Steven Rice
Corrs Chambers Westgarth, Sydney
steven.rice@corrs.com.au

The Australian government has proposed significant changes to the regulation of overseas companies (‘Overseas Companies’) seeking to provide financial services to clients in Australia.

Unless an exemption applies, Australian law requires a person, including an Overseas Company, to hold an appropriately authorised Australian financial services licence (AFSL) if the person carries on a ‘financial services business’ in Australia. A ‘financial services business’ is a business that involves providing ‘financial services’, such as ‘financial product advice’, ‘dealing’ in ‘financial products’ and ‘making a market’ in ‘financial products’. Traditional financial products, such as shares and funds, sustainable finance and Fintech businesses are within the scope of the AFSL requirement, whether the activities are in respect to ‘retail clients’ or ‘wholesale clients’ (eg, institutions and high-net-worth clients).

Importantly, the AFSL requirement has extended jurisdictional scope. If an Overseas Company induces clients in Australia to use its ‘financial services’, then the AFSL requirement will apply to the Overseas Company even if the Overseas Company is not physically present in Australia. Overseas Companies, such as advisers, brokers, banks, insurers and fund managers, are subject to this regulation. The Australian Securities and Investments Commission ('ASIC') regulates and enforces the AFSL requirement and has taken action against Overseas Companies for AFSL breaches.

Aside from the AFSL requirement, other Australian financial services regulations can also apply to Overseas Companies. This includes laws relating to anti-money laundering and counterterrorism financing, privacy, the regulation of credit, the registration of foreign companies that carry on business in Australia and the carrying on of banking or insurance business in Australia.

Exemptions to the AFSL requirement are currently available

There are many exemptions ('AFSL Exemptions') to the AFSL requirement and these have generally been in place for some time. Three current sets of AFSL Exemptions are frequently relied on by a range of Overseas Companies:

• the ‘limited connection’ AFSL Exemption: applies to an Overseas Company that is only subject to the AFSL requirement because of the extended jurisdictional scope of the AFSL provisions, which does not itself hold an AFSL and which only provides ‘financial services’ to ‘wholesale clients’;
• the ‘sufficient equivalence’ AFSL Exemption: applies to an Overseas Company that holds a specific regulatory permission issued by a recognised overseas financial services regulator, such as the UK Financial Conduct Authority, the US Securities and Exchange Commission or the Monetary Authority of Singapore; and
• the ‘professional investor’ AFSL Exemption: applies to an Overseas Company that provides limited types of ‘financial services’ to ‘professional clients’ in Australia. Importantly, the ‘financial services’ are limited to providing ‘financial product advice’, ‘dealing’ in derivatives, foreign exchange contracts or certain regulated emissions units, and ‘making a market’ in those products.

Significant changes to AFSL Exemptions are proposed: impact on Overseas Companies

The Australian government’s proposed changes to the AFSL Exemptions above are significant, and these are particularly relevant for Overseas Companies. Each of these changes is proposed to be effective as at 1 April 2025. Among other things, a new ‘comparable regulator’, ‘professional investor’ and exchange-traded derivatives market-making AFSL Exemptions ('New AFSL Exemptions') will be available and key existing AFSL Exemptions will no longer be available.

Current ‘limited connection’ AFSL Exemption will be removed

The current ‘limited connection’ AFSL Exemption will be repealed, effective 1 April 2025. Overseas Companies that rely on the current ‘limited connection’ AFSL Exemption will no longer be able to do so on and after 1 April 2025, and will instead need to rely on another AFSL Exemption or obtain an AFSL. This is particularly important for Overseas Companies to consider, as the current ‘limited connection’ AFSL exemption is seen by many Overseas Companies as a flexible and low compliance impact AFSL Exemption, and experience demonstrates that it is relied on by a wide range and large number of Overseas Companies.

Current ‘sufficient equivalence’ AFSL Exemption will be replaced by a ‘comparable regulator’ AFSL exemption

The current ‘sufficient equivalence’ AFSL Exemption, on which many Overseas Companies rely under transitional arrangements, will be replaced on 1 April 2025 by a ‘comparable regulator’ AFSL exemption. The ‘comparable regulator’ AFSL Exemption will be available where:

• for Australian clients, the ‘financial services’ are provided only to ‘wholesale clients’;
• the Overseas Company is a ‘foreign company’ or a partnership formed outside of Australia;
• the Overseas Company has and maintains all regulatory permissions necessary to legally provide the same ‘financial service’ in a place that is outside Australia (the ‘comparable jurisdiction’);
• the regulator that administers the Overseas Company’s regulatory permissions has been recognised for this purpose by the government; and
• the Overseas Company provides the ‘financial service’ from Australia or from the comparable jurisdiction.

Additional conditions ('Conditions') will apply to an Overseas Company seeking to rely on the ‘comparable regulator’ AFSL Exemption. The Overseas Company must:

• notify ASIC that it intends to rely on the ‘comparable regulator’ AFSL Exemption, give such reasonable assistance to ASIC as ASIC requires and submit to the non-exclusive jurisdiction of Australian courts;
• comply with any ASIC directions;
• give notice to clients that the Overseas Company is relying on the ‘comparable regulator’ AFSL Exemption;
• notify ASIC of changes to contact details;
• provide relevant ‘financial services’ ‘efficiently, honestly and fairly’;
• consent to information-sharing between ASIC and the Overseas Company’s home regulator, and notify ASIC of significant enforcement action, disciplinary action or investigation undertaken by regulators or financial market operators;
• have an agent in Australia and appropriately oversee its representatives;
• notify ASIC of any contravention of a condition that applies to that exemption; and
• comply with conditions imposed by ASIC on the Overseas Company in respect to the ‘comparable regulator’ AFSL Exemption.

Current ‘professional investor’ AFSL Exemption will be significantly changed

The current ‘professional investor’ AFSL Exemption will be repealed and replaced on 1 April 2025 by a significantly amended AFSL Exemption. The replacement ‘professional investor’ AFSL Exemption will be available where:

• for Australian clients, the financial services are provided only to clients that are ‘professional investors’; this term has an extensive definition, but currently includes AFSL holders (eg, fund managers and brokers), prudentially regulated Companies (generally including banks, insurers and certain pension/retirement fund trustees), listed entities, government bodies and foreign equivalents of these;
• the ‘financial service’ does not involve ‘dealing’ in a relevant exchange-traded ‘financial product’;
• the financial services are provided from outside Australia, except in the case of certain marketing visits;
• the Overseas Company’s head office and principal place of business are outside Australia; and
• the Overseas Company reasonably believes that in providing the financial service, it is not contravening any law applying to where the financial services are provided from, or where its head office and principal place of business are.

The Government will be able to make regulations that may limit the application of the future ‘professional investor’ exemption in respect to particular ‘financial services’, ‘financial products’ or ‘professional investors’.

Additional conditions will apply to an Overseas Company seeking to rely on the replacement ‘professional investor’ AFSL Exemption. The Overseas Company must:

• notify ASIC that it intends to rely on the replacement ‘professional investor’ AFSL Exemption, give reasonable assistance to ASIC as ASIC requires and submit to the non-exclusive jurisdiction of Australian courts;
• comply with any ASIC directions;
• give notice to clients that the Overseas Company is relying on the replacement ‘professional investor’ AFSL Exemption;
• notify ASIC of changes to contact details;
• provide relevant ‘financial services’ ‘efficiently, honestly and fairly’;
• notify ASIC of any contravention of a condition that applies to that exemption; and
• comply with conditions imposed by ASIC on the Overseas Company in respect to the ‘professional investor’ AFSL Exemption.

New exchange-traded derivatives market making AFSL Exemptions

This new AFSL Exemption will be available to Overseas Companies on and from 1 April 2025 where:

• the ‘financial service’ is making a market in certain exchange-traded derivatives;
• the financial services are provided from outside Australia;
• the Overseas Company’s head office and principal place of business are outside Australia; and
• the Overseas Company reasonably believes that in providing the financial service, it is not contravening any law applying to where the financial services are provided from, or where its head office and principal place of business are.

Additional conditions will apply to an Overseas Company seeking to rely on the new exchange-traded derivatives market making AFSL Exemptions. The Overseas Company must:

• notify ASIC that it intends to rely on this AFSL Exemption, give reasonable assistance to ASIC as ASIC requires and submit to the non-exclusive jurisdiction of Australian courts;
• comply with any ASIC directions;
• notify ASIC of changes to contact details;
• provide relevant ‘financial services’ ‘efficiently, honestly and fairly’;
• notify ASIC of any contravention of a condition that applies to that exemption; and
• comply with conditions imposed by ASIC on the Overseas Company in respect to this AFSL Exemption.

ASIC remedies

ASIC’s remedies are significantly stronger in relation to the New AFSL Exemptions compared to the current position:

• ASIC may cancel any of the New AFSL Exemptions from applying to an Overseas Company:
  • for particular ‘financial services’ or all ‘financial services’, if the Overseas Company does not comply with the conditions of that exemption; this cancellation power is not available to ASIC in respect to the ‘efficient, honest and fair’ condition; and
  • for all ‘financial services’ if the Overseas Company or its ‘fit and proper persons’ no longer comply with the ‘fit and proper person test’; and
• as an alternative to cancelling the application of any of the New AFSL Exemptions as above, ASIC may impose conditions on the future application of a New AFSL Exemption to an Overseas Company.

Before making a decision about a cancellation or the imposition of conditions, ASIC will be required to give an Overseas Company the reasons ASIC has for the proposed decision and an opportunity to appear at a hearing to make submissions about the matter.

In addition to ASIC’s administrative remedies above, ASIC may also seek civil penalties against an Overseas Company where the Overseas Company has contravened one of the conditions of a New AFSL Exemption.

Other potentially relevant AFSL solutions

While the New AFSL Exemptions will be available from 1 April 2025, replacing the AFSL Exemptions discussed above, two other AFSL solutions may be relevant to consider. First, the ‘fund management’ AFSL Exemption conditionally applies only to the provision of ‘fund management’ financial services, and is available only where the clients receiving ‘financial services’ are certain ‘professional investors’. Second, since 2020, ASIC has replaced the ‘sufficient equivalence’ AFSL Exemption in practice with the ‘foreign AFSL’ regime (a tailored AFSL for Overseas Companies with recognised regulators). Given the proposed ‘comparable regulator’ AFSL Exemption, It is not clear whether the ‘foreign AFSL’ will continue to be available.

Conclusion

The changes to the AFSL regime for Overseas Companies under the removal of current AFSL Exemptions and introduction of the New AFSL Exemptions are significant. Overseas Companies should carefully consider their AFSL position and prepare well ahead for these 1 April 2025 changes.