AFS licensing relief for foreign financial services providers

Overseas counterparties to derivatives and foreign exchange transactions: 

In September 2003, ASIC introduced Class Order 03/824 which sought to address regulatory concerns that:

  • overseas counterparties to derivatives and foreign exchange transactions may be caught by those counterparties engaging in “inducing conduct under s911D” when issuing financial products to Australian wholesale clients
  • those overseas counterparties may thus need to be licensed for entering into ad-hoc derivatives and foreign exchange contracts with Australian wholesale clients.

The original regulatory policy rationale for this relief was to ensure that isolated transactions by a foreign entity with Australian wholesale clients would not require that foreign entity to hold an AFS licence.

The Class Order provides relief for a foreign entity from the need to hold an AFS licence where it is:

  • dealing only with wholesale clients; and
  • carrying on a financial services business by engaging in conduct that is intended to induce people in this jurisdiction to use the financial services it provides, or is likely to have that effect (see s911D of the Corporations Act).

However, ASIC is proposing to repeal Class Order 03/824, which sunsets on 1 April 2017 as it has formed a preliminary view that the class order is no longer required and does not form a necessary and useful part of the regulatory framework because:

  • most wholesale clients that rely on Class Order 03/824 fall within the definition of ‘professional investor’ for the purposes of s911A(2E)
  • the exemption in s911A(2E) applies to the major types of financial services involving those financial products in respect of which ASIC believes the relief is most needed, such as dealings with overseas counterparties in derivatives.

The benefit of the Class Order was that there is no requirement for foreign entities that rely on Class Order 03/824 to notify ASIC of their reliance on that Class Order.

Therefore, in the absence of the Class Order relevant overseas counterparties and other foreign financial services providers which would otherwise rely on the Class Order will need to assess if they continue to qualify for exemption from the requirement to hold an AFS Licence under section 911A(2E) or an alternative statutory exemption or Class Order.

In this regard, for FFSPs that operate from specified countries, ASIC has recently extended existing class order relief from the need to hold an AFS licence for certain financial services under previous class orders which were due to sunset between 1 October 2016 and 1 April 2017 and which have now been extended for a further two years.

However, ASIC has only temporarily extended this relief in order to conduct a comprehensive review of the policy settings underlying the relief for FFSPs.

In proposing to repeal Class Order 03/824, ASIC has indicated that it is also proposing a one-year transitional period for entities that rely on the relief to make arrangements to allow them to continue carrying on their financial services business in Australia.

Any entity which would otherwise rely on Class Order 03/824 will therefore need to assess if it qualifies for exemption from the requirement to hold an AFS Licence on another basis.

For further advice about Class Order 03/824 or other applicable exemptions which may apply to Foreign Financial Services Providers operating in Australia please contact our Corporate Advisory and Financial Services Principal, Michael Bracken

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