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Imminent changes to Australian rules for foreign financial service providers

​Foreign financial service providers of financial services to Australian wholesale (institutional) clients may lose the benefit of existing regulatory ‘sufficient equivalence relief’ as a result of proposed reforms which aim to subject such providers to direct regulation by the Australian financial services regulator. The reforms, which are likely to be implemented, will require such foreign providers to apply for new licences and be subject to increased regulation. Any failure to do so whilst at the same time continuing to offer financial services into the Australian market will result in enforcement action and fines. The proposed time frame means that such foreign providers will need to decide by 30 September 2019 (noting that ASIC has indicated a 12 month transitional period will operate from 1 October 2019 to 30 September 2020) whether they wish to continue with this part of their business.

Currently a FFSP which provides financial services to Australian wholesale (institutional) clients can rely on sufficient equivalence relief or a separate “limited connection to Australia relief.”
 
The rationale behind introducing sufficient equivalence relief was to attract foreign investment and liquidity to Australian markets by preventing duplicated regulatory burdens, as FFSPs were already subject to equivalent regulations in their home jurisdictions.
 
Sufficient equivalence relief applies to those whose domestic or home jurisdictions and regulators are as follows:

​Jurisdiction Regulator(s)​
United Kingdom​ ​Financial Conduct Authority and Prudential Regulation Authority
United States ​ ​U.S. Securities and Exchange Commission
​U.S. Federal Reserve and Comptroller of the Currency
​U.S. Commodities Futures Trading Commission
Singapore​ ​Monetary Authority of Singapore
​Hong Kong  ​Securities & Futures Commission
Germany​ ​BaFin
Luxembourg​ ​CSSF
 
 
The ‘limited connection’ relief applies where the FFSP is:
− not in Australia;
− dealing only with wholesale clients; and
− carrying on a financial services business only 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.
 
The purpose of this relief was to address concerns that overseas counterparties to derivatives, foreign exchange transactions and providers of investment management services may be engaging in “inducing” activities when inducing wholesale clients in Australia to use their financial services. Without the benefit of this “limited connection relief”, they would be required to hold an AFS licence when engaging in inducing activity even when they were not otherwise carrying on a financial services business in Australia.
 
ASIC motivated to reform
 
Having reviewed the existing FFSP relief, and having regard to regulatory and supervisory concerns, the Australian Securities & Investments Commission (ASIC) has determined that the relief may no longer be appropriate. There is no equivalent relief for Australian licensees in each of the above foreign jurisdictions and, in light of the Royal Commission into financial services currently being conducted in Australia, the need for a more stringent regulatory regime and active regulatory enforcement has been brought into sharp focus. The proposed changes are also likely to be as a result of perceived limitations in the monitoring of, and enforcement against, FFSPs. The ASIC released a consultation paper on Foreign Financial Service Providers (FFSP) on 1 June.
 
New licence required
 
The consultation paper indicates that an organisation that currently relies on FFSP instruments of relief will, going forward, need to apply for a modified form of an Australian Financial Services (AFS) Licence (Foreign AFS Licence) or obtain an existing form of Australian Financial Services licence (Ordinary AFS Licence). The proposed Foreign AFS Licence has a less onerous compliance regime than an Ordinary AFS Licence and is available to an FFSP that can demonstrate that its domestic regulatory regime is sufficiently equivalent to the legal regime applicable in Australia.
 
ASIC has extended the current sufficient equivalence relief for 12 months until 30 September 2019. The consultation paper proposes a further transition period of 12 months to 30 September 2020 if ASIC proceeds with the new Foreign AFS Licence regime.
 
Timing:


New Foreign AFS Licence

Currently FFSPs are able to provide services to Australian institutional clients on the basis that they comply with the laws and regulations that apply in their home jurisdiction. The Foreign AFS Licence regime represents a significant departure as it will be necessary for an FFSP to be licensed in Australia and to understand and comply with certain Australian financial services regulatory requirements when dealing with Australian institutional clients. Whilst many of the Australian regulatory requirements and enforcement options are similar to those applying to an FFSP in other jurisdictions (eg the U.S., UK), there would undoubtedly be an increased compliance burden.

It is likely, based on past approaches to regulatory relief applications by ASIC, that the first applicant from a particular jurisdiction for a Foreign AFS Licence will have to demonstrate regulatory equivalence for that jurisdiction. Future applicants are likely to be able to take the benefit of such regulatory equivalence having already been demonstrated to ASIC and so will be able to focus on showing that there have been no changes which have altered the equivalency analysis.

Impact for FFSPs

FFSPs will need to decide if they are committed to the Australian market, and therefore are prepared to be subject to Australian regulation. If the answer is yes, an FFSP will need to decide whether to apply for a Foreign AFSL or an Ordinary AFSL; or determine whether it is possible to rely on another exemption. It is proposed that FFSPs who are able to demonstrate regulatory equivalency will be able to apply for a Foreign AFSL on and from 1 October 2019.

Further information

This article is part of the Allen & Overy Legal & Regulatory Risk Note, a quarterly publication.  For more information please contact Karen Birch – karen.birch@allenovery.com, or tel +44 20 3088 3710.​

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Jason Denisenko
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