Australia: The foreign AFS licence regime has arrived: what does it mean for foreign investment managers?

After extended consultation, on 3 July 2019, the Australian Securities and Investment Commission (ASIC) released the long awaited draft instrument ASIC Corporations (Foreign Financial Services Providers – Foreign AFS Licensees) Instrument 20191 (Foreign AFSL).

The Foreign AFSL will require foreign financial services providers (FFSPs) to apply for a modified form of the Australian financial services licence (AFS) licence. ASIC will provide firms relying on the current passport regime with a transitional period of 24 months to apply for the Foreign AFSL after the regime commences on 1 April 2020, but encourages applicants to apply for the foreign AFS licence as soon as applications open from 1 April 2020.

On 1 June 2018, ASIC released a Consultation Paper (CP 301),2 which proposed a new licensing regime for FFSPs broadly in line with what applies to other AFS licensees, but with meaningful relief from various provisions of the Australian Corporations Act and tailored licence conditions aimed at avoiding an unnecessarily burdensome licence for already foreign regulated firms. The newly issued draft Foreign AFSL instrument is in line with the regime proposed by CP 301.

Additionally, ASIC has released a new Consultation Paper 315 (CP 315), which seeks industry feedback on ASIC's proposed 'funds management' relief, which is intended as a new conditional 'limited connection' relief instrument. ASIC has released a draft instrument ASIC Corporations (Foreign Financial Services Providers – Funds Management Financial Services) Instrument 20193 for the proposed regime, which will be available to eligible FFSPs from 1 April 2020, with a six-month transitional period to 30 September 2020.

The 'funds management' relief may assist a subset of FFSPs looking to test the Australian professional investor market before deciding whether to apply for a Foreign AFSL or other arrangement.

The current relief framework

Generally, a person who carries on a financial services business in Australia must hold an AFS licence unless relief is granted by ASIC or an exemption applies.

ASIC granted relief to FFSPs that provided financial services to wholesale clients in Australia from the AFS licence requirements under one of two types of exemptions:

  1. Sufficient equivalence relief (Instrument 2016/396)4 – for FFSPs who were regulated in their home jurisdiction under a regime that was considered 'sufficiently equivalent' to the AFSL regime (sometimes referred to as 'passporting' relief).
  2. Limited connection relief (Instrument 2017/182)5 – the limited relief was granted to FFSPs transacting with wholesale clients in Australia where there was only limited and infrequent transactions with Australian wholesale clients. This is a narrow exemption.

The 'sufficient equivalence relief' ('passporting' relief) was previously provided to firms regulated in seven 'equivalent' jurisdictions.6 The relief available under both Instrument 2016/396 (sufficient equivalence) and Instrument 2017/182 (limited connection) was set to expire by 30 September 2019,7 however, ASIC has rolled over the relief by a further six months until 31 March 2020.8

The new Foreign AFSL regime: what you need to know

FFSPs who are regulated under an overseas regulatory model that has sufficient equivalence to the obligations imposed on Australia will need to apply for the Foreign AFSL to permit the provision of financial services to wholesale clients in Australia.

The Foreign AFSL imposes a subset of the key general obligations that apply to standard AFS licensees, such as the requirement to provide financial services efficiently, honestly and fairly, and to have in place adequate arrangements to manage conflicts of interest.

However, a Foreign AFSL holder will enjoy exemptions from other standard licence obligations on the basis that ASIC considers the overseas regulatory requirements achieve similar regulatory outcomes to the Australian requirements.9

The application process for the new Foreign AFSL will be streamlined compared to a standard AFS Licence application.

The proposed 'Funds Management' relief

Previously, the limited connection relief was available to FFSPs that had limited dealings or marketing activities with Australian wholesale clients. Following concerns that ASIC had little to no visibility of the entities relying on the limited connection relief, as well as having limited supervision powers over the activities of these entities, ASIC proposes to repeal the limited connection relief (effective from an extended sunset period ending 31 March 2020).10

The proposed new 'funds management' relief will replace the limited connection relief and is designed to exempt FFSPs from the requirement to hold an AFS Licence (because of the operation of the strict jurisdictional test) for the provision of 'funds management financial services' to professional investors in Australia, subject to:11

  • a cap on the scale of those services; and
  • conditions that apply to the operation of the relief.

Transitioning to the new regime

In CP 315, ASIC has indicated the following next steps to transition to the proposed regimes:

Proposed regulatory arrangement Transition
Foreign AFSL regime (which replaces the 'Passport' regime)
  • The Sufficient Equivalence relief will roll over to 31 March 2020.
  • The Foreign AFSL regime commences on 1 April 2020 with a transitional period to 31 March 2022, however ASIC encourages applications from 1 April 2020.
  • The transitional arrangements will only apply to FFSPs who have applied for Passport relief by 31 March 2020.
The 'funds management' relief (which replaces the 'limited connection' relief)
  • Funds Management relief commences 1 April 2020.
  • Transition period for FFSPs relying on limited connection relief ends 30 September 2020.
Standard AFS licence
  • FFSPs who are not able to come within one of the other regulatory arrangements proposed in this table or any other exemption12 should apply for a standard AFS Licence.

1 See Attachment 2 to CP 315: Draft instrument https://download.asic.gov.au/media/5191723/attachment-2-to-cp315-published-3-july-2019.pdf.

2 ASIC, Consultation Paper 301 – Foreign financial services providers.

3 See Attachment 3 to CP 315: Draft instrument https://download.asic.gov.au/media/5191724/attachment-3-to-cp315-published-3-july-2019.pdf.

4 ASIC Corporations (Repeal and Transitional) Instrument 2016/396.

5 ASIC Corporations (Foreign Financial Services Providers—Limited Connection) Instrument 2017/182.

6 See Class Order [CO 03/1099] UK regulated financial service providers; Class Order [CO 03/1100] US SEC regulated financial service providers; Class Order [CO 03/1101] US Federal Reserve and OCC regulated financial service providers; Class Order [CO 03/1102] Singapore MAS regulated financial service providers; Class Order [CO 03/1103] Hong Kong SFC regulated financial service providers; Class Order [CO 04/829] US CFTC regulated financial services providers; Class Order [CO 04/1313] German BaFin regulated financial service providers.

7 The relief under the above Class Orders was repealed in 2016, however, ASIC released ASIC Corporations (Repeal and Transitional) Instrument 2016/396 (Instrument 2016/396) to extend the relief provided by the Class Orders until 27 September 2018. On Friday 21 September 2018, ASIC released ASIC Corporations (Amendment) Instrument 2018/807 (Instrument 2018/807), which extended the relief available under both Instrument 2016/396 (sufficient equivalence) and Instrument 2017/182 (limited connection) until 30 September 2019.

8 See Consultation Paper 315: Foreign financial services providers: further consultation, 5.

9 See Draft Instrument ASIC Corporations (Foreign Financial Services Providers – Foreign AFS Licensees) Instrument 2019 at [13].

10 As noted above, ASIC has extended this relief until 31 March 2020.

11 See CP 315, 11.

12 See for example Corporations Regulations 2001 (Cth) reg 7.6.02AG.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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