The Australian Government has announced that it is consulting on an additional Australian financial services license (DISCLAIMER) Exceptions for foreign financial service providers (FFSP), including foreign fund managers and foreign financial product advisors. These proposed exemptions will replace certain existing AFSL exemptions that have been in effect for over 20 years and have been relied upon by many FFSPs.
The AFSL exemptions for FFSPs are subject to consultation (Exceptions) are set out in a draft law for a proposed AFSL exemption for “professional investors” (Exception for professional investors) and a proposed AFSL exemption for “comparable regulators” (Similar regulatory exemption). The government has stated that the exemptions are intended to “provide Australian investors with access to global financial markets and attract additional investment and liquidity to Australian markets” and represent the latest developments in a somewhat unstructured, extended consultation period and the proposed reform to the AFSL Regulation FFSPs , which started in 2016.
In a previous Corrs Insight we provided a summary of the draft exemptions bill. In this article we will take a closer look at both the professional investor exemption and the comparable regulatory exemption. In doing so, we will consider some of the potential impact of the exceptions on FFSPs that replace the current FFSP AFSL “limited connection” and “sufficient equivalence” exceptions, as proposed. The “limited connection” and “sufficient equivalence” exceptions now expire on March 31, 2025.
Proposed exemption for professional investors
A broader exception
The professional investor exemption is intended to provide FFSPs with a new general exemption from the requirement to hold an AFSL. There is a similar AFSL “professional investor” exemption for FFSPs, but it is already in effect:
- The current exemption is limited Financial Services it applies: only to advice, trading and marketing of financial products; And
- The current exemption is limited financial products it only applies to derivatives, foreign exchange contracts and certain CO2 emission units.
The proposed exemption for professional investors applies instead to all Financial services, excluding financial products and services that may subsequently be excluded by regulation.
Replacement for “Restricted connection”.
Because 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 particular jurisdiction (see the discussion of the Professional Investor Exemption for comparable regulators below), the Professional Investor Exemption effectively becomes the Professional Investor Exemption professional investors replace current “limited connections” exemption. The current “limited connections” exemption allows FFSPs that do not carry on a financial services business in Australia to provide financial services to wholesale customers in Australia, subject to certain conditions.
Additional clarity welcome
Under the Professional Investor Exemption, an FFSP must generally provide financial services from outside Australia. There are helpful concessions for financial services provided by FFSP representatives on marketing visits to Australia, which may not exceed a total of 28 calendar days (including weekends and public holidays) in a financial year.
This clarity of responsibility is to be welcomed. A shortcoming of the current “limited connections” exemption is that FFSPs relying on it will still need to consider whether they are carrying on a financial services business in Australia based on their interactions with customers and potential customers in Australia. The courts and ASIC have not yet provided clear guidance on this test.
Notwithstanding the fact that the professional investor exemption makes it clear that FFSPs can undertake limited marketing trips to Australia without having to hold an AFSL, FFSPs relying on the professional investor exemption should still consider whether their activities in Australia carrying on business in Australia may constitute 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 “large clients”
Importantly, and as the title suggests, FFSPs can only rely on the professional investor exemption if they provide financial services to “professional investors”. “Professional Investors” are a subset of “Wholesale Clients” and include:
- Entities regulated by APRA (other than trustees of pension funds and certain other funds with net assets of less than $10 million); And
- publicly traded companies and their related corporations, companies and individuals controlling at least $10 million (including amounts held by partners and under a trust managed by the individual)
Because “professional investors” are a narrower clientele than “wholesale clients,” FFSPs do not have access to certain types of “wholesale clients.” In particular, FFSPs cannot rely on:
- the path to certification as a qualified accountant (to attract high net worth individuals with a gross income of at least $2.5 million or $250,000 in the last two financial years); or
- the price or value path for financial products of A$500,000 within the meaning of the professional investor exemption.
FFSPs must instead rely on one of the tests for “professional investor” status.
“Reasonable belief in legality” required
In order for an FFSP to rely on the professional investor exemption, an FFSP must reasonably believe that the provision of the financial service provided by the FFSP does not violate the laws applicable at the FFSP’s principal place of business and principal place of business and in the jurisdictions from which it operates the financial service was provided.
The draft explanatory materials for this requirement indicate that “reasonable belief” requires reliance on objective facts and not mere suspicion. An FFSP may need to obtain legal advice on the legality of providing these financial services from these jurisdictions to support its considerations in this regard.
Requirements must be adhered to
In contrast to the current “limited association” exemption, FFSPs wishing to rely on the professional investor exemption must meet certain material conditions. This includes notifying ASIC of the FFSP’s intention to invoke the professional investor exemption. This notification must be made within 15 days before and 15 days after the provision of the relevant financial service.
In addition, FFSPs are required to do everything necessary to ensure that financial services are provided efficiently, honestly and fairly. While this condition is consistent with the obligation applicable to holders of AFSLs, it may require a standard of care that is higher or different from the standard of care agreed in the legal documentation between the FFSPs and their investors.
Similar regulatory exemption
The Comparable Regulator Exemption may be available to provide an AFSL exemption to companies and partnerships regulated by comparable regulators that provide “wholesale” financial services. The comparable regulatory exemption would replace the current AFSL “sufficient equivalence” exemption.
More jurisdictions will apply
The comparable regulatory authorities are not listed in the draft law but are subject to the decision of the responsible minister. This allows flexibility to add or remove foreign regulators from the list of comparable regulators.
Although the initial list of comparable regulators has not yet been published, the explanatory materials accompanying the draft law suggest that the first comparable regulators may be those deemed 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 jurisdictions
The Comparable Regulator Exemption specifically provides that the financial services provided under the proposed exemption must be provided from the comparable jurisdiction or Australia. This is different from the current “sufficient equivalence” exception, which does not specify from which offshore jurisdictions the financial services can be provided. FFSPs that have offices and employees in multiple jurisdictions could find it difficult to comply with the regulations and FFSPs would need to take care to ensure that financial services to investors in Australia are only provided from the comparable jurisdiction or Australia (and not from a regional or regional one Region) will be provided other office).
Requirements must be adhered to
FFSPs wishing to invoke the Comparable Regulator Exemption must meet certain conditions. This also applies to the current “sufficient equivalence” exemption. The conditions for the Comparable Regulator Exemption include the requirement for the FFSP to do everything necessary to ensure that financial services are provided efficiently, honestly and fairly. This is not a condition of the current “sufficient equivalence” exemption and, as noted above, may involve a different or higher standard of care than that agreed in the legal documentation of FFSPs and their investors.
FFSPs wishing to rely on the Comparable Regulator Exemption must also take reasonable steps to ensure that their representatives are appropriately supervised in the provision of financial services and are sufficiently trained and competent to provide this type of financial service. FFSPs must ensure that they have appropriate systems and processes in place to meet this condition, even if their requirements differ from those of the relevant comparable regulatory authority.
It is expected that FFSPs will generally view the proposed exemptions discussed in this article as a broadly positive development. It remains to be seen whether the exceptions will be introduced as proposed.
This publication is introductory in nature. The content is current at the time of publication. They do not constitute legal advice and should not be relied upon as such. Before taking any action in relation to the matters discussed in this publication, you should always seek legal advice based on your specific circumstances. Some information may be obtained from external sources and we cannot guarantee the accuracy or timeliness of this information.
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