Exposure draft legislation released for foreign financial service provider licensing options

The Government has announced its long-awaited Australian financial services (AFS) licensing options for foreign financial service providers (FFSPs). We summarise the key take aways.

To ensure Australia remains an attractive jurisdiction for FFSPs, the Treasury has kickstarted a process to streamline the current patchwork of AFS licensing relief into a single framework within the Corporations Act 2001 (Cth) (Corporations Act).

This reform has been underway since 2021, when the former Government published draft legislation for industry consultation.[1] Around the same time, the Australian Securities and Investments Commission (ASIC) had repealed, or announced its intention to repeal, FFSP licensing exemptions available through various ASIC instruments.

The Government has now announced a new consultation process (from 7 August 2023 – 8 September 2023) on:

• a professional investor exemption;

• a comparable regulator exemption;

• a market maker exemption; and

• an exemption from the ‘fit and proper’ person assessment to fast‑track the licensing process for FFSPs authorised to provide financial services in a comparable regulatory regime.[2]

Professional investor exemption

The new professional investor exemption would replace the existing professional investor exemption (which is found in s 911A(2E), as inserted by the Corporations Regulations 2001 (Cth) (Corporations Regulations)).

Currently FFSPs are exempt from requiring an AFS licence if they provide financial services to ‘professional investors’ in advising, dealing, or making a market in derivatives, foreign exchange contracts, and specified carbon units.

A ‘professional investor’ includes entities such as certain superannuation fund trustees, banks, registered financial corporations, listed entities, AFS licensees holders, and persons who control at least A$10 million (including any amount held by an associate or under a trust that the person manages).

The new exemption would provide AFS licensing relief to FFSPs which provide financial services (which do not involve dealing in certain products tradeable on certain prescribed markets) to ‘professional investors’, and as long as the:

1. FFSP provides the financial service from outside Australia;
   
   
2. FFSP’s head office and principal place of business is located outside Australia; and
   
   
3. financial service does not contravene a law applying in the country where the financial service is provided (or where their office or business is located).

The new exemption appears to expand the list of financial services and products a FFSP can provide to a ‘professional investor’. However, to address potential market risks, the Corporations Regulations may prescribe that the exemption does not apply to particular kinds of financial services, financial products or professional investors.

Notably, the new exemption extends to representatives of FFSPs who conduct marketing visits in Australia (although such visits are capped at 28 days per financial year).

Comparable regulator exemption

The ‘comparable regulator exemption’ is proposed to replace the ‘sufficient equivalence’ relief and is intended to exempt FFSPs authorised to provide financial services in a ‘broadly’ comparable jurisdiction, from the requirement to hold an AFS licensing when providing financial services to wholesale clients.

The Minister will publish a list of broadly comparable jurisdictions separately by legislative instrument. This list is yet to be determined, however the use of the phrase ‘broadly’ comparable, may indicate an intention to list more jurisdictions than that previously available under ‘sufficient equivalence’ relief.

FFSPs currently relying on the ‘sufficient equivalence’ may potentially do so until 31 March 2025.

Derivatives market maker exemption

The new market maker exemption would provide AFS licensing relief to FFSPs making a market for derivatives that are able to be traded on a licensed market (as prescribed by the Corporations Regulations).

As with the professional investor exemption, the market maker exemption would be available to derivatives market makers who:

1. provide the service from outside Australia;
   
   
2. have a head office and principal place of business that is located outside Australia; and
   
   
3. provide a financial service that does not contravene a law applying in the country where the financial service is provided.

Conditions of exemptions

The Bill seeks to impose a set of conditions on FFSPs that they must comply with to rely on the exemptions, including notification requirements and complying with directions from ASIC. The Bill also includes a new condition for FFSPs to provide financial services ‘efficiently, honestly and fairly’ (which has been a long-standing feature of the statutory obligations imposed on AFS licensees).

Penalties

It is proposed that FFSPs must notify ASIC of a failure to comply with any of these conditions. If a FFSP contravenes a condition, then ASIC could either cancel the exemption, subject the FFSP to a show cause process, or impose additional conditions for future application of an exemption. Notably, ASIC could cancel an exemption if it reasonably believes that a FFSP has failed the ‘fit and proper person test’ or does not act honestly, efficiently or fairly.

‘Fit and proper person’ test exemption

For FFSPs who wish to obtain an AFS licence, the ‘fit and proper person’ test exemption aims to expedite the AFS licence process for FFSPs from jurisdictions with comparable regulatory regimes to provide financial services to wholesale clients while they establish permanent operations in Australia.

Transitional arrangements

The Bill is anticipated to commence on 1 April 2024, which is meant to align with the end of the transitional arrangements for the existing ASIC relief instruments (i.e. sufficient equivalence relief and limited connection relief – see below). It is unclear whether the Bill will now commence on 1 April 2025, after the recent announcement that reliance on the existing instrument relief will be extended a year, from 2024 to 2025.

Other FFSP licensing options

Finally, until the commencement of the new FFSP licensing options, FFSPs can potentially continue to rely on the following pathways:

1. ASIC class order/sufficient equivalence/passport relief: a FFSP can rely on this relief up until 31 March 2025, extended from 31 March 2024. FFSPs that were unable to rely on this relief as of 31 March 2020 cannot rely on this relief. It is unclear whether entities currently relying on this relief need to re-apply for the comparable regulator exemption.[3]
2. Limited connection relief: FFSP can rely on limited connection relief up until 31 March 2025, extended from 31 March 2024.[4]
3. Funds management relief: the commencement of funds management relief has been delayed a year, to 1 April 2025. Funds management relief will replace limited connection relief.[5] Funds management relief applies in more limited circumstances than limited connection relief. Entities relying on limited connection relief should consider what FFSP licensing options will best suit their business before the sunsetting of the relief on 31 March 2025.[6]
4. Foreign AFS licence: Subject to the outcome of the consultation process, FFSPs may potentially apply for a modified AFS licence if they held a relevant authorisation in a sufficiently equivalent overseas regulatory regime and wished to provide financial services to Australian wholesale clients.[7] It is unclear what, if anything, will happen to this licensing option now that the similar comparable regulator exemption has been announced as a distinct FFSP licensing option.

Treasury has not confirmed the timeline for these licensing options to be finalised, however we suggest that FFSPs keep updated with this reform and assess what options are appropriate for their business model and needs.

^{[1] Treasury Laws Amendment (Measures for Consultation) Bill 2021: Licensing exemptions for foreign financial service providers.}

^{[2] https://treasury.gov.au/consultation/c2023-430917.}

^{[3] The relevant ASIC Class Order as modified by ASIC Corporations (Amendment) Instrument 2023/588.}

^{[4] ASIC Corporations (Amendment) Instrument 2023/588. See also ASIC Information Sheet 157.}

^{[5] ASIC Corporations (Foreign Financial Services Providers—Limited Connection) Instrument 2017/182, as modified by ASIC Corporations (Amendment) Instrument 2023/588.}

^{[6] ASIC Corporations (Foreign Financial Services Providers—Funds Management Financial Services) Instrument 2020/199, as modified by ASIC Corporations (Amendment) Instrument 2023/588.}

^{[7] ASIC Corporations (Foreign Financial Services Providers—Foreign AFS Licensees) Instrument 2020/198.}