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Relief to Foreign Financial Service Providers – Consultation Letter

July 29, 2021


Via Electronic Mail (FFSP@treasury.gov.au)

 

Regulatory Powers and Accountability Unit
Financial System Division
The Treasury
Langton Crescent
PARKES ACT 2600
Australia

 

Re:      Relief to Foreign Financial Service Providers – Consultation Paper (July 9, 2021)

 

Dear Sir or Madam:

The Investment Adviser Association (IAA), the leading not-for-profit association in the United States dedicated to advancing the interests of investment advisers,[1] appreciates the opportunity to comment on the Government’s July 9 Consultation Paper (Consultation) on Relief to Foreign Financial Service Providers (FFSPs).[2] The Consultation was issued in connection with the Government’s announcement that it will consult on options to restore the previously well-established regulatory relief provided for FFSPs that are licensed and regulated in jurisdictions with comparable financial service rules and obligations.[3] The Consultation is intended to help the Government assess the options available – and the costs and benefits thereof – for restoring relief from licensing to FFSPs and fast-tracking the licensing process. Our comments below are limited to restoring the relief for FFSPs and do not address the fast-track process.

The IAA submitted comments to the Australian Securities and Investments Commission (ASIC) on behalf of IAA members that are FFSPs and that provide portfolio management services to wholesale clients and professional investors in Australia or advise offshore funds. In 2018, we urged ASIC to retain the “sufficient equivalence” class order relief in lieu of imposing a licensing requirement and wrote again in 2019 expressing concerns with the limited and narrow nature of ASIC’s proposed “funds management relief” that would replace the sufficient equivalence class order. We also recommended that ASIC formally consult on the details of a new licensing process for FFSPs before proceeding with a new licensing requirement.[4] However, ASIC repealed both the sufficient equivalence and the limited connection class orders in March 2020, replacing them with the narrower “funds management relief.”[5]

The Government’s Consultation now seeks feedback on ways to reduce duplicative regulatory requirements on FFSPs that are subject to primary regulation in other jurisdictions and encourage more participation by FFSPs in the Australian market, while maintaining appropriate protections. We strongly support the Government’s efforts in this regard.

  1. We Support the Option to Restore the Prior Relief and Recommend that the Government Expand it to Add Jurisdictions Already Approved Under the Funds Management Relief

Our FFSP members relied on the former sufficient equivalence and limited connection class order relief for FFSPs that permitted them to provide services to wholesale clients and professional investors in Australia without having to obtain a license from ASIC to do so. In addition, the two relief regimes played a significant role in facilitating competition and giving access to a wider range of products and services to wholesale investors. We are thus pleased that the Government is providing options for restoring and extending the relief, consistent with appropriate investor protections. The Consultation seeks feedback on three possible options for restoring relief from the licensing requirement for FFSPs.[6] The IAA strongly supports Option 1A, which would restore both the sufficient equivalence relief and the limited connection relief, and also urges the Government to extend that relief to the additional jurisdictions that are already approved under the funds management relief issued by ASIC, as described in Option 2.

  1. Responses to Select Consultation Questions

Q2. Which of the proposed options would be most effective in providing relief to FFSPs and why?

We recommend that the Government adopt Option 1A with certain elements of Option 2, as described below. Specifically, the most efficient and helpful course of action would be for ASIC to restore the sufficient equivalence and limited connection instruments. We also ask that it allow firms that do not fit squarely into the class order requirements (e.g., firms organized in an unapproved jurisdiction but regulated by an approved regulator) to seek individualized exemptive relief (“Special Instrument”) that was previously available under the sufficient equivalence order.

We also recommend that the class relief not be limited to those jurisdictions identified in Option 1A but be made available to other recognized jurisdictions where possible, and include all those deemed substantially in compliance with the regulations as determined by ASIC under the funds management relief, i.e., those identified in Option 2. Although we opposed many of the conditions and limitations that ASIC adopted in connection with the funds management relief, we believe any changes going forward for FFSPs should leverage the determinations made in connection with the adoption of Regulatory Guide RG 176[7] about substantial compliance. The sufficient equivalence and limited connection class orders only recognize the UK, the United States, Hong Kong, Singapore, Germany, and Luxembourg. We believe they should also be opened up to France, Canada (including all of Canada’s provinces, not just Ontario), and Sweden as these jurisdictions were recognized by ASIC to offer robust regulatory protections in connection with the funds management exemption. We do not believe that it makes sense to bifurcate treatment of FFSPs that offer products or services to wholesale clients in Australia and that are subject to a sufficiently strong regulatory and enforcement regime in their home jurisdiction. Doing so would create a subset of robustly regulated FFSPs that have previously been deemed equivalent that would be required to obtain an AFSL in order to offer products or services to wholesale clients simply because they were not approved under the sufficient equivalence relief framework.

Q3. Is there a specific need for the limited connection relief if option 2 or 3 is adopted?

Yes. We believe that the limited connection relief should be reinstated regardless of whether Option 2 or 3 is also adopted. The limited connection relief is important to FFSPs seeking to raise capital and/or gauge interest in investments, but that do not otherwise carry on a financial services business in Australia. The relief is also important to firms that have progressed their business in Australia to the point of seeking to obtain an AFSL and/or apply for relief under a different exemption, allowing them to operate in a compliant manner during the application period. We also do not believe that all of the conditions proposed in connection with Options 2 and 3 are necessary and that the conditions in the sufficient equivalence and limited connection orders are sufficient to protect investors and ASIC’s regulatory interests.

 

Q8. Which conditions in paragraph 34 should not be attached to FFSP relief and why?

We strongly recommend against including any auditing or reporting requirements (condition (k)) for FFSPs that are not engaged in providing custodial or depositary services. For example, investment managers providing portfolio management services do not provide custodial or depositary services, and therefore should not be required to comply with the auditing and reporting requirements in paragraph 34. Many FFSPs treat audit-related information as commercially sensitive and this condition may thus prevent some FFSPs from entering the Australian market.

In addition, as noted in other submissions,[8] we do not believe that conditions (l)-(o), including those related to having adequate conflicts of interest or risk management arrangements in place (conditions (n) and (o)), should be included because ASIC has already assessed the FFSP as being subject to a sufficiently equivalent foreign regulatory regime. Duplicative reviews and potentially conflicting requirements would not provide any additional protection but would be unnecessarily burdensome. Condition (m) would not apply to FFSPs unless they are providing custodial or depositary services and should thus not be included. We also do not believe that conditions (r) and (s) should be included as they would make the exemption less useful and unworkable.

 

Q9. Should there be other consequences to a breach of relief conditions other than the FFSP relief no longer being available?

No. FFSPs are subject to breach laws of their particular jurisdiction of oversight when there is no Australian client subject to a breach. Where there is no Australian client subject to a breach, there is no regulatory interest by ASIC, especially where the FFSP must comply with requirements for breach notification and management in its own regulated jurisdiction.

 

III.      Next Steps: Another Consultation

In order to provide sufficient time for thoughtful input, we recommend that a second consultation with a longer comment period be issued following the Government’s review of comments on this Consultation. The second consultation should lay out proposed steps forward before any final regulation or recommendation is issued. Our members need adequate time to consider the potential effects of any proposal, including the cost-benefit impacts and the potential burdens of any particular course of action.

 

*          *          *

We appreciate your consideration of the IAA’s comments and would be happy to provide any additional information that may be helpful. Please contact the undersigned or IAA Associate General Counsels Monique Botkin or Sanjay Lamba at (202) 293-4222 if we can be of further assistance.

 

Respectfully Submitted,

/s/ Gail C. Bernstein

 

Gail C. Bernstein
General Counsel

 

 

 

[1] The IAA’s member firms manage more than $25 trillion in assets for a wide variety of individual and institutional clients, including pension plans, trusts, investment funds, endowments, foundations, and corporations. For more information about the IAA, please visit www.investmentadviser.org.

[2] See Relief to Foreign Financial Service Providers (9 July 2021), Australian Government, The Treasury, available at https://treasury.gov.au/sites/default/files/2021-07/c2021-189465-cp.pdf.

[3] Consultation at 2.The relief would be limited to FFSPs that deal with wholesale clients and professional investors.

[4] See Letter from the IAA to ASIC on Consultation Paper 301: Foreign Financial Services Providers (Nov. 14, 2018), available at https://higherlogicdownload.s3.amazonaws.com/INVESTMENTADVISER/aa03843e-7981-46b2-aa49-c572f2ddb7e8/UploadedImages/November_13__2018_-_IAA_Comment_Letter_to_ASIC_re_Consultation_Paper_301.pdf and Joint Letter from the IAA and ICI Global to ASIC on Consultation Paper 315: Foreign financial services providers: Further consultation (Aug. 8, 2019), available at https://higherlogicdownload.s3.amazonaws.com/INVESTMENTADVISER/aa03843e-7981-46b2-aa49-c572f2ddb7e8/UploadedImages/about/Comment_Letter_Compendiums/2019/August_8__2019_-_Letter_on_ASIC_CP315_on_FFSPs_FINAL.pdf.

[5] Consultation at 2.

[6] Option 1A would restore the sufficient equivalence relief and limited connection relief as they applied before they were repealed in 2020. This would apply to FFSPs regulated by the United Kingdom, United States, Hong Kong, Singapore, Germany and Luxembourg. Option 1B would restore the sufficient equivalence relief as it applied before it was repealed in 2020 and continue the funds management relief in place of the limited connection relief for eligible FFSPs. Option 2 would expand relief for certain financial services provided by FFSPs, subject to several conditions, and expand to several more jurisdictions, such as France, Canada, Denmark, and Sweden, where the FFSP is regulated by the local regulator. The IAA notes that Canada includes more than only those regulated by the Ontario Securities Commission, and, as discussed in the body of this letter, recommend that the final path include FFSPs regulated by any of the Canadian provincial regulators. Option 3 would expand relief for all financial services provided by FFSPs, subject to the same conditions as Option 2, and include the same jurisdictions as Option 2.

[7] See https://asic.gov.au/regulatory-resources/find-a-document/regulatory-guides/rg-176-foreign-financial-services-providers/.

[8] See, e.g., MinterEllison Submission on ASIC Consultation Paper 315 (Aug. 9, 2019), available at https://download.asic.gov.au/media/5493183/cp315-submission-minterellison.pdf.

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