In brief - As we move closer to the start of 2020, foreign financial service providers should consider their Australian licensing arrangements and Australian Securities and Investments Commission (ASIC) relief
ASIC has for a number of years provided relief to foreign financial service providers (FFSPs), currently set out in Regulatory Guide 176: Foreign Financial Service Providers. There has been a sound policy basis for this, including to facilitate access to global providers of portfolio management services and the ability to maintain investor protection by limiting the relief to wholesale clients accessing the services.
How best to regulate FFSPs has been under ASIC's consideration for some time now, with ASIC having engaged in an extensive review of its policy and relief for FFSPs. (See our August 2018 article ASIC proposes a modified form of AFSL for foreign financial service providers, and our September 2019 article Major AFS licensing change on horizon for foreign financial services providers.)
The most recent consultation by ASIC was in the middle of this year at which time ASIC proposed specific licensing relief to allow FFSPs to provide funds management financial services to professional investors in Australia.
Importantly for global FFSPs, ASIC proposes further relief for portfolio management services to Australian funds. This is subject to a proposed strict framework which we discuss below.
A brief overview of the proposed relief for funds management services
The scope of services for the proposed relief is limited to "funds management financial services". These services are proposed to be defined by reference to two categories, broadly:
Category 1: Interests in an offshore fund
The services deal in interests in an offshore fund (being a managed investment scheme or company established outside Australia) where:
- the services are to a "professional investor in Australia", and
- the services include dealing in an offshore fund, financial advice is provided in relation to an offshore fund or making a market for or in relation to interests in an offshore fund
Category 2: Portfolio Management Services
The provision of portfolio management services to:
- the trustee of a superannuation fund
- an approved deposit fund
- a pooled superannuation trust or a public sector superannuation scheme
- a person who operates a managed investment scheme that has assets of at least AUD$10 million
- a life company, or
- exempt public authority
The circumstances of the provision of portfolio management services to Australian funds by an FFSP will require careful assessment under each category.
For example, Category 1 adopts the statutory definition for a "professional investor", which includes an AFS licensee, a body regulated by APRA except a trustee of a super fund where the fund has assets of less than AUD$10 million, a person who controls at least AUD$10 million, and a person who is a listed entity or related body corporate of a listed entity.
Custodial or depository services are not addressed given the operation of Corporations Regulation 7.6.01(1)(k).
The licensing relief proposed is subject to a cap on the scale of an FFSP’s services in Australia based on annual aggregated revenue and conditions that will apply to the operation of the relief.
In summary these conditions are:
- a cap of 10% of annual aggregated consolidated gross revenue, including the aggregated consolidated gross revenue of entities within its corporate group (for each of the previous and current financial years), generated from the provision of funds management financial services in Australia, and
- an FFSP must not carry on a business in Australia and must appoint a local agent, entry into a deed covenanting to certain jurisdictional obligations (and lodgement of the deed with ASIC), proof of compliance arrangements for the aggregated revenue cap and other regulatory assistance
The policy intention expressed in ASIC's Consultation Paper is to achieve a narrowing of the limited connection relief (which is to be repealed) and increase the jurisdictions that can rely on the relief.
Advancements in technology could be a problematic issue as financial services and technology facilitates greater global interconnection. Further, heightened technology solutions can provide new or better capabilities for advice and trade (dealing) arrangements.
Implementation of licensing relief
ASIC has proposed the following timetable for implementation of licensing relief for "funds management financial services":
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 2021.