The Australian Treasury introduced the Treasury Laws Amendment (Streamlining and Improving Economic Outcomes for Australians) Bill (Bill) to the Australian House of Representatives on 17 February 2022. The Bill introduces new licensing exemptions for foreign financial service providers (FFSPs). The Treasury previously consulted on the exemptions in December and January. Most notably, there will be new exemptions for FFSPs who are regulated by a “comparable regulator” or provide financial services to “professional investors”.

A link to the Bill is available here. A link to an article by MinterEllison Australia on this topic is available here. 

Who needs to read it? Why?

New Zealand financial service providers (FSPs) operating in, or into, Australia should consider the potential implications of the proposed changes to the licensing exemptions regime on their business.

What does it cover?

Generally, if you carry on a financial services business in Australia, you will need to hold an Australian Financial Services Licence (AFSL) (section 911A(1) of the Corporations Act 2001 (Corporations Act)), unless relief is granted by the Australian Securities and Investments Commission (ASIC) or an exemption applies. Operating without an AFSL, if required, is an offence. Unlike New Zealand’s comparable regimes, this applies whether the clients/investors are wholesale or retail.

Regardless of where a person is carrying on business, a person will be deemed to be carrying on a financial service business in Australia if the person engages in conduct that is (i) intended to induce people in Australia to use the financial services the person providers or (ii) is likely to have that effect (section 911D(1) of the Corporations Act).

Until March 2020, ASIC provided two exemptions that benefited FFSPs[1]: the “sufficient equivalence” exemption and the “limited connection” exemption.  Both forms of relief allowed an FFSP to conduct a financial service business in Australia without the need for an AFSL.  Briefly:

• the sufficient equivalence exemption was available to FFSPs providing specified financial services to wholesale clients only, where the FFSP was regulated by a foreign regime considered by ASIC to be “sufficiently equivalent”.
• the limited connection exemption was available to FFSPs who were only deemed to be carrying on business in Australia (through inducing or intending to induce Australian persons to use their financial services) where they provided financial services to wholesale clients only. Note that (unlike the sufficient equivalence exemption) this exemption is available to all types of financial services.

Transitional arrangements have been put in place so that FFSPs currently relying on the sufficient equivalence and limited connection exemptions have until 31 March 2023 to obtain an AFSL or rely on a different exemption (such as those introduced by the Bill below).  New FFSPs entering into the market cannot rely on the sufficient equivalence exemption, however, the limited connection is still available to new FFSPs until 31 March 2023.  We comment further on the transitional arrangements applying in the interim below.

There is also currently a professional investor exemption in regulation 7.6.02AG of the Corporations Regulations 2001, which provides that a person is not required to hold an AFSL if the person:

• is not in the jurisdiction;
• provides financial services to professional investors only; and
• deals in, advises on, or makes a market in, derivatives, foreign exchange contracts, carbon units, Australian carbon credit units or eligible international emission units.

The Bill replaces the sufficient equivalence, and limited connection relief, and current professional investor exemption and introduces two new exemptions for FFSPs. Unlike the previous sufficient equivalence and professional investor exemption (which were limited to specified financial services[2]), the new exemptions do not limit the types of financial products or services that may be provided.  However, the Bill gives the Australian Government the power to exclude the exemption’s application to particular kinds of financial products, financial services or investors.

Professional Investor Exemption

The new professional investor exemption (PI Exemption) exempts FFSPs from the requirement to hold an AFSL where the FFSP only provides financial services from outside Australia to “professional investors”. This is likely to be of interest to New Zealand FSPs who meet the requirements.

To rely on the PI exemption, the following conditions must be satisfied:

• the financial service is provided only to “professional investors”;
• the person provides the financial service from a place outside Australia;
• the person’s head office and principal place of business are located at one or more places outside Australia; and
• the person reasonably believes that the provision of the financial service does not contravene any laws that apply in the person’s principal place of business, head office, or the place from where the financial services are provided.

A “professional investor” is a subset of wholesale investors under the Corporations Act – they include a financial services licensee, trustee of a superfund or similar scheme with net assets of at least A$10 million, a listed entity or related body corporate of a listed entity, an exempt public authority or a person who controls gross assets of at least A$10 million.

While the activities of the FFSP must be outside Australia, the PI Exemption permits limited marketing visits to Australia.  FFSPs intending to make marketing visits should consider the restrictions on visits outlined in the Bill and whether their conduct would constitute “carrying on business in Australia” (which would require registration with ASIC).

Comparable Regulator Exemption

The comparable regulator exemption (CR Exemption) will exempt FFSPs from the requirement to hold an AFSL where the FFSP is a foreign company or partnership regulated by “comparable regulators” and that provide financial services to wholesale clients.

The CR Exemption is only available where the FFSP is authorised, registered or licensed to provide the same financial service by a regulator in a foreign jurisdiction.  The CR Exemption only applies to comparable regulators as approved by the Australian Government.  It is expected that that the following regulators will be approved initially as comparable regulators: US: SEC, OCC, CFTC; UK: FCA, PRA; Singapore: MAS; HK: SFC; Germany: BaFin; France: AMF, ACPR; Luxembourg: CSSF; Denmark: FSA; Sweden: FI; and Ontario: OSC.  Importantly, there has been no indication that this list will include New Zealand’s Financial Markets Authority (FMA).

Fit and Proper Person Test Exemption

The Fit and Proper Person Test Exemption makes it easier for FFSPs to apply for an AFSL.  Foreign companies regulated by “comparable regulators” are exempt from the fit and proper person test when applying for an AFSL to provide financial services to wholesale clients. Again, it is not currently expected that the FMA will be approved as a comparable regulator.

Requirements for FFSPs relying on the new exemptions

FFSPs relying on the PI Exemption or CR Exemption must:

• notify ASIC within 15 business days after the FFSP first starts relying on this exemption;
• notify ASIC of its business plans (ie the kinds of financial service it provides);
• notify its customers (or prospective customers) that it has the benefit of an exemption from the requirement to have an AFSL;
• notify ASIC of certain events and comply with information requests or requests for assistance from ASIC; and
• submit to the jurisdiction of the Australian Courts.

FFSPs relying on the CR Exemption must also:

• have and maintain all authorisations, registrations or licences necessary in its home jurisdiction;
• consent to information sharing between ASIC and its home regulator;
• notify ASIC of significant enforcement actions, investigations or disciplinary action taken outside Australia;
• have an agent in Australia; and
• maintain sufficient oversight of representatives and ensure representatives are adequately trained and competent to provide the relevant financial services (ASIC expects appropriate systems and processes to be put in place to ensure this requirement is met).

General industry practice in relation to notification is to wait to receive ASIC’s acknowledgement of reliance on the exemption before commencing reliance.  However, the new regime permits notification after reliance has commenced.

FFSPs failing to comply with these requirements may lose the benefit of the exemption they rely on, or ASIC may impose additional conditions on the FFSP’s reliance on an exemption (such as requiring additional disclosures or regular reporting).

When the new regime will begin and transition

The PI Exemption and CR Exemption will apply in relation to financial services provided on and after 1 April 2023.  The Fit and Proper Person Test Exemption will apply to applications for an AFSL on and after 1 April 2023.  This aligns with the transitional arrangements for those relying on the existing exemptions.

In the interim, FFSPs wishing to enter the Australian market have two options:

• obtain an AFSL;
• rely on the current professional investor exemption (if that is available to them); or
• rely on the limited connection relief.

FFSPs wishing to enter the market in the interim do not have the benefit of either the sufficient equivalence exemption or its replacement, the CR Exemption.

We also note that from 1 April 2023, ASIC expects to introduce a new relief for FFSPs who are fund managers. This replicates the limited connection relief (which from 1 April 2023, will no longer be available) for FFSPs who provide funds management to certain categories of Australian professional investors.  However, FFSPs looking to rely on this new relief will need to comply with certain conditions set by ASIC.

Our view

New Zealand FSPs will benefit from the expansion of the PI Exemption to all financial services, where their clients are “professional investors”.  That is to be welcomed as it facilitates cross-Tasman business.  FSPs that are currently carrying on business in Australia, or who intend to operate to Australia should consider whether they should take advantage of the PI Exemption as an alternative to holding an AFSL.

Unfortunately, the CR Exemption and the Fit and Proper Test Exemption are not currently expected to be available to New Zealand FSPs – this is predominantly because the exemption applies to FFSPs who are both provide services to “wholesale clients” and regulated by a “comparable regulator”.  Unlike in other jurisdictions (many of whom are listed as comparable regulators), the Financial Markets Conduct Act 2013 does not require FSPs who only have wholesale investors to be licensed, and therefore we assume the FMA was not considered a comparable regulator.

However, it is possible for NZ fund managers or derivative issuers to apply for a licence on a voluntary basis even if all investors are wholesale. Accordingly, we consider the omission of the FMA from the proposed list of comparable regulators is disappointing. The comparability of the regulation, where a licence is held, has already been confirmed, in the context of retail offers by the Mutual Recognition of Securities Offers regime referred to above, and the Asia Region Funds Passport initiative.   We believe there would be value in the New Zealand Government raising this with their Australian counterparts, in the spirit of Australia-New Zealand Closer Economic Relations Trade Agreement the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, even if those agreements do not strictly apply.

What next?

If you have any questions in relation to the proposed FFSP exemptions or are considering how these changes affect your business, please contact one of our experts, in New Zealand or Australia.

Footnotes

[1] New Zealand issuers extending retail offers into Australia, may of course also make use of the relief provided under the Mutual Recognition of Securities Offers scheme, if the conditions are met – but those include that there is a registered PDS and so the scheme only assists retail offers.

[2] For a comparison of the types of services covered, see the table in page 10 of the Exposure Explanatory Memorandum for the Bill (here).

This article was written together with our Australian colleagues Richard Batten (Partner) and Prayas Pradhan (Senior Associate), with assistance from Sarah Jones, a solicitor in MinterEllisonRuddWatts’ Financial Services team.