This article was written by Jim Boynton, Damien Richard and Mark McFarlane.
On 9 July 2021, Federal Treasury released its Consultation Paper on options for licensing relief for foreign financial services providers (FFSPs) and fast-tracking the licensing process for FFSPs. This is a critical step on the path to resolving the uncertainty faced by FFSPs following the Federal Budget.
In May 2021, as part of the 2021-22 Federal Budget, the Government announced that it will consult on options to restore the previous Australian financial services (AFS) licence relief available to FFSPs, known as the ‘sufficient equivalence’ and ‘limited connection’ relief. This announcement took FFSPs by surprise, as many were advanced in their preparations to adapt to the new regime previously announced by ASIC. Under ASIC’s previous proposals, FFSPs would have required a new ‘foreign AFS licence’ or standard AFS licence by 1 April 2022, or be eligible to rely on another exemption such as the new ‘funds management financial services’ relief which would have commenced on 1 April 2022.
In response to the Federal Budget announcement, ASIC has extended the transitional period for FFSPs relying on ‘sufficient equivalence’ and ‘limited connection’ relief by 12 months to 31 March 2023, to allow the consultation to take place.
The Budget announcement reflected a concern that the previously announced regime, which replaces well-established relief, may not have struck the right balance. Australian wholesale investors need adequate access to foreign markets and products through FFSPs providing those services. Some FFSPs may have chosen to restrict servicing the Australian market, or even to not service the Australian market at all, in response to the previously announced changes.
Information on ASIC’s previously announced proposals can be found here.
Treasury has today released the consultation paper on Relief to Foreign Financial Service Providers. Responses are due to Treasury by 30 July 2021.
What are the relief options proposed?
The Consultation Paper proposes three broad licence relief options for FFSPs.
Option 1 – restoring the status quo
Option 1A – true status quo
This option involves restoring the sufficient equivalence relief and the limited connection relief as it applied before their repeal by ASIC. FFSPs regulated in jurisdictions assessed as ‘sufficiently equivalent’ could therefore continue to provide certain financial services to wholesale clients, subject to complying with a number of conditions. FFSPs with the required limited connection to Australia could continue to service wholesale clients under the limited connection relief.
Option 1B – status quo with a significant limitation
This option would restore the sufficient equivalence relief, but not the limited connection relief. The limited connection relief would be replaced with the more targeted funds management financial services (FMFS) relief announced by ASIC. The FMFS relief is limited to foreign investment funds and portfolio management services, and only applies when servicing a subset of wholesale clients known as ‘eligible Australian users’. The scope of the FMFS relief is therefore much more limited than the limited connection relief.
Option 2 – sufficient equivalence relief with more conditions
This option would provide relief for FFSPs providing specified financial services to wholesale clients. The breadth of financial services, and financial products to which they may relate, would closely track the sufficient equivalence relief. For some FFSPs, the coverage could be broader.
To qualify for the relief, an FFSP would be required to notify ASIC and be regulated in a jurisdiction assessed as ‘sufficiently equivalent’ to Australian regulation. This list of jurisdictions is expanded compared to those currently covered by the sufficient equivalence relief.
The Government is seeking feedback on an extensive list of possible conditions under this option. Many are based on the existing conditions in the sufficient equivalence relief. Others are new and include obligations applicable to AFS licence holders, such as ensuring that financial services are provided ‘efficiently, honestly and fairly’ and a similar breach reporting obligation. One concerning possible condition is “not dealing with unauthorised or unlicensed entities”, which could be much more limiting than servicing only “wholesale clients”.
It is also proposed that ASIC have increased powers to regulate FFSPs under the relief. Consideration is being given to extending the enforceable undertaking tool to FFSPs and introducing civil penalties.
This option does not provide a replacement for the limited connection relief. This is a significant shortcoming and does not seem consistent with the Federal Budget announcement.
Option 3 – Option 2 but with no financial service limitations
This option is the same as option 2, however all financial services provided to wholesale clients would be within the scope of the relief.
This option suffers from the same limitation as option 2, in that no replacement for the limited connection relief is proposed.
FFSPs relying on individual sufficient equivalence relief
The Consultation Paper does not specifically address the position of FFSPs who may be relying on individual relief based on the standard sufficient equivalence Class Orders. FFSPs in this category should consider how each exemption option impacts them.
Fast-tracking the licensing process for FFSPs
The Consultation Paper is seeking feedback on three options to fast-track the AFS licensing process for FFSPs.
Option 1 – modify the fit and proper person test
This option would allow ASIC to dispense with the requirement to apply the fit and proper person test to every relevant person in the context of an FFSP’s AFS licence application.
Those involved in licence applications and variations would be well aware of the significant practical challenges the fit and proper person test has posed for FFSPs. It typically requires police and bankruptcy checks to be obtained for multiple people, often in multiple jurisdictions.
Option 2 – modified licensing regime for FFSPs servicing wholesale clients
The option would put in place a modified AFS licence regime for FFSPs servicing wholesale clients that are regulated by foreign regulators who are signatories to the Multilateral Memorandum of Understanding (MoU) of the International Organisation of Securities Commissions (IOSCO). Exemptions from some aspects of the licence application process and licence obligations would apply, and some additional conditions would be imposed.
Unlike the current foreign AFS licence regime, this option would only require regulation by an MoU signatory rather than regulation in a jurisdiction that has been assessed as ‘sufficiently equivalent’ to Australian regulation.
Option 3 – automatic modified licence for FFSPs
Under this option, an FFSP would be granted an AFS licence if it demonstrates:
- it is regulated by an overseas regulator that is an IOSCO board member;
- it holds an existing foreign licence authorising the financial services it intends to provide in Australia; and
- it will only service wholesale clients in Australia.
A licence granted under this option would be subject to all the standard AFS licence obligations, as well as additional conditions. This option therefore has the disadvantage that it would subject an FFSP to duplicative regulation in both its home jurisdiction and in Australia.
Next steps – industry engagement is essential
Responses to the Consultation Paper are due by 30 July 2021.
The Consultation Paper is an important opportunity for FFSPs and their Australian clients to ensure continued access to foreign financial markets and financial products. ASIC has expressed some frustration in the past after having received limited feedback on its proposals in this area.
Industry engagement with the Consultation Paper is therefore key to securing a quality outcome. We are available to assist with your submission and to assess how the proposed options impact on your business.