 attached to CP 315 provides guidance on how FFSPs may apply for the foreign AFS licence. Broadly, to apply for a foreign AFS licence, an FFSP will need to:

• ensure that it is eligible to apply for a foreign AFS licence (including, by considering whether it is covered by the sufficient equivalence relief or by applying to extend the sufficient equivalence relief to cover its overseas regulatory regime);
• ensure that it is registered as a foreign company if it is required to do so under the Corporations Act. In regards to this, note that ASIC has stated in the draft updated RG 176 that applicants will need an Australian Business Number (ABN) or an Australian Registered Body Number (ARBN) to lodge an application;
• provide the required proof documents with an FFSP's application (note that the amount and type of proofs will depend on the complexity of the financial services and products an FFSP applies for as well as ASIC's analysis of an FFSP's business and the markets it proposes to operate in);
• understand and be able to comply with an FFSPs obligations as a foreign AFS licensee and with its licence conditions; and
• lodge the application and pay the application fee.

How to make comments on ASIC's FFSP proposals

FFSPs and the wider industry are invited to comment on the proposals contained in CP 315. Comments should be sent to ASIC by 9 August 2019 and will assist ASIC in developing its policy on FFSPs and the relevant proposed licensing framework. In particular, ASIC is interested in understanding the likely compliance costs associated with ASIC's proposal, the likely effect on competition and other impacts, costs and benefits.

If you would like to discuss the various proposals contained in CP 315, strategies to ensure compliance with the Australian licensing regime or require assistance to draft a submission please contact us.