Proposed new AFSL exemptions for foreign financial service providers

The Australian Government has announced it is consulting on additional Australian financial services license (AFSL) exemptions for foreign financial service providers (FFSP), including foreign fund managers and foreign financial product advisers. These proposed exemptions will replace certain existing AFSL exemptions, which have been in place for over 20 years and that many FFSPs have relied on.

The AFSL exemptions for FFSPs subject to consultation (Exemptions) are set out in exposure draft legislation for a proposed ‘professional investor’ AFSL exemption (Professional Investor Exemption) and a proposed ‘comparable regulator' AFSL exemption (Comparable Regulator Exemption). The Government has said the Exemptions are “intended to provide Australian investors with access to global financial markets and attract additional investment and liquidity to Australian markets” and are the latest developments in a somewhat unstructured extended period of consultation and proposed reform on the AFSL regulation of FFSPs that started in 2016.

In a previous Corrs Insight we provided a summary of the exposure draft legislation for the Exemptions. In this article we will consider both the Professional Investor Exemption and the Comparable Regulator Exemption in greater detail. In doing so, we will consider some of the potential implications for FFSPs of the Exemptions replacing the current ‘limited connection’ and ‘sufficient equivalence’ FFSP AFSL exemptions, as has been proposed. The ‘limited connection’ and ‘sufficient equivalence’ exemptions will now expire on 31 March 2025.

Proposed Professional Investor Exemption

A broader exemption

The Professional Investor Exemption is proposed to provide FFSPs with a new general exemption from the requirement to hold an AFSL. There is an existing, similar, ‘professional investor’ AFSL exemption for FFSPs which is already in place, however:

• the current exemption is limited in the financial services it applies to: only financial product advice, dealing in, and making a market; and
  
  
• the current exemption is limited in the financial products it applies to: only derivatives, foreign exchange contracts, and certain carbon emissions units.

The proposed Professional Investor Exemption will instead apply to all financial services, other than financial products and services that may later be excluded by regulation.

‘Limited connection’ replacement

Given that the Professional Investor Exemption is intended to apply to all financial services and does not require the FFSP to be licensed by a regulator in a specified jurisdiction (see the discussion of the Comparable Regulator Exemption below), the Professional Investor Exemption will effectively replace the current ‘limited connection’ exemption. The current ‘limited connection’ exemption allows FFSPs that do not carry on a financial services business in Australia to conditionally provide financial services to wholesale clients in Australia.

Additional clarity welcome

Under the Professional Investor Exemption, a FFSP must generally provide the financial services from outside Australia. There are helpful concessions for financial services provided by FFSP representatives during marketing visits to Australia which must not in total exceed 28 calendar days (including weekends and public holidays) in a financial year.

That jurisdictional clarity is welcome. A shortcoming of the current ‘limited connection’ exemption is that FFSPs which rely on it still need to consider whether they are carrying on a financial services business in Australia because of their interactions with clients and potential clients in Australia. The courts and ASIC to date have not provided bright line guidance on that test.

Notwithstanding that the Professional Investor Exemption makes it clear that FFSPs may make limited marketing trips to Australia without being required to hold an AFSL, FFSPs relying on the Professional Investor Exemption should still consider whether their activities in Australia could constitute carrying on a business in Australia for the purposes of other Australian laws (for example, the Privacy Act 1988 (Cth) and the requirement to register as a foreign company under the Corporations Act 2001 (Cth)).

‘Professional investors’ narrower than ‘wholesale clients’

Importantly, and as suggested by its title, the Professional Investor Exemption can only be relied upon by FFSPs to provide financial services to ‘professional investors’. ‘Professional investors’ are a subset of ‘wholesale clients’ and include:

• APRA regulated bodies (other than trustees of superannuation funds and certain other funds that have net assets of less than $10 million); and
  
  
• listed entities and their related bodies corporate and persons that control at least $10 million (including amounts held by associates and under a trust that the person manages)

Because ‘professional investors’ are a narrower range of clients than ‘wholesale clients’, FFSPs will not be able to access certain ‘wholesale client’ types. In particular, FFSPs will not be able to rely on:

• the qualified accountant certification pathway (to onboard high net worth individuals with at least $2.5 million or $250,000 of gross income for the prior two financial years); or
  
  
• the AUD$500,000 financial product price or value pathway, for the purpose of the Professional Investor Exemption. 

FFSPs will need to rely on one of the tests of 'professional investor' status instead.

‘Reasonable belief in lawfulness’ required

For a FFSP to rely on the Professional Investor Exemption, an FFSP must have a reasonable belief that the provision of the financial service provided by the FFSP would not contravene any law applying at the FFSP’s head office and principal place of business, and in the jurisdictions from which the financial service was provided.

The draft explanatory materials for this requirement indicate that a 'reasonable belief' requires reliance on objective facts, rather than just mere suspicion. A FFSP may need to obtain legal advice on the lawfulness of the provision of those financial services from those jurisdictions to assist with its considerations in this regard.

Conditions must be complied with

Unlike the current ‘limited connection’ exemption, FFSPs wishing to rely on the Professional Investor Exemption will need to comply with certain substantive conditions. These include notifying ASIC of the FFSP's intention to rely on the Professional Investor Exemption. This notification must be done within the period commencing 15 days before and ending 15 days after the provision of relevant financial service.

Also, FFSPs are required to do all things necessary to ensure that the financial services are provided efficiently, honestly and fairly. While that condition is consistent with the obligation that applies to holders of AFSLs, it may require a standard of care that is higher or different to the standard of care that is agreed to in the legal documentation between the FFSPs and their investors.

Comparable Regulator Exemption

The Comparable Regulator Exemption will be potentially available to grant an AFSL exemption to companies and partnerships that are regulated by comparable regulators and that provide financial services to ‘wholesale clients’. The Comparable Regulator Exemption would replace the current ‘sufficient equivalence’ AFSL exemption.

Will apply more jurisdictions

The comparable regulators are not set out in the draft legislation but will be a matter for determination by the relevant Minister. This allows for the flexibility to add overseas regulators to, or remove regulators from, the list of comparable regulators.

While the initial list of comparable regulators has not been published, the explanatory materials to the draft legislation indicates that the initial comparable regulators may be those that are considered to be comparable regulators under the foreign AFSL regime. These regulators are the US SEC, OCC and CFTC, Singapore MAS, Hong Kong SFC, German BaFin, Luxembourg CSSF, UK FCA and PRA, Danish FSA, Swedish FI, French AMF and ACPR and Ontario OSC.

Financial services only from comparable jurisdiction

The Comparable Regulator Exemption explicitly provides that the financial services provided under the proposed exemption must be provided from the comparable jurisdiction or from Australia. This is unlike the case with the current ‘sufficient equivalence’ exemption, which does not prescribe the offshore jurisdictions from which the financial services can be provided. It could be challenging to comply with for FFSPs that have offices and employees across multiple jurisdictions and FFSPs would need to take care to ensure that financial services provided to investors in Australia are provided only from the comparable jurisdiction or Australia (and not from a regional or other office).

Conditions must be complied with

FFSPs wishing to rely on the Comparable Regulator Exemption will need to comply with certain conditions. This is also the case with the current ‘sufficient equivalence’ exemption. The conditions for the Comparable Regulator Exemption include the requirement on the FFSP to do all things necessary to ensure that the financial services are provided efficiently, honestly and fairly. This is not a condition of the current ‘sufficient equivalence’ exemption and, as noted above, may be a different or higher standard of care than that agreed to in legal documentation by FFSPs and their investors.

FFSPs wishing to rely on the Comparable Regulator Exemption will also need to take reasonable steps to ensure that their representatives are adequately supervised when providing financial services, and are adequately trained and competent to provide those kinds of financial services. FFSPs will need to ensure that they have appropriate systems and processes in place to satisfy this condition, even if its requirements are different to those imposed by the applicable comparable regulator.

It is expected that FFSPs will generally consider the proposed exceptions discussed in this article to be a broadly positive development. Whether the Exemptions will be instituted as proposed is to be seen.