Draft legislation on licensing relief and fast-tracked licensing process

What you need to know

The exposure draft legislation seeks to introduce: 

• An expanded "professional investor" exemption, which provides an exemption from the requirement to hold an AFSL for FFSPs when providing financial services from outside Australia to professional investors. 
• A "comparable regulator" exemption, which provides an exemption from the requirement to hold an AFSL for FFSPs regulated by "comparable regulators" when providing financial services to wholesale clients.
• A fit and proper person test exemption, which provides an exemption for FFSPs regulated by "comparable regulators" from the fit and proper person test when applying for or varying an AFSL to provide financial services to wholesale clients. 

Importantly, the current "limited connection exemption" which is available to FFSPs who service wholesale clients from outside Australia, will no longer be available.

What you need to do

Provide feedback on the exposure draft legislation by 12 January 2022. 

Following the Treasury's consultation on FFSP licensing relief, Treasury has now released the first tranche of exposure draft legislation to provide regulatory relief to FFSPs.  The exposure draft legislation seeks to introduce three exemptions, each of which are set out in detail below. 

Professional investor exemption

The exposure draft legislation seeks to introduce a professional investor exemption, which exempts FFSPs from the requirement to hold an AFSL when 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.  The Explanatory Memorandum clarifies that this condition does not preclude FFSPs from appointing local representatives or making infrequent marketing visits to Australia. 
• 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 the provision of the financial service does not contravene any laws that apply in the FFSP's principal place of business, head office or the place from where the financial services are provided.

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.
• Notify the client that the FFSP is relying on the exemption.
• Give reasonable assistance to ASIC in relation to the performance of ASIC's functions or the exercise of ASIC's powers.
• Comply with a direction by ASIC to provide information.
• Submit to the non-exclusive jurisdiction of Australian courts.
• Notify ASIC of any changes to contact details. 

A failure to comply with the conditions may result in ASIC cancelling the FFSP's exemption, ASIC imposing additional conditions on the FFSP's use of the exemption, or ASIC applying to the court for a declaration of contravention of a civil penalty provision and a pecuniary penalty order.

This exemption will be introduced as section 911A(2)(eo) of the Corporations Act and will replace the existing exemption located in regulation 7.6.02AG(2E) of the Corporations Regulations (which only covers the provision of certain financial services with respect to derivatives, foreign exchange contracts, carbon units, ACCUs and EIEUs).  To address potential market risk, the draft exposure legislation provides that regulations could be made to disapply the professional investor exemption for a particular kind of financial service, financial product or professional investor. 

A significant change from the existing professional investor exemption is that reliance on the exemption requires the FFSP to notify ASIC of that reliance – this is not a feature of the current exemption.

Comparable regulator exemption

The exposure draft legislation also seeks to introduce a comparable regulator exemption, which exempts FFSPs from the requirement to hold an AFSL when all of the following conditions are satisfied: 

• The financial service is provided only to wholesale clients.
• The FFSP is a foreign company.
• The FFSP is authorised, registered or licensed to provide the same financial service by a regulator in a foreign jurisdiction (home regulator). 
  
  According to the Explanatory Memorandum, this has the effect of limiting the financial services provided under this exemption to those which the FFSP is authorised, registered or licenced to provide in their home jurisdiction.  This means that the FFSP may not provide financial services under this exemption that are not regulated by the FFSP's home regulator, or regulated by the FFSP's home regulator but for which the FFSP is not authorised, registered or licensed to provide in their home jurisdiction (although the provider could separately rely potentially on the professional investor exemption for these services).
• The Minister has determined that the home regulator administers a "comparable" regulatory regime under section 911T (noting that the Minister has not yet made any such determinations).  In making such a determination, the Minister must have regard to whether the regulatory regime that the home regulator administers produces comparable outcomes to Australia's regulatory regime in regulating and improving the performance of the relevant financial services system and the financial services providers in that system.  The Minister must have regard to (among other things): whether the home regulatory regime is clear, transparent, certain and adequately enforced; whether the home regulatory regime is broadly consistent with the Objectives and Principles of Securities Regulation, developed by IOSCO; whether the home regulator is either a signatory to the Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information, developed by IOSCO or is otherwise a party to any other effective cooperation arrangement with ASIC; any relevant submissions received in relation to the home regulator or that home regulatory regime; and any relevant advice (or assessment) received from ASIC. 

A FFSP that relies on this exemption must comply with the following conditions (some of which overlap with the conditions that attach to the professional investor exemption): 

• Notify ASIC that the FFSP has used, or intends to use, the exemption.
• Notify the client that the FFSP is relying on the exemption.
• Give reasonable assistance to ASIC in relation to the performance of ASIC's functions or the exercise of ASIC's powers.
• Comply with a direction by ASIC to provide information.
• Submit to the non-exclusive jurisdiction of Australian courts.
• Consent to information sharing between ASIC and the FFSP's home regulator.
• Notify ASIC of significant enforcement action, disciplinary action or investigation taken against the FFSP in any place outside Australia.  The Explanatory Memorandum provides that 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; and the size (severity) of the penalty (if applicable).  The FFSP must provide this notice as soon as practicable (but 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 in Australia. 
• Maintain sufficient oversight over representatives who provide the financial service and take reasonable steps to ensure that the representatives comply with financial services laws.  The Explanatory Memorandum provides that the requirement to maintain sufficient oversight over representatives includes ensuring that the FFSP's representatives are appropriately trained and supervised to provide the financial services. 

The consequences for failing to comply with one of the above conditions is set out in the "professional investor exemption" section above.

This exemption will be introduced as section 911A(2)(ep) of the Corporations Act, and effectively replaces the expiring "sufficient equivalence" Class Orders and legislative instruments.  FFSPs who have traditionally relied on the existing sufficient equivalence exemptions will note the similarity in the conditions of reliance on the exemption.

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 exposure draft legislation 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. The proposed exemption is available to a FFSP when all of the following conditions are satisfied:

• The FFSP is a foreign company.
• The licence, if granted, would be restricted to the provision of services to wholesale clients.
• The FFSP holds one or more authorisations, registrations or licences (as applicable) for the provision of financial services in a foreign jurisdiction from a regulator determined by the Minister to be a "comparable regulator".  

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