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Proposed changes to Australia's foreign fund manager regulatory framework
Proposed regulatory changes for foreign fund managers
ASIC have advised that it is proposing to close the door on the 'light touch' regulatory framework foreign regulated firms currently enjoy and have proposed that foreign firms including fund managers from a 'sufficient equivalent' jurisdiction, would need to apply for what ASIC has termed as a 'foreign AFSL'.
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.
Australian regulator's proposed overhaul of current regulatory framework
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.
Recent proposed changes to new foreign fund manager regulatory framework
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.
What should foreign fund managers do?
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.
Footnotes
1 This definition of wholesale investor is broad and includes both high net worth investors as well as institutional investors.
2 See paragraphs 1 to 8 of ASIC’s recently issued Consultation Paper 301 ‘Foreign financial services providers’ (July 2018) (CP 301) for an overview of this current relief framework.
3 A person carrying on a financial services business in Australia must hold an AFSL unless they can rely on an available exemption. Importantly, under Australia’s financial services laws, a foreign fund manager can still be taken to be providing financial services in Australia from offshore if their offshore activities are targeted at inducing Australian investors to use their financial services (or their offshore activities are likely to have that effect).
4 ASIC has determined these regulatory regimes include those overseen by the UK’s FCA, the USA’s SEC, Federal Reserve and OCC, Hong Kong’s SFC, Singapore’s MAS and Germany’s BaFin.
5 By releasing CP 301.
6 ASIC cited a number of concerns it had with the current relief framework including non-compliance by foreign fund managers, its constraints on supervising activities of foreign fund managers providing services under this relief framework (and its associated enforcement powers) and that Australian fund managers had not enjoyed a reciprocity of relief in corresponding ‘sufficient equivalent’ jurisdictions (just to name a few).
7 ASIC has assessed the US, the UK, Hong Kong, Singapore, Germany, Luxembourg, Denmark, Sweden, France and Brazil as jurisdictions that are ‘sufficiently equivalent’.
8 The foreign AFSL is proposed to be a modified form of AFSL.
9 Consultation Paper 315: ‘Foreign financial services providers: Further consultation” (July 2019).
10 Outlined in CP 301.
11 ‘Funds management services’ as currently drafted will include both offshore funds and portfolio management services of assets located outside Australia by a manager.
12 This is a conditional exemption that only has limited application because:
- it only applies if services are provided to Australia ‘professional investors’ (i.e. a regulated Australian institutional investor such as a superannuation fund) in the case of offshore funds and if services are provided to ‘eligible Australian users’ being a small defined group of professional investors in the case of portfolio management services; and
- as currently proposed, it is subject to a cap on the scale of the services that a foreign fund manager can provide under the exemption (10 percent of aggregate consolidated revenue of the foreign fund manager’s group).
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