Replacing the passport relief system: what does ASIC’s regulatory guidance mean for foreign financial services providers?
ASIC has long been consulting on proposed changes to the regulatory regime applicable to foreign financial services providers (FFSPs) and specifically its proposal to introduce the ‘Foreign Australian financial services licence’ (Foreign AFS licence). This proposal requires FFSPs to adopt a modified version of the standard AFS licence to provide financial services to Australian wholesale clients.
ASIC also introduced another regulatory regime for FFSPs known as the ‘funds management financial services relief’.
On 10 March 2020, after extended consultation on the implementation of both regimes, ASIC released its much anticipated finalised regulatory guidance on the new regulatory regimes applicable to FFSPs in Regulatory Guide 176: Foreign Financial Services Providers (RG 176).
So what are the features of RG 176 and, importantly, what are the likely impacts for FFSPs when the new regimes commence?
RG 176 – what’s new?
Updated regulatory framework for FFSPs
ASIC’s RG 176 provides a useful overview of the regulatory framework for FFSPs, which includes:
- Funds management relief: an FFSP is exempt from the requirement to hold an AFS licence when only carrying on a financial services business in Australia because of s 911D of the Corporations Act relating to the provision of ‘funds management financial services’ to certain types of professional investors in Australia.
- Foreign AFS licence: an FFSP that is authorised by an overseas regulatory authority that regulates the FFSP under a ‘sufficiently equivalent’ regime may be eligible to apply for a foreign AFS licence to provide specified financial services to wholesale clients in Australia.
- Standard AFS licence: if an FFSP is not eligible for either of the above regimes, and no other licensing exemption applies, the FFSP must hold a standard AFS licence to carry on a financial services business in Australia.
Expanded list of ‘sufficiently equivalent jurisdictions’
ASIC has now expanded the list of overseas regulatory jurisdictions which it deems to be ‘sufficiently equivalent’ to include:
- Hong Kong
- Canada (Ontario)
- United Kingdom
- United States
Accordingly, FFSPs operating within these jurisdictions should consider whether any of the regulatory regimes above would be applicable to them going forward.
Application process for Foreign AFS licences
The application process for the Foreign AFS licence is more streamlined than the standard AFS licence application. FFSPs may apply for a Foreign AFS licence online. When doing so, ASICs online portal will indicate which ‘proof’ documents the FFSP must lodge based on the complexity of the FFSPs business and the authorisations sought. Although the ‘proofs’ to be lodged may vary between businesses, we anticipate that applicants will, at a minimum, need to lodge the following ‘proof’ documents:
- A5 Proof – Business Description.
- B3 Proof - Arrangements for Managing Conflicts of Interests.
- B3.1 Proof - Compliance Arrangements.
- B7 Proof - Risk Management System Statement.
- People Proofs – Responsible Officers Checks.
ASIC has indicated that further information about fees can be found in Information Sheet 30 fees for commonly lodged documents (INFO 30), however, at the date of this article, ASIC has not yet updated INFO 30 to indicate the fees for Foreign AFS licence applications.
ASIC has also indicated that information on ‘annual industry funding levies’ may be found under ASIC’s cost recovery regulations.. However, the levies have not yet been updated for the Foreign AFS licence.
Obligation on Foreign AFS licence holders to notify ASIC
A condition of the Foreign AFS licence is that the licensee must notify ASIC as soon as practicable and in any event within 15 business days after it becomes aware or should reasonably become aware of ‘significant’ investigations, enforcement or disciplinary action.
In RG 176, ASIC has provided further guidance on this condition, stating that determining whether an investigation, enforcement or disciplinary action may be ‘significant’ should be determined by considering whether it is serious enough that it may raise questions about the licensee’s compliance with the Foreign AFS licence. Minor breaches, if frequent, may also amount to ‘serious’ breaches and ASIC encourages the FFSP to notify them of these.
Funds management relief
The funds management relief exempts FFSPs from the requirement to hold an AFS licence when it engages in conduct that ‘induces’ or is ‘likely to induce’ (Inducing Conduct) certain types of professional investors in Australia to use its ‘funds management financial services’.
RG 176 provides some insight into what is meant by ‘funds management financial services’. Essentially, there are two parts to the definition of funds management financial services:
- Financial services provided to ‘eligible Australian users’ by offshore fund managers; and
- Portfolio management services by foreign fund managers which may involve both Australian and offshore financial products.
Effectively, the ‘funds management relief’ is a modified version of the repealed ‘limited connection’ instrument, which provided licensing relief where a person was deemed to be carrying on a financial services business in Australia only because of s 911D of the Corporations Act in relation to the provision of financial services to wholesale clients. However, the ‘funds management relief’ applies only in respect of Inducing Conduct in relation to ‘funds management financial services’.
A scenario where the new ‘funds management relief’ might apply would be where a U.S. asset manager operating a fund (e.g. a Delaware limited partnership) visits Australia to market and build relationships with Australian institutional clients, and the U.S. asset manager attempts to persuade the investor to subscribe to securities in its fund.
A grey area with the new regime is whether a Foreign AFS licence will be required to be permitted to undertake any subsequent financial services, as the funds management relief only covers the Inducing Conduct. We suspect ASIC’s view would be that a Foreign AFS licence is likely to be required in these circumstances.
Commencement of instruments – transitional arrangements