Since the early 2000’s, a foreign regulated firm (including a fund manager) that was regulated in a foreign jurisdiction which was ‘sufficiently equivalent’ to Australia and who met certain other criteria, enjoyed the benefit of being able to provide its financial services to the Australian wholesale¹ investor market under a ‘light touch’ Australian regulatory framework. Specifically, this meant that they could rely on the following two categories of conditional licensing relief² rather than having to apply for and hold an Australian financial services licence³ (AFSL):

• ‘limited connection’ relief (for a foreign firm that provided its services entirely from offshore, and so only had a limited connection to Australia); and
• ‘sufficiently equivalent’ relief (for those approved foreign firms regulated by a ‘sufficiently equivalent’ regulatory regime as determined by the Australian Securities and Investments Commission (ASIC)⁴ ).

Reliance on this relief framework was a well-trodden path for numerous foreign firms including fund managers operating in the Australian wholesale and institutional market. In our experience, foreign firms routinely used this framework as the regulatory pathway for “testing the waters” on the Australian market and for carrying out their wholesale investor business in Australia (especially if their business in Australia only comprised a small percentage of their overall global business). In some circumstances a foreign firm would apply for its own AFSL but that was rare and typically the application was done via a newly formed Australian subsidiary and explicable in the bespoke circumstances of that group.

The Australian regulator has been reviewing this relief framework for the past few years. This review culminated in ASIC delivering some unexpected news to the industry mid last year⁵. ASIC advised that it was proposing to close the door on this ‘light touch’ regulatory framework by repealing both categories of relief⁶. Instead, ASIC proposed that foreign firms including fund managers from a ‘sufficient equivalent’ jurisdiction⁷, would need to apply for what ASIC has termed as a ‘foreign AFSL’⁸. For all other foreign firms, they would need to apply for an ordinary AFSL (unless they could rely on another exemption) or cease to provide financial services in Australia. Please see our prior article ‘ASIC signals crackdown on foreign financial services providers’ for further details.

Following the most recent industry consultation process and responses received by ASIC, ASIC has recently issued a subsequent consultation paper on this topic⁹. In this recent consultation paper, ASIC:

• confirmed their original proposals¹⁰ that: 
  • the current regulatory relief for foreign firms including fund managers would be repealed (i.e. the ‘limited connection’ and the ‘sufficient equivalence’ relief). The effective date has been pushed out by ASIC to 31 March 2020;
  • a foreign AFSL regime will be introduced for foreign firms including fund managers regulated in a ‘sufficiently equivalent’ jurisdiction. This regime is proposed to start 1 April 2020 with a two year transition to allow foreign firms that are currently relying on the ‘sufficient equivalent’ relief to apply for a foreign AFSL and implement procedures to comply with the requirements of the foreign AFSL framework; 
• is proposing to introduce a new exemption for foreign fund managers that provide ‘fund management services’¹¹ from outside of Australia to Australian professional investors¹². This relief is proposed to start from 1 April 2020 with a six-month transition period to 30 September 2020. This proposed relief is most welcome as it will enable Australia institutional investors to readily interface with foreign managers and get access to overseas investment management expertise not available in the Australian market; and
• noted that it is not proposing to introduce a ‘reverse solicitation’ type exemption for foreign fund managers subject to consulting with the industry on this proposal.

Looking forward, based upon ASIC’s published position the current light touch regulatory pathway for foreign firms including fund managers has a likely end date of 31 March 2020. This means that foreign firms that currently rely on this relief pathway will need to consider their future Australian business strategy. This is a process that should be started now. If a foreign fund manager is willing to limit the scale of activities in Australia to 10 percent of their group’s consolidated revenue and they only provide services to ‘professional investors’, then the ‘fund management’ relief recently proposed by ASIC may be available to them. Alternatively, they can choose to apply for a foreign AFSL (for those from a ‘sufficiently equivalent’ jurisdiction) or an ordinary AFSL (for all others). Although this will require an additional allocation of costs and resources to apply for and maintain the relevant AFSL. Otherwise, they will need to shut down their Australian operations and exit the Australian wholesale investor market entirely.