A new AFS licensing regime for Foreign Financial Service Providers

Foreign financial service providers will be subject to a new regulatory regime from 1 April 2020, which will require a number of previously exempt foreign financial service providers (FFSPs) to hold an Australian Financial Services (AFS) licence.

At the same time a new exemption specific to funds managers will also take effect.

This article outlines the new FFSP regulatory framework, who the changes will affect and when.

It should also be noted that the final regulatory regime implemented by ASIC differs in key respects from the last round of consultation.

What is the new foreign AFS licensing regime?

The new foreign AFS licensing regime will impose a scaled down version of the existing AFS licensing regime on eligible FFSPs, and require all other foreign FFSPs to comply with Australia’s licensing regime in full.

So, depending on eligibility, FFSPs will either need to apply for a modified foreign AFS license (which is less onerous) or a full AFS licence.

Eligible FFSPs

FFSPs will be eligible to apply for a foreign AFS license if they:

• are incorporated or formed in a jurisdiction that the government has recognised as having a financial services regime sufficiently equivalent to Australia’s regime
• carry on business in their relevant jurisdiction
• hold a relevant authorisation under a sufficiently equivalent overseas regulatory regime to provide relevant financial services to wholesale clients
• are registered as a foreign company if they are required to do so under the Corporations Act, and
• only provide their services to wholesale clients in Australia.

The jurisdictions that are currently recognised include: Denmark, France, Germany, Hong Kong, Luxembourg, Canada (Ontario), Singapore, Sweden, UK and the United States.  FFSPs that are not formed or incorporated in one of these jurisdictions will need to apply for a full AFSL.

Modified obligations for eligible FFSPs

A number of the AFS licensing obligations will not apply to foreign AFS licensees, including for example the obligation to:

• have adequate resources
• maintain the competence to provide financial services
• ensure representatives are appropriately trained and maintain training records for representatives
• to notify ASIC of events that may cause a material adverse change to its financial position, and
• comply with client money handling obligations.

These obligations will not apply because ASIC acknowledges that similar obligations and regulatory supervision are imposed by similar overseas requirements.

The AFS licensing obligations that will apply to foreign AFS licensees include, for example, the obligation to:

• provide financial services efficiently, honestly and fairly
• have adequate arrangements in place to manage conflicts of interest
• have adequate risk management systems, and
• comply with any additional conditions imposed on their licence and applicable financial services laws.

In particular, FFSPs operating under the modified licence are limited to providing the permitted financial services to wholesale clients. The financial services permitted vary depending on the jurisdiction of the FFSP.

Foreign licensees will also need to comply with breach reporting obligations, which includes an obligation to report to ASIC any significant breach of the FFPS’s licence in its home jurisdiction and also be subject to ASIC’s supervisory and enforcement provisions.

What will the licensing process involve?

From 1 April 2020, eligible FFSPs can apply for a foreign AFS licence under a streamlined approach. In addition to the online licence application the FFSP will be required to submit additional documents to ASIC such as:

• Overview of the financial services business
• Consent for ASIC to contact the home Regulator
• Declarations, police checks and bankruptcy checks of the responsible officers
• Declarations and certifications that the FFSP will comply with its obligations as a foreign AFS licensee and the licence conditions
• Depending on the financial services business being provided and the complexity of the financial services business, supporting documents describing compliance arrangements, risk management systems, custodial and depository arrangements, and where applicable an overview of the FFSPs arrangements in relation to derivatives products , foreign exchange products and making a market (as detailed in ASIC Regulatory Guide 3), and
• Other supporting documents ASIC may request.

Who will the changes affect and when?

All FFSPs who do not fall within the narrow exemption of providing funds management services to professional investors will be required to hold a foreign AFS licence and comply with the new foreign AFS licensing regime.

The change will affect:

• FFSPs operating under the sufficient equivalence relief. FFSPs operating under the “sufficient equivalence” class order, which provides relief to FFSPs providing financial services to wholesale clients in Australia but which already operate under a foreign financial services regime recognised as equivalent to the Australian regime will no longer be exempt from licensing obligations. Providers currently operating under this exemption will need to be licensed from 1 April 2022.
• FFSPs with a limited connection. FFSPs operating under the “limited connection to Australia” class order, which provides relief to FFSPs that provide financial services to wholesale clients in Australia that only have a limited connection to Australia, will no longer be exempt from licensing obligations. For example, a business that does not market in Australia, or have an Australian agent or bank account, but that has a few Australian clients due to reverse solicitation (that is, where an Australian client solicits a foreign provider), would likely be considered to have a limited connection to Australia. Providers currently operating under this exemption will need to be licensed from 1 April 2022.  Any new FFSP will require a licence from 1 April 2020.
• FFSPs relying on reverse solicitation. It is now clear that FFSPs operating without an AFS licence based on the understanding that reverse solicitation is not sufficient to bring them within Australia’s financial services regime need to be licensed. This also reflects the recent Federal Court decision in Australian Securities and Investments Commission v One Tech Media Ltd [2020] FCA 46, which somewhat expanded the circumstances in which a foreign entity will be taken to have induced and provided financial services to Australian clients. If an FFSP currently operating under this understanding already meets the criteria of the limited connection relief, it will need to be licensed from 1 April 2022. If not, it will require a licence from 1 April 2020.
• Fund managers. FFSPs whose conduct is limited to inducing eligible Australian users (a sub-class of the existing professional investor category) to use a funds management financial service relating to offshore investment vehicles or portfolio management services offered by the FFSP will still be granted licensing relief, subject to certain conditions.  The relief under the new regime will commence from 1 April 2022.

ASIC has provided the new regime will “facilitate Australian wholesale access to foreign investment opportunities, preserves market integrity against misconduct in wholesale markets, and strengthens ASIC’s ability to take effective regulatory and supervisory action”.

Want more? You can read ASIC’s media release and updated Regulatory Guidance 176 on its website.

Got more questions?

Authors: Sarah Archer (Senior Associate) & Frank Varga (Head of Licensing)