Australia: ASIC's review of passport relief provided to foreign financial services providers

Foreign financial service providers who rely upon Class Order passport relief have a temporary reprieve, with ASIC announcing a two-year extension.

On 28 September 2016, the Australian Securities and Investments Commission temporarily extended seven class orders¹ for foreign financial service providers (FFSP) who rely upon Class Order "passport" relief.

ASIC has also announced consultation on the proposed repeal of Class Order 03/824, an exemption relied upon by FFSPs with a limited connection to Australia.

Providing financial services in Australia

Generally, where an entity carries on a financial services business in Australia, it is required to hold an Australian financial services licence (AFSL), or otherwise rely upon an exemption. In this regard, the Class Order passport relief afforded by ASIC exempts FFPS from the requirement to hold an AFSL, in certain circumstances.

The policy rationale behind Class Order passport relief was to attract additional investment and liquidity to Australian markets by addressing the duplicated regulatory burden arising from compliance with Australia's regulatory regime where FFSP were already subject to sufficiently equivalent regimes in their home jurisdictions.

The Class Order passport relief has been widely adopted by FFSP providing financial services in Australia. In fact, according to ASIC, approximately 775 FFSP currently rely upon it.

Two year extension

The Class Order passport relief was due to expire between 1 October 2016 and 1 April 2017, but the relief under those Class Orders has been extended for two years from 28 September 2016. Throughout this period, ASIC intend to consider whether the current relief settings should continue on an extended basis. While ASIC appears committed to facilitating the cross-border provision of financial services it will only do so "where it does not undermine our ability to ensure fair and efficient markets".

ASIC note in Consultation Paper 268 – Licensing relief for foreign financial service providers with a limited connection to Australia (CP 268), that ASIC is consulting with the industry on proposals to amend the relief for FFSPs, with the intention to strike an appropriate balance between:

• facilitating the cross-border provision of financial services on the basis of substituted compliance; and
• ensuring ASIC can adequately supervise these foreign entities in Australian markets.

There seems to be some suggestion that ASIC is not comfortable that it has appropriate oversight of FFSP currently relying upon the Class Order passport relief.

What do FFSP relying upon the Class Order passport relief need to do?

Entities currently relying on the Class Order passport relief are not required to take any specific action or lodge any new notification with ASIC, as the relief provided under the Class Orders continues.

In saying this however, there is an additional condition that has been added for entities that are currently relying on the Class Order passport relief, which requires them to comply with any written notice given by ASIC directing the person to give to ASIC a written statement containing specified information about the financial service business operated by the person in this jurisdiction within a specific time-frame. This additional obligation differs slightly and is broader than the current requirement contained in the Class Order relief, which can see ASIC requesting information about any financial service provided in Australia.

Given ASIC's statement in CP 268 that there is "recent evidence of non-compliance with our relief for FFSP", we suspect that ASIC may use this additional information requesting power to gain access to information to enable it to assess compliance with the passporting relief.

FFSP relying on the Class Orders passport relief should also consider whether references to those Class Orders in any client facing documentation needs to be updated to reflect the new exemption arrangements.

CO 03/284

C0 03/284 currently provides important relief for FFSP from the need to hold an AFSL where it is:

• dealing only with wholesale clients; and
• carrying on a financial services business by engaging in conduct that is intended to induce people in this jurisdiction to use the financial services it provides or is likely to have that effect.

ASIC's rationale for this relief was to ensure that isolated transactions by a foreign entity with Australian wholesale clients would not require that entity to hold an AFSL. It was granted in part to address concerns that overseas counterparties to derivatives and foreign exchange transactions may be caught engaging in inducing conduct under section 911 of the Corporations Act when issuing financial products to Australian wholesale clients, and accordingly would need to be licensed when entering into ad-hoc derivatives and foreign exchange contracts with Australian wholesale clients. It is likely that FFSP relying upon CO 03/284 do not qualify for the Class Order passport relief, or they only carry on small and infrequent business in Australia.

However, ASIC is now proposing to repeal CO 03/824 (which would otherwise sunset on 1 April 2017), although ASIC is proposing a one-year transition period. ASIC is of the view that the relief intended to be provided by CO 03/284 has subsequently been provided under section 911A(2E) of the Corporations Act (which is inserted via Corporations Regulation 7.6.02AG). In saying this however, there are differences between the relief afforded under CO 03/284 and that under section 911A(2E):

• CO 03/284 applies to the provision of any financial service or financial product, rather than the specific financial services and products contained in section 911A(2E) (which are limited to dealing, advising or making a market in derivatives, foreign exchange contracts, and a range of financial products related to carbon emissions); and
• CO 03/824 applies where the service is provided to a wholesale client, while section 911A(2E) states that the financial service must be provided to a professional investor, as defined in section 9 of the Corporations Act. This would then exclude for example, high net worth individuals (who are considered wholesale clients, but would not meet the professional investor test).

As such, we think the repeal of CO 03/284 may have a significant impact on some FFSP currently relying on CO 03/824. We suspect that those FFSP will be unable to find an alternative suitable exemption and as such will need to consider applying for passporting relief (to the extent that they qualify for such relief), apply for individual relief or alternatively obtain an AFSL in their own right. ASIC is encouraging those FFSP currently relying on CO 03/824 to provide financial services in relation to products or services that are not specified in section 911A(2E) to identify themselves as part of the consultation process. ASIC has stated that where only a small number of entities engaging in activities not covered by section 911A(2E) identify themselves, it will consider repealing CO 03/824 and will encourage the relevant FFSP to apply for individual relief.

Footnote

¹ASIC Class Order [CO 03/1099] UK regulated financial service providers;ASIC Class Order [CO 03/1100] US SEC regulated financial service providers; ASIC Class Order [CO 03/1101] US Federal Reserve and OCC regulated financial service providers; ASIC Class Order [CO 03/1102] Singapore MAS regulated financial service providers; ASIC Class Order [CO 03/1103] Hong Kong SFC regulated financial service providers; ASIC Class Order [CO 04/829] US CFTC regulated entities; and ASIC Class Order [CO 04/1313] German BaFin regulated financial service providers.

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.