Following on from consultations, ASIC has finalized and released its new regulatory framework for foreign financial services providers (FFSPs) providing financial services to Australian wholesale clients.
May 26 2020 | AtoZ Markets – Some Australian Forex companies have decided to relocate to Seychelles due to the Australian Securities and Investments Commission (ASIC)’s plans last year to ban all onboarding of non-Australian clients. Because the move is part of the regulator’s proposals to create a very draconian system of regulation, these FX companies should now take stock and reconsider their decision.
ASIC new regulatory framework allows Australian Forex companies to operate with international clients
ASIC animosity toward what it calls the ‘margin FX industry’, ended in 2019, something that has been brewing for many years. The grievance came in the form of the release of official draft rulings on all aspects of CFD trading, and also the prohibition of onboarding of non-Australian retail clients. However, banning all Australian FX and CFD firms from accepting overseas clients is like removing their lifeline.
This week, some clarifications were made on the possibility that Australian FX companies will be able to continue to accept international clients. With that in mind, ASIC has made specific new licensing rules for this purpose.
So, it could well be business as usual, but with a little bit of extra bureaucracy. The good news is that regions of the world with similar regulatory structures are now part of these new rulings, which are subject to application for a foreign license. It’s a good start, maybe more will be added in time.
A closer look at ASIC new regulatory framework
Australian law firm Minter Ellison has revealed the new rules are all about. Minter Ellison has clarified that the new foreign Australian financial services (AFS) licensing regime allows FFSPs from jurisdictions that are regulated in a sufficiently equivalent jurisdiction to Australia (as approved by ASIC) to apply for a ‘foreign’ AFS licence so it can provide a range of financial services to Australian wholesale clients, whether from inside or outside of Australia.
The final foreign licensing regime is very similar to previous proposals. More information about it can be found in our earlier alerts for (see Foreign financial services regime reworked and Foreign provider must hold Australian licence) – note however that the other proposals have changed significantly.
What are the requirements to apply?
FFSPs seeking to apply for a foreign AFS licence must :
- Be authorized in a sufficiently equivalent overseas regulatory regime to provide substantially the same financial services as the FFSP wishes to provide in Australia
- Have a local agent appointed under the regime, unless the FFSP is a company
- Have a reasonable belief that it is fully compliant with any laws of its home jurisdiction relating to the provision of financial services to wholesale clients
- Understand and be able to comply with your obligations as a foreign AFS licensee and with your licence conditions
- Submit a number of supporting ‘proof’ documents to ASIC as part of the licence application.
Do I need ASIC registration as a foreign company in order to apply?
No! There is no strict requirement than an FFSP applying for a foreign AFS license must first register with ASIC as a foreign company. Foreign company registration depends on whether the applicant will be ‘carrying on a business’ in Australia, which is dependent on many factors.
Accordingly, FFSPs looking to apply for a foreign AFS licence will need to consider what activities it will engage in Australia. This will help to ascertain whether registration is with ASIC as a foreign company is compulsory.
Important licensee requirements to comply with
It is compulsory for Foreign AFS licensees to comply with the following key requirements under Chapter 7 of the Corporations Act 2001 (Cth):
- Ensure the financial services are provided efficiently, honestly and fairly
- Have adequate arrangements for the management of conflicts of interest and adequate risk management systems
- Comply, and take reasonable steps to ensure representatives comply, with Australian financial services laws and the conditions on its licence
- Obligation to report a ‘significant breach’ (or likely significant breach) to ASIC within the specified timeframe, and
- Notify ASIC of various matters such as changes to the licensee’s authorizations in the relevant home jurisdiction and any significant investigation, enforcement, or disciplinary action undertaken by the relevant overseas regulatory authority against the licensee.
Foreign AFS license holders are exempt from certain requirements of Chapter 7 of the Corporations Act that domestic AFS license holders must adhere to – e.g. financial adequacy, organizational competence, training of representatives, and client money handling. These exemptions are provided on the basis that the FFSP would be subject to sufficiently equivalent overseas regulatory requirements that would achieve similar regulatory outcomes to the exempted provisions.
When does ASIC’s new regulatory framework begin?
The new foreign AFS licensing regime started on 1 April 2020. Also, applications you can make applications through ASIC’s online electronic licensing portal.
ASIC has also stated that FFSPs will be able to apply for a foreign AFS licence but delay the start date of their licence – this may be a good strategy for FFSPs who are eligible to continue to rely on the sufficient equivalence for the full transition period (see below) and want to benefit from the ‘lighter’ set of regulatory obligations in relation to the sufficient equivalence relief.
What is happening with the sufficient equivalence relief?
As of 1 April 2020, the sufficient equivalence relief will expire and those FFSPs that were not relying on the relief on 31 March 2020 will need to apply for a new foreign AFS licensing regime, apply for a ‘standard’ AFSL or rely on an exemption (such as the limited connection relief) to provide financial services to Australian clients.
Is there a transition period?
Yes – ASIC has confirmed a two year transition period, allowing FFSPs relying on the sufficient equivalence relief as at 31 March 2020 to be able to continue to rely on the sufficient equivalence relief until 31 March 2022. This means that if you are an eligible FFSP considering or intending to rely on the sufficient equivalence relief, you should gather and lodge relevant documents to ASIC by 31 March 2020 so you are able to obtain the benefit of this relief for a further 2 years (but do make sure you submit all relevant documents and ensure they are complete and meet the relevant requirements).
Which jurisdictions are ‘sufficiently equivalent’?
ASIC has added Denmark, Sweden, France and Canada (Ontario) to its list of sufficiently equivalent overseas regulatory regimes. The full list of sufficiently equivalent jurisdictions is:
- Canada (Ontario)
- Hong Kong
- the United Kingdom, and
- the United States.
What if you are not from a ‘sufficiently equivalent’ jurisdiction?
You cannot apply for a foreign AFS licence without authorization under the above sufficiently equivalent overseas regulatory regimes. You need to consider whether you are able to rely on the ‘funds management’ relief or some other exemption from the need to hold an AFS licence. Otherwise, you will need to apply for a ‘standard’ AFS licence before the expiry of the ‘limited connection’ on 31 March 2022 if that is available to you.
Alternatively, you can apply to ASIC for recognition of their regulatory regime as sufficiently equivalent. Criteria on which these applications will be considered has been set out in ASIC’s RG 176.
What is funds management financial services relief
The funds management financial services (FM) relief exempts FFSPs from having to hold an AFS license it they provide, from offshore, ‘funds management financial services’ to ‘eligible Australian users’ (i.e. certain types of professional investors in Australia) and do not otherwise carry on a business in Australia. Notably, ASIC has decided against applying a revenue cap to the relief.
What are funds management financial services?
There are three kinds of funds management financial services covered by the relief:
- Dealing in, advising on, making a market in (as issuer) or providing a custodial and depository services in relation to an offshore fund
- Dealing in any kind of financial products under a portfolio management services agreement
- Providing a custodial or depository service under or in relation to a portfolio management services agreement..
What is an ‘eligible Australian user’?
ASIC has limited the application of the relief to following types of professional investors:
- Responsible entities of registered schemes
- Superannuation trustees if the fund has at least A$10 million net assets
- Licensed trustees of wholesale trusts
- Entities regulated by the Australian Prudential Regulation Authority (APRA), and
- Government authorities.
What does a FFSP need to do to rely on relief?
To rely on the relief, an FFSP must:
- Not have a place of business in Australia
- Appoint a local agent for service
- Confirm the following to ASIC:
- intention to rely on the relief
- the FFSP’s home jurisdiction that it can provide funds management financial services in its home jurisdiction
- the FFSP’s home jurisdiction regulator is a signatory to the IOSCO Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information (MMOU);
- on the written request of ASIC or the home regulator, the FFSP will enable the disclosure of information between ASIC and the home regulator; and
- that it will comply with written notices from ASIC and assist ASIC during surveillance checks.
When does it begin?
The new funds management financial services relief started on 1 April 2022. Until then, FFSPs can continue to provide financial services from offshore to wholesale clients in certain circumstances in reliance on the ‘limited connection’ relief. ASIC has indicated that a tailored form will be prepared for FFSPs to complete and lodge where it seeks to rely on the funds management financial services relief.
ASIC has extended the ‘limited connection’ relief until 31 March 2022 in order to provide a transition period for FFSPs.
What do you think about ASIC’s new regulatory framework? Let us know in the comment section below.