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10 May, 2017
ASIC extends its licensing exemption for foreign financial services providers and confirms it will consult on passport relief.
Background
Where a person or entity carries on a financial services business in Australia, it is generally required to hold an Australian financial services licence (AFSL) or rely on an exemption. The relevant Australian regulator, the Australian Securities and Investments Commission (ASIC), has issued relief to certain foreign financial services providers (FFSP Class Orders), which provides an exemption from the requirement to hold an AFSL, where (i) financial services are provided to wholesale clients only and (ii) the provider is regulated in an offshore jurisdiction that has been assessed by ASIC as being substantially equivalent to the Australian regulatory regime.
The underlying policy to the FFSP relief was to attract international fund managers and additional investment to Australia and investment options for Australian investors
Application to offshore fund managers
These exemptions have in the past applied to offshore providers regulated by the following regulators:
(a) German BaFin;
(b) Hong Kong Securities and Futures Commission;
(c) Singapore Monetary Authority;
(d) UK Financial Conduct Authority;
(e) US Securities and Exchange Commission ;
(f) US Commodities and Futures Commission; and
(g) US Federal Reserve and Comptroller of the Currency.
Extension to Luxembourg fund managers
ASIC recently issued ASIC Corporations Instrument (CSSFRegulated Financial Services Providers) 2016/1109, which provides a similar exemption in respect of Luxembourg fund managers that hold a current licence or authorisation which has been granted by the Commission de Surveillance du Secteur Financier, if the fund manager is:
(a) a management company, which can manage undertakings for collective investment in transferable securities relating to the law dated 17 December 2010 in respect of undertakings for collective investment of Luxembourg (Luxembourg Law) that fall under Chapter 15 of the Luxembourg Law; or
(b) an investment company that has designated itself as “self-managed” and was established under Part I of the Luxembourg Law.
Compliance with FFSP class orders
Continued reliance on these FFSP Class Orders is subject to the specific conditions of the relief being complied with. A key condition is the requirement for the provider to provide written disclosure to clients before the financial services are provided that the provider does not hold an AFSL and is regulated under the laws of the relevant offshore jurisdiction, which differ from Australian laws.
The FFSP Class Orders are very useful as they allow for a wide range of financial services and products to be provided to Australian wholesale clients, compared to other exemptions in the Corporations Act or Regulations which are more limited and restrictive in scope. Many offshore providers therefore rely on the FFSP Class Orders to conduct business with their Australian clients. The relevant exemption allows offshore firms to carry on business on a “fly-in” basis in Australia and by establishing an office in Australia.
ASIC effectively rolled over these exemptions for the next two years without any changes by issuing ASIC Corporations (Repeal and Transitional) Instrument 2016/396 (Instrument). The Instrument temporarily extends the effect of these Class Orders that were due to sunset between 1 October 2016 and 1 April 2017. This temporary extension of relief will sunset two years from the commencement of the Instrument unless ASIC takes action to preserve it. In providing the temporary extension, ASIC does not require the entities relying on the FFSP Class Orders to lodge any new notification to ASIC.
Extension of related relief
Class Order 03/824 (the related relief) exempts providers from the requirement to hold an AFSL where the person provides regulated financial services to wholesale clients, where the only reason the person is taken to be carrying on a financial services business in Australia is as a result of section 911D of the Corporations Act.
Section 911D provides an expanded definition of when a financial services business is taken to be carried on “in Australia”. It provides that a person carries on a financial services business in Australia if the person engages in conduct that is intended to induce people in Australia to use the financial services the person provides or is likely to have that effect, whether or not the conduct is also aimed at persons in other jurisdictions. Therefore, a wholly offshore business may still be captured under the Australian licensing requirements, if Australian clients are targeted.
Class Order 03/824 is therefore generally relied on by those offshore providers who do not have any presence or staff in Australia, and cannot avail themselves of the FFSP Class Orders (e.g. because they are regulated in a jurisdiction which has not been assessed as being sufficiently equivalent to the Australian regime under an FFSP Class Order and where specific relief is required, or because they are not regulated at all).
In late 2016 ASIC released Consultation Paper 268 Licensing relief for foreign financial services providers with a limited connection to Australia (CP 268), which proposed that Class Order 03/824 be revoked (following a one-year transitional period), as ASIC considers the exemption is substantially covered by the licensing exemption under section 911A(2E) (as inserted by regulation 7.6.02AG). Interestingly, section 911A(2E) provides limited relief as it only covers dealing, advice, or market making services to professional investors in derivatives, foreign exchange contracts, and carbon and emission units.
On 28 March 2017, ASIC released the outcome of its Consultation Paper 268, which related to the status of Class Order 03/824. Notwithstanding its earlier stated proposal to revoke the Class Order, the outcome of ASIC’s consultation is that its future status can be considered together with the status of the FFSP Class Orders which, as noted above, have also been extended to that date. The new instrument is ASIC Instrument 2017/182.
Industry levy for ASIC supervisory costs
Following a recommendation in the final report of the Financial System Inquiry, the Australian government has released draft legislation that will enable ASIC to recover its regulatory supervision costs though annual levies and fees-for-service. Effectively, entities that are “regulated” by ASIC in a financial year will be required to pay a levy that will recover ASIC’s regulatory costs for that financial year.
Interestingly, it is proposed that the levies will extend to FFSPs who have been granted an exemption by ASIC. The explanatory material suggests this is justified on the basis that ASIC may still incur some regulatory costs and exert regulatory effort in relation to these entities.
Currently, the draft legislation contemplates that the methods or formulas that will be used to apportion ASIC’s regulatory costs will be set through a combination of regulations and legislative instruments. An annual return must be lodged with ASIC by 31 October each year. After the amounts of levy have been determined for a financial year, ASIC will issue notices to entities setting out the amount of levy and when it will be due and payable.
Failure to pay the levy by the required date will attract a late payment penalty at the rate of 20 per cent per annum. Where an amount remains unpaid for more than 12 months, a range of administrative actions may be taken, including deregistration, licence suspension, or cancellation.
Next steps
In respect of the industry levy, the submission process for the draft legislation closed on 10 March 2017. Additional public consultation will be held on the regulations necessary to implement the details of the funding model.
In light of the ongoing review by ASIC in respect of the effect of the FFSP relief and the proposed revocation of the related relief, we recommend that you consider the impact of the proposals in CP 268 to entities in your group that might be relying on the Class Order 03/824, and notify relevant legal or compliance counterparts in offshore jurisdictions as appropriate.
Businesses which already rely on the FFSP Class Orders 03/824 should continue to monitor developments, and in particular, should keep a watchful eye out for ASIC’s consultation on these exemptions, expected to take place later in 2017.
Insights
ASIC has extended the effect of certain FFSP relief for two years.
ASIC has extended the relief under the FFSP relief to certain Luxembourg fund managers.
ASIC is consulting with the industry and reviewing the substantive operation of the FFSP relief.
ASIC proposes to repeal certain related relief following a one-year transitional period.
The businesses and activities of FFSPs that rely on the FFSP relief or the related relief should be considered in detail.
Draft legislation has been released under which ASIC will be able to recover its regulatory supervision costs through annual levies and fees-for-service.
For further information, please contact:
Lisa Simmons, Partner, Ashurst
lisa.simmons@ashurst.com
