Licensing Exemptions for Foreign Financial Service Providers

This paper seeks to summarise the core aspects of the draft legislation. Polar 993 largely compliments the Government in relation to the draft legislation as it seems to strike a balance between the various competing needs and tensions.

In summary if passed, the legislation will provide relief to foreign financial service providers by:

• Providing an exemption from the requirement to hold an Australian financial services licence for persons that provide financial services from outside Australia to professional investors (Professional Investor Exemption)
• Providing an exemption from the requirement to hold an Australian financial services licence for foreign companies regulated by comparable regulators and that provide financial services to wholesale clients (Comparable Regulator Exemption); and — Fast-tracking the licensing process for foreign companies seeking to establish more permanent operations in Australia by providing an exemption for foreign companies regulated by comparable regulators from the fit and proper person test when applying for an Australian financial services licence to provide financial services to wholesale clients (Fast Tracked Licence)

If the legislation is adopted, FFSPs which includes, foreign fund managers, foreign investment managers, foreign asset managers, offshore investment vehicles, foreign banks and foreign brokers, who wish to conduct financial services activities in Australia will be able to do so in the following ways:

• Meeting the requirements of the Professional Investor Exemption;
• Meeting the requirements of the Comparable Regulator Exemption;
• Obtaining Fast Tracked AFS Licence; or
• Appointment as a Corporate Authorised Representative under an AFS Licence through an AFS Licensee such as Polar 993.

HOW CAN POLAR 993 ASSIST?

Polar 993 may appoint foreign financial services providers (FFSPs) under its licence to provide financial services in Australia, to wholesale clients, by way of a Corporate Authorised Representative appointment. A corporate authorised representative appointment allows the authorised FFSP to conduct some or all of the financial services that Polar 993 is authorised to provide under its AFS Licence.

Benefits that an FFSP may have by becoming a Corporate Authorised Representative (CAR) under the AFS Licence of Polar 993 include:

• Allowing the FFSP to operate in Australia without having the necessity for itself to become directly registered and regulated by the Australian Securities and Investments Commission (ASIC).
• An appointment as a Corporate Authorised Representative can be completed quickly.
• Ensuring that the FFSP is at all times compliant with the Australian financial services regime and is not relying on one of the exemptions and potentially limited by its restrictions.

WHAT IS THE PROFESSIONAL INVESTOR EXEMPTION?

The new professional investor exemption is proposed to provide an exemption from the requirement to hold an Australian financial services licence for foreign companies that provide financial services from outside Australia to professional investors.

The professional investor exemption is only available in the following circumstances:

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

Compliance with certain conditions under this exemption is required which includes notifying ASIC of the foreign company’s intention to rely on the exemption, complying with ASIC’s request for assistance, and submitting to the non-exclusive jurisdiction of Australian courts.

Failure to comply with a condition, may result in a cancellation of the foreign company’s exemption, imposition of additional conditions on the foreign company’s use of the exemption, or application to the court for a civil penalty and pecuniary penalty order by ASIC.

It is important to note that the professional investor exemption is only available to persons that qualify as “Professional Investors” as defined in section 9 of the Corporations Act and does not extend to “Wholesale Clients” as per the current Limited Connection exemption that is in place. Where foreign companies are looking to provide financial services to non-professional investors, this exemption will be too narrow and not of benefit.

It should also be noted that while the professional investor exemption is only available to persons that provide the financial services from a place outside Australia, it will not preclude foreign financial service providers from making infrequent marketing visits to Australia.

WHAT IS THE COMPARABLE REGULATOR EXEMPTION?

The new comparable regulator exemption will provide an exemption from the requirement to hold an Australian financial services licence for foreign companies that provide financial services to wholesale clients.

The comparable regulator exemption is only available in the following circumstances:

• The financial services are provided only to wholesale clients;
• The foreign financial service provider is defined as a foreign company; and
• The foreign company is legally authorised, registered or licensed to provide the same financial service by a regulator in a foreign jurisdiction and the Minister has determined that the regulator administers a comparable regulatory regime.

The requirement to be regulated by the home regulator for the same financial services seeks to safeguard wholesale clients in the absence of an Australian financial services licence, by having the same effect as that of limiting the financial services provided under this exemption to those which the foreign company is authorised, registered or licenced to provide in their home jurisdiction. This means that the foreign company may not provide financial services under this exemption that are:

• Not regulated by the company’s home regulator; or
• Regulated by the foreign company’s home regulator, but for which the foreign company is not authorised, registered or licensed to provide in their home jurisdiction.

In the event a foreign company loses (or gives up) its relevant authorisation (for any reason) to legally provide a financial service in its home jurisdiction it will no longer be able to rely on the comparable regulator exemption and would need to obtain an Australian financial services licence covering the provision of that financial service.

The judgement and the application of authorisations equivalency will be an interesting test for ASIC to monitor and of foreign companies to form a view on. The Australian structure in relation to specific authorisations on an AFS licence is somewhat unique to the Australian regulatory system. Whilst many foreign companies may have registration in a comparable regime, they may find it difficult to establish that they hold the equivalent authorisations. This requirement by the Government does seem to be a good approach, as it seeks to ensure that not only are foreign company’s registered but that they hold the equal skills required as an AFS Licence holder providing the same services.

Conditions applicable to the professional investor exemption also extend to the comparable regulator exemption, with a few additional ones as follows:

• Consenting to information sharing between ASIC and the foreign company’s home regulator;
• Notifying ASIC of any significant enforcement or disciplinary actions taken against the foreign company in any place outside Australia;
• Appointing an agent in Australia; and
• Maintaining sufficient oversight over its representatives.

As part of the condition to maintain sufficient oversight over its representatives, the foreign company must ensure appropriate training and supervision of the representatives as well as compliance with the financial services law, in relation to the financial services provided.

The consequences for non-compliance are the same as those under the professional investor exemption as noted above.

As at the time of the release of the draft legislation, the following regulatory bodies will be regarded as comparable regulators:

• Securities and Exchange Commission (US SEC);
• US Federal Reserve and Office of the Comptroller of the Currency (OCC);
• Commodity Futures Trading Commission (US CFTC);
• Monetary Authority of Singapore (Singapore MAS);
• Securities and Futures Commission (Hong Kong SFC);
• Bundesanstalt für Finanzdienstleistungsaufsicht of Germany (German BaFin);
• Luxembourg Commission de Surveillance du Secteur Financier (CSSF);
• UK Financial Conduct Authority or Prudential Regulatory Authority (UK FCA or PRA);
• Danish Financial Supervisory Authority (Danish FSA);
• Finansinspektionen (Swedish FI);
• Autorité des Marches Financiers of France (French AMF);
• Autorité de contrôle prudentiel et de resolution of France (French ACPR); and
• Ontario Securities Commission (Ontario OSC).

FAST TRACKED LICENCE

Foreign companies that are authorised, registered or licensed by a comparable regulator and only provide financial services to wholesale clients are exempt from the requirement to satisfy the fit and proper test requirement when applying for an Australian financial services licence. This will somewhat simplify one aspect of the application process.

However, a foreign company that is applying for an AFS Licence will still be subject to all other applicable provisions under the Corporations Act which includes:

• The obligation to provide financial services efficiently, honestly and fairly;
• The obligation to have in place adequate arrangements for the management of conflicts of interests;
• The obligation to comply with applicable financial services laws;
• The obligation to take reasonable steps to ensure that representatives comply with the applicable financial services laws; and
• The requirement to have adequate risk management systems.

In essence, other than the simplified test for fit and proper persons, a foreign company seeking an AFS Licence is subject to essentially the same obligations as all other AFS licensees. Accordingly, the complex and time-consuming application process still remains as the foreign company will still be required to prepare all of the other core proofs and documents required when seeking an AFS licence.

CONCLUSION

All FFSPs including, foreign fund managers, foreign investment managers, foreign asset managers, offshore investment vehicles, foreign banks and foreign brokers, need to give consideration to their current and ongoing licensing arrangements in Australia. FFSPs in order to carry out financial services in Australia need to have the appropriate licensing.

If the draft legislation is passed an FFSP that does not obtain its own AFS licence and does not fall under the Professional Investor Exemption or the Comparable Regulator Exemption described above, will only be able to conduct financial services in Australia if it is appointed as a Corporate Authorised Representative. It is important to note that the scope of FFSPs includes financial product issuers, financial product intermediaries, product advisers and financial product distributors.

Polar 993 is able to appoint FFSPs under Polar 993’s AFS licence as a Corporate Authorised Representative, which will then allow the FFSP to provide financial services in Australia to wholesale and professional clients and may materially simplify the operational requirements of the FFSP.

This presentation is issued by Polar 993 Pty Ltd (ACN 642 129 226) (AFSL 525458) and Polar 993 Advisory Pty Ltd (ACN 649 554 932) (AFSL 531197) collectively known as Polar 993. This presentation is provided to potential clients on a confidential, personal and private basis for use only by the recipient as a wholesale client under the Corporations Act 2001 (Cth) and should not be forwarded to others. It is indicative only and may be subject to change by the Board of Polar 993. The information contained in this presentation is of a general nature only and is not to be taken to contain any financial advice or recommendation, legal advice or taxation advice. This presentation is neither an offer to sell nor a solicitation of any offer to acquire interests or any other any investment. Polar 993, its directors, officers, employees, agents or associates, or any party named in this presentation does not guarantee the performance of any fund or any service. Past performance is not a reliable indicator of future performance.