In brief - FFSPs, foreign operators and investors, Australian operators and investors should consider the impact of ASIC's FFSP proposal
has released consultation paper CP 301 Foreign financial services providers
which proposes repeal of the current FFSP relief provisions and introduction of a modified form of Australian Financial Services Licence for FFSPs (the Foreign AFSL).
Perimeter issues are among the most complex in the regulation of financial services, given:
- the amount of cross-border activity in financial services
- economies of scale in combining country operations
- the difficulty of policing overseas fraud, and
- territorially assertive financial regulators
Australia has long operated a scheme providing conditional relief to FFSPs (foreign financial service providers) from the requirements to comply with Australia's financial services regulation for portfolio management services to Australian wholesale clients.
Although limited to wholesale clients on the surface, substantial retail money can sit within a wholesale structure - a common example is a master fund that is wholesale, and a feeder fund that is retail. For example, an Australian superannuation fund holds retail money and the fund may allocate across a range of investments.
ASIC commences a review of the relief to FFSPs
ASIC considers that the current regime in Australia does not strike an appropriate balance between cross-border facilitation, market integrity, and investor protection.
ASIC expects new legislative instruments reflecting its proposals and updated regulatory guide to be released in September 2019.
If those proposals come into effect:
- FFSPs will need to consider whether they must apply for a Foreign AFSL based on the financial services they currently provide, or intend to provide in Australia.
- Australian operators and investors should ensure they are familiar with the new regime and its practical implications. Australian operators may also wish to explore equivalent (or reciprocal) opportunities to recognise Australian regulation for services to overseas clients.
- For completeness, foreign investors will need to consider any improvement or risk arising from an FFSP's activity that may have an impact on them.
New regime will have far-reaching effects
The current "lite" regime applies only where dealing with wholesale clients.
Traditionally, wholesale clients have been viewed as being able to look after themselves and not in need of significant regulatory protection and intervention. Australia's current FFSP regime reflects that thinking.
Under the proposed regime, FFSPs would be subject to ASIC's directions power, breach reporting requirements, requirement to give reasonable assistance during surveillance checks, and remedies and penalties under the Corporations Act.
The new regime is a substantial change to the treatment of FFSPs and seems to reflect the increased sophistication in financial markets and services, with the distinction between wholesale and retail being considered holistically.
ASIC expects the result will be an ability to monitor more effectively and supervise FFSPs' conduct in Australia. Effective supervision is a key issue for many reasons, including:
- It may reduce regulatory arbitrage and it provides the possibility for redress for misconduct, both are relevant to sell and buy sides of industry.
- A foreign regulator's reach may not extend to conduct in Australia. Supervisory cooperation arrangements may be in place, however, there may be limitations with the scope of power for a foreign regulator - for good reason: it ensures sovereignty of regulation.
- The nature of the financial service or product provided in Australia may mean it is not within the foreign regulatory framework, even where there is regulatory equivalence.
This is commentary published by Colin Biggers & Paisley for general information purposes only. This should not be relied on as specific advice. You should seek your own legal and other advice for any question, or for any specific situation or proposal, before making any final decision. The content also is subject to change. A person listed may not be admitted as a lawyer in all States and Territories. © Colin Biggers & Paisley, Australia 2022.