15 July, 2019
Regulatory reforms for foreign fund managers
What you need to know
- On 3 July 2019, Ashurst published a Financial Services Update which summarises the key elements of ASIC's newly released Consultation Paper 315 (CP315) and guidance on their proposed licensing regime and exemptions for foreign financial services providers (FFSP).
- The purpose of this article is to examine the new proposed "funds management relief" as contained in draft instrument ASIC Corporations (Foreign Financial Services Providers – Funds Management Financial Services) Instrument 2019/XXX.
- Under this draft ASIC Instrument, ASIC proposes to provide relief from the Australian financial services licensing regime to FFSPs who provide "funds management financial services" to certain eligible professional investors in Australia, where such services account for no more than 10% of aggregated consolidated gross revenue for the FFSP and any entity within its corporate group – calculated on a backward and forward looking basis.
What you need to do
Foreign fund managers who provide services to Australian clients or have Australian investors in their fund structures will need to consider the implications of the proposed relief and whether it would be available if the relief is issued by ASIC in the form proposed. Fund managers who are concerned that the relief is not adequate should consider preparing a response to the consultation paper seeking modifications of the current proposal.
Foreign fund managers should be also be aware of the option of seeking either a full AFSL or a new "lighter touch" foreign AFSL, should the relief not be available to them.
Background
ASIC has two long standing exemptions for FFSPs servicing clients in Australia – the "limited connection" exemption and the "sufficient equivalence" exemption. For a refresh on ASIC's proposals to revoke these exemptions, please see our Financial Services Update dated 3 July 2019.
In light of the proposed revocation of those exemptions, ASIC proposes to make a new "funds management relief" exemption to the Australian financial services licensing (AFSL) regime, currently set out in ASIC Corporations (Foreign Financial Services Providers – Funds Management Financial Services) Instrument 2019/XXX (Draft ASIC Instrument) released with CP315.
The rationale behind this new relief stems from ASIC's proposal to revoke its "limited connection" exemption, which would effectively eliminate any relief or statutory exemptions for those FFSPs that are based in places that fall outside the "sufficient equivalence" jurisdictions, and offer interests or securities in an offshore fund or provide portfolio management services to wholesale clients in Australia.
At a high level, the proposed relief has some limitations which are hard to rationalise based on the policy objectives for the changes to the regulatory approach to FFSPs, such as investor protection and market integrity.
Who will qualify for the proposed "funds management relief"?
FFSPs that provide "funds management financial services" and satisfy certain conditions will qualify for this proposed relief.
In essence, the Draft ASIC Instrument defines "funds management financial services" as:
(a) (dealing, advice or market making for a professional investor) dealing in, providing financial product advice in relation to, or making a market in relation to, interests in or securities issued by an "offshore fund" – in each case, when the relevant service being provided to a professional investor (a subset of wholesale clients) in Australia.
Broadly speaking, "offshore funds" are managed investment schemes (MIS) and foreign companies which satisfy certain conditions – for example, that they are established and operated outside Australia (in respect of a MIS) or do not carry on business in Australia (in respect of a foreign company), on the basis that its assets include investments in securities, land, offshore funds or other investments, and of which at least 50% by value of its non-cash or cash equivalent assets are located outside Australia; and
(b) (portfolio management services for Eligible Australian users) providing financial services on behalf of a limited sub-set of professional investors (Eligible Australian users) – ie:
- a person in Australia that is a trustee of a superannuation fund, an approved deposit fund, a pooled superannuation trust, or a public sector superannuation scheme (as defined in the Superannuation Industry (Supervision) Act 1993), in each case with net assets of at least $10 million;
- a person in Australia that operates a MIS with net assets of at least $10 million;
- an Australian life company (as defined in the Life Insurance Act 1995); and
- an exempt public authority.
The proposed relief is contingent on the satisfaction of a number of other conditions, which in essence include that the FFSP:
- is not a registered foreign company in Australia nor holds an AFSL covering the provision of funds management financial services;
- provides certain notifications to ASIC regarding its intention to rely on the relief, consents to the disclosure by the overseas regulator to ASIC regarding the FFSP and complies with directions from, and provides reasonable assistance to, ASIC;
- makes certain covenants to ASIC by way of a deed for the benefit of, and enforceable by, ASIC;
- appoints a local agent; and
- prepares documents demonstrating its satisfaction of the 10% revenue cap (discussed further below) and makes certain written confirmations in relation to this cap.
What is the 10% revenue cap?
One of the conditions for relief proposed by the Draft ASIC Instrument is that the provision of funds management financial services in Australia must account for no more than 10% of the FFSP's annual aggregated consolidated gross revenue (which includes the aggregated consolidated gross revenue of entities within its corporate group) in the previous financial year (10% revenue cap).
In the first 3 months of the current financial year in which an FFSP intends to rely on the relief, the FFSP must have no reason to believe that the 10% revenue cap was not satisfied in respect of the previous financial year. After this period, the FFSP must have a reasonable belief that the 10% revenue cap was satisfied for the previous financial year, and must also document the basis for such belief.
In addition to this, the FFSP must, every 6 months, document reasonable estimates of (i) total gross revenue (including total consolidated gross revenue), and (ii) the amount of gross revenue (including total consolidated gross revenue) to be derived from the provision of funds management financial services – in each case, for the current financial year, and which must identify that the FFSP will not exceed the 10% revenue cap in the current financial year. The FFSP must also document and retain the calculations and assumptions underpinning these estimates.
What does this mean for fund managers?
Fund managers must be wary that the proposed relief would only be applicable to certain types of financial services in relation to offshore funds which are provided to professional investors, and in the case of portfolio management services, only when provided to a limited subset of professional investors being the Eligible Australian users. Relevantly, an Eligible Australian user includes a person that operates a MIS with net assets of at least $10 million. It is not clear how this test will apply to a foreign fund manager seeking to act as a fund manager for a new global investment MIS being established in Australia.
Furthermore, the Draft ASIC Instrument as it stands currently would require fund managers to reduce their financial services business activities in Australia to a level such that it could reasonably believe that it would satisfy the 10% revenue cap, if they wish to rely on the relief.
Interestingly, ASIC states at [48] CP315 that, "if the FFSP forms a view that it will or may breach the aggregated revenue cap in the financial year that it provides the services, the FFSP should not provide the service". In our view, this is highly impractical for fund managers as it requires them to determine the level of business activity with professional investors in Australia on a forward looking basis, and to cease the provision of financial services if the estimate does not satisfy the 10% revenue cap or it would otherwise be at risk of losing the benefit of the relief.
Consultation period
ASIC is currently consulting on the Draft ASIC Instrument, and is seeking feedback on the 10% revenue cap. It has considered some alternatives to this threshold, including making the cap contingent on the number of clients serviced by the FFSP, or tying the 10% threshold to specific services.
Transitional arrangements
ASIC proposes that this relief will be available from 1 April 2020, with a 6 month transitional period to 30 September 2020 to facilitate compliance with the conditions of the relief.
For further information, please contact:
Lisa Simmons, Partner, Ashurst
lisa.simmons@ashurst.com
