ASIC signals crackdown on foreign financial services providers
Astrid Raetze, Samantha Shields, Nick Alexander and Megan House examine ASIC's proposed changes for foreign financial services providers.
On 1 June 2018, the Australian Securities and Investments Commission (ASIC) released a consultation paper (CP 301) seeking feedback on its proposal to:
- repeal the full suite of legislative instruments that currently allow foreign financial services providers (FFSPs) to carry on financial services businesses with wholesale clients in Australia without holding an Australian financial services (AFS) licence (the FFSP relief) and
- introduce a modified form of AFS licence, referred to as a ‘foreign AFS licence’ (FAFS licence) available only to FFSPs that are licensed or authorised in the jurisdictions ASIC considers ‘sufficiently equivalent’.
In our view, the proposal represents a clear departure from ASIC’s historical approach to the regulation of FFSPs, which to date has prioritised the facilitation of cross-border investment and liquidity into Australian wholesale markets. We expect that small to medium-sized FFSPs, in particular, will feel the brunt of the proposed changes. Relevantly, while ASIC has in large part justified the proposed changes by citing past instances of non-compliance with disclosure conditions by multinational investment banks, ASIC’s proposed regulatory response will impact all FFSPs with wholesale clients in Australia, including offshore fund managers.
What are the types of FFSP relief that ASIC plans to repeal?
The first is ASIC Corporations (Repeal and Transitional) Instrument 2016/396 (referred to by ASIC as the ‘sufficient equivalence relief’, but more commonly known as the ‘passport relief’) which conditionally exempts FFSPs from the requirement to hold an AFS licence on the basis that they are sufficiently regulated in their home jurisdiction. These jurisdictions are the United Kingdom (where authorised by the FCA), the United States (where authorised by the SEC, the Federal Reserve, the OCC, or the CTFC), Singapore (where authorised by the MAS), Hong Kong (where authorised by the SFC), Germany (where authorised by BaFin), and Luxembourg (where authorised by CSSF).
The second is any bespoke individual relief issued on similar terms to the sufficient equivalence relief. According to CP 301, such relief has only been granted to regulated FFSPs in Denmark, Sweden, France, and Brazil to date.
The third is ASIC Corporations (Foreign Financial Services Providers – Limited Connection) Instrument 2017/182 (more commonly known as the ‘limited connection relief’) which exempts FFSPs that are only carrying on financial services business in Australia by engaging in inducing conduct (i.e. promotional or marketing campaigns) in the Australian jurisdiction under s911D of the Corporations Act.
What is the FAFS licence?
Under the proposed regime, from 30 September 2019 only FFSPs who are licensed or authorised in sufficiently equivalent jurisdictions (including FFSPs relying on individual relief issued on the basis of ASIC’s sufficient equivalence principles) will be eligible to apply for and maintain a lighter-touch form of AFS licence (FAFS licence) to carry on financial services business with wholesale clients in Australia.
Importantly, FAFS licensees would be exempt from four of the key general obligations of an AFS licensee under s912A of the Corporations Act. These include the requirements to:
- have adequate resources, such as financial, technological or human resources, to provide the financial services and supervisory arrangements of the licence (s912A(1)(d))
- maintain the competence to provide the financial services (s912A(1)(e))
- ensure its representatives are competent and adequately trained to provide the financial services (s912A(1)(f)) and
- comply with other obligations prescribed by the Corporations Regulations 2001 for the purposes of s912A of the Corporations Act 2001 (Cth) (s912A(1)(j)).
What does this mean?
We’ve highlighted the main takeaways for FFSPs below:
- It’s time to apply for sufficient equivalence relief If you are an FFSP operating in a jurisdiction that has already been deemed sufficiently equivalent by ASIC, you should consider applying for sufficient equivalence relief or individual relief issued on similar terms prior to 30 September 2019. This is because, if you obtain such relief, it is reasonable to expect that your application process for obtaining a FAFS licence will be less onerous than it might otherwise be for a novel applicant that is unknown to ASIC.
- If you’re an inducer, consider applying for individual relief If you currently rely on the limited connection relief to engage in inducing conduct (i.e. mass marketing campaigns) with wholesale clients in Australia, ASIC has flagged in CP 301 that it is retaining its discretion to issue such entities with relief on a case-by-case basis. While it is presently unclear whether such applications will be governed by the requirements of RG 176 (which ASIC intends to revise) or RG 51, early engagement with ASIC on this point (rather than later) is the wisest move here.
- Expect the application process for the FAFS licence to be less onerous than for a standard AFS licence While ASIC has not provided any insight into the application process for a FAFS licence in CP 301, we anticipate that it will generally be less involved than the application for a standard AFS licence. This is because ASIC proposes to exempt FAFS licensees from s912A(1)(d), (e), (f), and (j), resulting in very real question marks over whether ASIC will require applicants for a FAFS licence to: appoint responsible managers (which ordinarily comprises part of ASIC’s assessment of organisational competence under s912A(1)(e)) and/or submit documentary Proofs demonstrating adequate financial, technological or human resources (which ordinarily comprises part of ASIC’s assessment under s912A(1)(d)).
- Expect the compliance costs associated with your Australian business to grow substantially Although ASIC proposes to exempt FAFS licensees from a number of requirements in the Corporations Act (listed in Table 4 of CP 301) and Corporations Regulations (listed in Table 5 of CP 301), some of the key financial record-keeping obligations (s987A, 988A, 988C, 988D(b), 988E and 988G) will apply under the current proposal. In practical terms, this may require FAFS licensees to demerge financial records about their Australian transactions from their consolidated financial records. In addition, it is proposed that FAFS licensees will be subject to ASIC’s direction power (in s912C), the Australian breach reporting requirements (in s912D), the requirement to cooperate with an ASIC surveillance (in s912E), and the other remedies and penalties available to ASIC against AFS licensees (in s914A, s915A, s915B, and s1311(1))
- It looks like FAFS licensees will still be able to appoint corporate authorised representatives (CARs) and act as intermediaries Under the current proposal, FAFS licensees will be able to appoint corporate authorised representatives under s911A(2)(a), enter into intermediary arrangements under s911A(2)(b), and will remain liable for their representatives’ conduct. It is unclear how this squares with ASIC’s current proposal to exempt FAFS licensees from the requirement to ensure its representatives are competent and adequately trained to provide the financial services under s912A(1)(f).
Timing of changes
ASIC proposes to:
- consider submissions in response to CP 301 that are received by 31 July 2018
- repeal the sufficient equivalence relief and the limited connection relief on 30 September 2019 and
- provide a further 12 month transitional period from 30 September 2019 to 30 September 2020 to allow FFSPs to apply for a FAFS licence.
If you would like assistance with preparing a submission or preparing an application for FFSP relief or discussing the implications of CP 301 for your business, please do not hesitate to contact a member of our team.