ASIC’s new licensing changes – the end of passport exemptions for foreign financial services providers?

07 June 2018

On 1 June 2018, ASIC announced a proposal that requires foreign financial services providers (FFSPs), including global investment banks and wholesale managed funds, to apply for a modified form of an Australian financial services licence (AFS Licence).[1] The modified licence will be classified as a “foreign AFS licence” and will impose specific conditions on these licensees. The proposals follow ASIC’s comprehensive review of FFSP relief which raised concerns of non-compliance and supervisory issues for entities that benefit from the relief.

The current position

Currently, FFSPs who provide foreign services to wholesale clients are not required to hold an AFS Licence if they are regulated by an overseas regime that ASIC deems to be sufficiently equivalent to the Australian financial services regime. These jurisdictions include the UK (CO 03/1099), the USA (CO 03/1100), Singapore (CO 03/1102), Germany (CO 04/1313) and Hong Kong (CO 03/1103). There are two main “passporting” exemptions:

The sufficiently equivalent exemption (Instrument 2016/396) – for FFSPs who are regulated in their home jurisdiction under a regime that is sufficiently equivalent to the AFSL regime; and
The limited connection exemption (Instrument 2017/182) – for FFSPs who have limited and infrequent transactions with Australian wholesale clients.

The existing exemptions are likely to be extended until 30 September 2020 (taking into account the 12-month extension provided by CP 301, and a proposed further 12-month transitional period for the new regime).[2]

The proposals and rationale

The aim of FFSP relief is to facilitate the import of financial services to Australia.[3] However, ASIC’s recent review (published in CP 301) highlighted that the current relief framework fails to strike an appropriate balance between cross border investment facilitation, market integrity and investor protection.[4]

Consequently, the new foreign AFS licensing regime seeks to rectify these issues by:

repealing the sufficient equivalence relief and allowing FFSPs to apply for a foreign AFS licence;[5] and
repealing the limited connection relief.[6]

This new regime recognises the need for regulatory responses to evolve with financial services to combat the challenges of globalisation and technological advancements.[7]

What to do if you are a FFSP currently relying on the passporting regime?

Start reviewing ASIC’s AFS licensing kit and application process

FFSPs should familiarise themselves with ASIC’s AFS licensing kit (RG 1-3) which sets out the application process for AFS Licences. ASIC may require FFSPs to provide similar core and additional proof documentation to demonstrate their ability to comply with the modified AFS licensing regime for FFSPs.

Understand your obligations under the modified foreign AFS licensing regime

CP 301 proposes a modified regime that would apply for FFSPs that are regulated under overseas regulatory models that have sufficient equivalence to the obligations imposed on Australia’s AFS Licence holders. In short, ASIC proposes to exempt FFSPs from certain obligations in the Corporations Act. We set out below a comparison between the general AFS Licence obligations that apply to FFSPs versus obligations that apply to all Australian AFS Licence holders:

*AFS Licence obligation (s 912A of the Corporations Act)*	Australian AFS Licence holders	FFSPs
Section 912A(1)(a): do all things necessary to provide financial services efficiently, honestly and fairly	√	√
Section 912A(1)(aa): have adequate arrangements in place for managing conflicts of interest that may arise wholly, or partially, in relation to activities undertaken by the licensee or a representative of the licensee in the provision of financial services as part of the financial services business of the licensee or the representative	√	√
Section 912A(1)(b): comply with the conditions on the licence	√	√
Section 912A(1)(c): comply with the conditions on the licence, subject to certain modifications to the Corporations Act	√	√
Section 912A(1)(ca): take reasonable steps to ensure that representatives comply with the financial services law	√	√
Section 912A(1)(d): have adequate resources to provide the financial services covered by the licence and carry out supervisory arrangements	√	X
Section 912A(1)(e): maintain the competence to provide those financial services	√	X
Section 912A(1)(f): ensure that its representatives are adequately trained and are competent to provide those financial services	√	X
Section 912A(1)(h): have adequate risk management systems	√	√
Section 912A(1)(j): comply with any other obligations that are prescribed by regulations made for the purposes of section 912A(1)	√	X

Be prepared for conditions that may be imposed on the modified AFS licence.

Pro Forma 209 (Australian financial services licence conditions) sets out a list of standard AFS Licence conditions that may be imposed on an Australian AFS Licence, depending on the scope of authorisation sought by the AFS Licence holder.

CP 301 suggests that these licence conditions may also be applied to foreign AFS licence holders, with further additional conditions that ASIC may impose through upcoming legislative instruments, such as the following:

that the foreign AFS licensee must not appoint representatives unless they are employees of the foreign AFS licensee or authorised representatives, employees or directors that are wholly owned bodies corporate of the foreign AFS licensee;
that the foreign AFS licensee must notify ASIC of significant changes including exemptions that the licensee has obtained within their home jurisdiction and any significant enforcement action; and
that the foreign AFS licensee will need to notify ASIC of any changes regarding their local agent.

Next steps

For a period of 12 months from 30 September 2018, ASIC will extend the current FFSP relief for both sufficient equivalent relief and limited connection relief. During these 12 months, ASIC will engage in public consultation with the industry about the operation of the licensing relief and the proposed new licensing regime. Submissions on CP 301 close on 31 July 2018.

If the proposals are then adopted, the industry will have a further 12 months to implement the arrangements and FFSPs will be expected to comply with the new licencing regime by 30 September 2020. Further, a revised Regulatory Guide 176 will be issued.[8]