Update on AFSL exemptions for foreign providers and fit and proper requirements

What you need to know

The Federal government has introduced a Bill into Parliament seeking to enact new AFSL exemptions for foreign financial services providers (FFSPs) servicing the Australian market.  These are: 

• An expanded professional investor exemption – where the FFSP provides financial services from outside Australia to professional investors.
• A comparable regulator exemption – where the FFSP is regulated by one or more "comparable regulators" and provides financial services to wholesale clients.

For FFSPs which hold or wish to hold an AFSL, the Bill also includes a fit and proper person test exemption, which exempts a licensee regulated by "comparable regulators" from the requirement to provide fit and proper information when applying for or varying an AFSL to provide financial services to wholesale clients. 

An order was made for Parliament to further consider the Bill on 29 March 2022.

The current "limited connection exemption" and "sufficient equivalence exemptions" which are available to FFSPs who service wholesale clients under various ASIC Class Orders will cease to be available.

What you need to do

If you are an FFSP, consider the way you can service Australian clients from offshore.  

Parliament is considering a Bill which proposes to provide regulatory relief to FFSPs.  The Bill seeks to introduce three exemptions, each of which are set out in detail below. 

1.  Professional investor exemption

The Bill seeks to introduce a professional investor exemption, which exempts FFSPs from the requirement to hold an AFSL. 

Which FFSPs are able to rely on the professional investor exemption? 

A FFSP may rely on the professional exemption if all of the following conditions are satisfied:

• The relevant financial service is provided only to "professional investors" (as defined in section 9 of the Corporations Act, which includes AFSL holders, bodies regulated by APRA, a person controlling at least $10 million, or a listed entity or its related body corporate). 
• The FFSP provides the financial service from a place outside this jurisdiction, except during limited marketing visits.  In other words, FFSPs relying on this exemption may provide financial services from within Australia during limited marketing visits.  There is no restriction on the types of financial services that may be provided during a marketing visit (subject to any regulations being made excluding particular kinds of products, services or professional investors from this exemption).  The total length of marketing visits that the FFSP may make in any financial year is no more than 28 calendar days (full or partial days, and including public holidays and weekends) regardless of the number of representatives that are in Australia at the same time (i.e. where two or more representatives of the FFSP are in Australia for a marketing visit on the same day, that counts as a single day). 
• The FFSP's head office and principal place of business are located at one or more places outside Australia.  The Explanatory Memorandum clarifies that this requirement is intended to ensure that the exemption is only used by FFSPs genuinely operating from outside Australia.  
• The FFSP reasonably believes that providing the same or substantially the same financial service would not contravene any law applying in the FFSP's principal place of business, head office or the place from where the financial services are provided.  This requirement does not restrict the provision of financial services that are permitted, but not otherwise regulated, in any of the relevant places.  For example, if the provision of a financial service to professional investors is not regulated in a relevant foreign jurisdiction, the FFSP may provide the financial service, as long as the provision of the service is not in contravention of any law in that (or any other relevant) jurisdiction. 

What are the ongoing conditions of the professional investor exemption? 

A FFSP that relies on the professional investor exemption must comply with certain conditions, including the requirement to: 

• Notify ASIC that the FFSP has used, or intends to use, the exemption within the prescribed 30 business day time period (which is 15 business days before and 15 business days after the service is first provided).  The notification must specify certain matters as set out in section 911H(2)(b). 
• Notify the client that the FFSP is exempt from the requirement to hold a licence and is relying an exemption.  The notice must specify the exemption that the FFSP is seeking to rely on.  If it is not practicable to give the notice before providing the financial service, then the notice must be given to the client as soon as practicable after the financial service is provided to the client.
• Give assistance to ASIC, as reasonably requested, in relation to the performance of or exercise of ASIC's functions and powers.  Assistance may, among other things, require the FFSP to show ASIC, or give ASIC a copy of, the FFSP's books.
• Comply with a direction by ASIC to provide information.  ASIC may only use this condition to give directions that relate to the financial service(s) provided under the exemption.
• Consent to the non-exclusive jurisdiction of Australian courts within the prescribed 30 day time period (as explained above).  
• Notify ASIC of any changes to contact details as soon as practicable after the change. 

2.  Comparable regulator exemption

The Bill also seeks to introduce a comparable regulator exemption, which exempts certain FFSPs regulated in certain offshore jurisdictions from the requirement to hold an AFSL. 

Which FFSPs are able to rely on the comparable regulator exemption? 

A FFSP may rely on the comparable regulator exemption if all of the following conditions are satisfied: 

• The financial service is provided only to wholesale clients.
• The FFSP is a foreign company or a partnership formed outside Australia.  
• The FFSP has and maintains any authorisations, registrations or licences necessary to provide the same or substantially the same financial service in a place outside Australia (comparable jurisdiction).  If no such requirement applies, this condition is taken to have been satisfied as it would otherwise be legal to provide that financial in the comparable jurisdiction.  If, for example, dealings involving foreign exchange contracts are permitted but are not subject to regulation in a comparable jurisdiction, the FFSP is taken to have satisfied this condition.  If a FFSP loses (or gives up) a required authorisation, registration or licence, it may no longer rely on this exemption and the Explanatory Memorandum provides that the FFSP may make a voluntary notification to ASIC that they no longer intend to rely on this exemption.  
• The regulator administering the authorisations, registrations or licences for the comparable jurisdiction is a regulator determined by the Minister under section 911T as a comparable regulator (comparable regulator) under section 911T (noting that the Minister has not yet made any such determinations).  A FFSP relying on the comparable regulator exemption may be regulated by more than one comparable regulator.  In any given situation, the relevant comparable regulator is to be determined in relation to the specific financial service provided to the client. 
• The FFSP provides the financial service from Australia or from the comparable jurisdiction.  For example, if a FFSP provides a financial service for which the comparable regulator is the UK FCA, the FFSP may only provide that service from either the UK or from Australia.  Financial services provided from any other place would not satisfy this condition. 

A FFSP that relies on this exemption must comply with all of the conditions that attach to the professional investor exemption (as set out above), as well as the following conditions: 

• Consent to information sharing between ASIC and the comparable regulator within the prescribed 30 day time period (as explained above).
• Notify ASIC of significant enforcement action, disciplinary action or investigation taken against the FFSP by any regulator, government authority or operator of a financial market in any place outside Australia.    This condition is not limited to any action or investigation undertaken by the comparable regulator(s).  In determining significance, the FFSP may consider a number of factors including whether the action relates to the provision of the financial service under the comparable regulator exemption; the extent to which the relevant conduct indicates that the FFSP's arrangements to ensure compliance with their obligations under the financial services laws are inadequate; the number and frequency of breaches; whether the FFSP's actions have resulted in material loss or damage to a client(s); and the size (severity) of the penalty (if applicable).  The FFSP must provide this notice as soon as practicable (and before 15 business days) after the day on which the FFSP becomes aware (or would reasonably be expected to have become aware) of such an action.  
• Appoint an agent (for service) in Australia. 
• Maintain adequate oversight over representatives who provide financial services in reliance on the exemption and and take reasonable steps to ensure that those representatives are adequately trained and competent to provide those kinds of financial services.  The Explanatory Memorandum provides that this condition requires FFSPs to put in place appropriate systems and processes to ensure that its representatives are adequately supervised, trained and competent to provide financial services in reliance on the comparable regulator exemption.  The Explanatory Memorandum states that financial services provided by representatives, which are not provided in reliance on this exemption, are not within the scope of this condition. 

3.  Fit and proper person test exemption 

Where an FFSP wishes to apply for an (or vary) an AFSL to provide financial services to wholesale clients, the Bill also contemplates an exemption from the fit and proper person test that would have ordinarily applied to applicants for an AFSL (or to vary an AFSL).  This test would have required ASIC to be satisfied that there is no reason to believe that the applicant, its officers and controllers are not fit and proper to provide the financial services covered by the licence. 

Which FFSPs are able to rely on the fit and proper test exemption? 

A FFSP is able to rely on the fit and proper test exemption if all of the following conditions are satisfied: 

• The FFSP is a foreign company or partnership formed outside Australia.
• The licence, if granted, would be restricted to the provision of services to wholesale clients.
• The FFSP any authorisations, registrations or licences necessary to legally provide the same or substantially the same financial service in a comparable jurisdiction as issued by a comparable regulator.  If a comparable regulator permits but does not regulate the provision of a kind of financial service, this condition is taken to have been satisfied. 

The intention of this exemption is to fast-track the licensing process for FFSPs seeking to establish more permanent operations in Australia.  This exemption applies whether the AFSL was granted before, on, or after the commencement of the legislation. 

Authors: Jonathan Gordon, Partner; Corey McHattan, Partner; Nicky Thiyavutikan, Senior Associate and Cindy Lam, Lawyer.