Consultation Paper Released on Financial Services Licensing Exemptions for Foreign Financial Service Providers

Today, Treasury released its consultation paper in relation to the Australian financial services license (AFSL) exemptions for foreign financial service providers (FFSPs) and the options to fast track AFSL applications for FFSPs.

Read our insights here.

If you have any questions, get in touch with one of our experts below.

 

Fiona Smedley
Fiona Smedley
Partner
+61 2 9225 5828
Ewan MacDonald
Ewan MacDonald
Special Counsel
+61 2 9225 5351
Steven Rice
Steven Rice
Special Counsel
+61 2 9225 5584
Yorick Ng
Yorick Ng
Senior Associate
+61 2 9225 5568

FSR GPS: ‘Superannuation trustee service’ as a financial service

This edition of our ‘FSR GPS’ (Guidelines, Principles and Strategies) series covers the proposed laws recently tabled before Parliament to introduce a new ‘financial service’ in the Corporations Act 2001 (Cth) (Corporations Act) and Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act), namely, the financial service of ‘providing a superannuation trustee service’.

In short, this reform will extend the statutory obligations of AFS licensees to nearly all activities performed by RSE licensees. This includes the general conduct obligations in section 912A(1) of the Corporations Act and the breach reporting regime in section 912D of the Corporations Act, which is expected to be considerably expanded under separate proposed reforms. These reforms form part of the Government’s response to the recommendations made by the Financial Services Royal Commission.

We have set out some key questions and answers in relation to the new financial service of providing a superannuation trustee service below.

When do these new obligations commence?

If Parliament passes the Financial Sector Reform (Hayne Royal Commission Response) Bill 2020 (Bill), these obligations will apply from the later of 1 January 2021 or the day after Royal Assent.

What is a superannuation trustee service?

The Bill defines a superannuation trustee service as being provided whenever a person ‘operates a registrable superannuation entity as trustee of the entity’.[1]

This concept is deliberately broad – it is intended to cover ‘all of the activities involved in operating a registrable superannuation entity, at all stages of the trustee’s interactions and transactions with members and others’ (EM, [9.104]), including, for example:

  • product design and development;
  • marketing to employers and consultants;
  • investment selection;
  • fee charging;
  • death benefit nominations;
  • oversight of service providers; and
  • insurance claims handling (noting that there is also a separate new financial service being introduced for insurance claims handling, known as a ‘claims handling and setline service’).

The definition of a superannuation trustee service is subject to only limited exceptions. For example, there is an exception for exempt public sector superannuation schemes and an exception from the requirement to hold an AFS licence authorisation if the superannuation trustee services are provided only to wholesale clients.

What does this mean for me as a trustee?

As a result of these amendments, nearly all the activities you perform as an RSE licensee will be subject to the AFS licensing obligations in the Corporations Act. This includes fund administration and operational activities which were previously outside the purview of the AFS licensing regime.

In contrast, under the current law (i.e. without the proposed amendments), the AFS licensing obligations often apply only to the extent that the RSE licensee:

  • provides financial product advice (e.g. in relation to investment options in the fund);
  • deals in financial products as RSE trustee; or
  • deals in superannuation products (e.g. by issuing interests in the fund).

While this is an extension of the obligations that apply to superannuation fund trustees, the operational and administration activities of a superannuation fund trustee are already largely regulated by APRA under its Prudential Standards, such as in respect of material outsourcing, information security and investment governance. Accordingly, most superannuation trustees will already have a stringent governance process in this regard, which can be updated to capture the new AFS licensing and breach reporting obligations.

Further, the introduction of the Design and Distribution Obligations (DDO) regime in October 2021 means that a number of superannuation fund trustees are already in the process of updating their product and distribution governance frameworks. In this process, it would be prudent to also ensure that the AFS licensee conduct obligations are also appropriately addressed.

What obligations will apply when I provide this service?

If you provide a superannuation trustee service, you will also need to comply with the conduct and other obligations that usually apply when an AFS licensee provides a financial service.

For example, this includes an obligation to:

  • do all things necessary to ensure the superannuation trustee service is provided efficiently, honestly and fairly (s 912A(1)(a));
  • report and investigate breaches of specified financial services laws (this includes the new expanded breach reporting laws proposed for ss 912D to 912EB);
  • maintain financial records in accordance with Corporations Act Part 7.8 Division 6; and
  • have adequate professional indemnity insurance in relation to financial services provided to retail clients (s 912B).

We frequently advise on the implications of these obligations for our clients, including the obligation to ensure financial services are provided ‘efficiently, honestly and fairly’. Some of our recent articles on that obligation are available here, here and here.

The interaction between the breadth of trustee actions covered by the new financial service and the extensive nature of the efficiently, honestly and fairly obligation is acutely significant. This is because the particular relevant activity will be subject to a new conduct obligation in addition to the trustee’s equitable and statutory duties.

Am I caught if I provide services to an RSE licensee?

No. Only a ‘person who operates a registrable superannuation entity as trustee’ can provide a superannuation trustee service.

This is reflected in [9.128] of the Explanatory Memorandum:

An RSE licensee is the only entity who requires an authorisation to provide a superannuation trustee service. Administrators, custodians and others who may undertake activities on behalf of a trustee who operates a registrable superannuation entity do not themselves operate the registrable superannuation entity.

What if I only provide this service to wholesale clients?

If the only superannuation trustee services you provide are services to wholesale clients, you will not be required to hold an AFS licence that authorises you to provide a superannuation trustee service.[2]

Note that, generally speaking, superannuation trustee services will be taken to be provided to a person as a retail client (due to the deeming provision in section 761G(6) of the Corporations Act), unless it is provided to:[3]

  • the trustee of a superannuation fund, approved deposit fund, pooled superannuation trust, or public sector superannuation scheme with assets of at least $10 million;
  • an RSA provider.

This means that an RSE licensee is, in most circumstances, likely to be providing a superannuation trustee service to retail clients, as the wholesale client exemption mentioned above is unlikely to apply.

Do I need to apply for an AFSL authorisation to provide this service?

Not if you:[4]

  • already hold an RSE licence and an AFS licence authorisation to deal in a superannuation product, as of just before the Commencement Date; or
  • have already lodged or will have lodged, before the Commencement Date, an application for an AFS licence authorisation to deal in a superannuation product, on the condition that:
    • ASIC ultimately grants the application for that authorisation on or after the Commencement Date; and
    • you hold an RSE licence when the licence application or variation is granted.

In these instances, the Bill proposes to provide that a licence condition will automatically be applied to the AFS licence authorising the licensee to provide a superannuation trustee service.

What if I have any other questions?

Ask us! We’re assisting several of our clients implement proposed new laws that will apply to superannuation trustees, including the obligation on RSE licensees to ‘not wear two hats’ (we have published an article on this here).

 

[1] Corporations Act s 766A(1)(ec).

[2] Bill, inserting Corporations Act s 911A(2)(ga).

[3] Bill, amending Corporations Act s 761G(6).

[4] Part 10.49 of the Bill

 

Michael Vrisakis
Michael Vrisakis
Partner
+61 2 9322 4411
Ruth Stringer
Ruth Stringer
Consultant
+61 2 9225 5099
Steven Rice
Steven Rice
Special Counsel
+61 2 9225 5584
Tamanna Islam
Tamanna Islam
Senior Associate
+61 2 9225 5160
Shan-Verne Liew
Shan-Verne Liew
Solicitor
+61 2 9225 5210

 

Changes for AFSL applicants and updates for foreign AFSL applicants, including guidance on the ‘fit and proper person’ test

By Fiona Smedley, Ewan MacDonald, Nick Alexander and Soraya Pradhan 

 

The Australian Securities and Investments Commission (ASIC) has made important changes to the requirements for new and current applicants for a ‘full’ Australian financial services license (AFSL) and a ‘foreign’ AFSL. By updating Information Sheet 240 (INFO 240), Regulatory Guide 105 (RG 105), and its licensing kit in Regulatory Guides 1 to 3 (RG 1, RG 2, and RG 3), ASIC has:

  • provided guidance on how it will administer the new “fit and proper person” test;
  • reduced the potential number of non-core proofs that must be provided at the commencement of the application for a new or varied AFSL; and
  • clarified the application process for foreign AFSL applicants, including by:
    • reducing the number of core proofs that must be provided; and
    • requiring foreign AFSL applicants to nominate Responsible Managers in the Form FS01.

 

ASIC’s new approach to administering the fit and proper person test

As noted in our article of 28 February 2020, under recent changes to the Corporations Act, ASIC must satisfy itself that AFSL applicants pass a new “fit and proper person” test in relation to its officers and controllers (and officers of controllers where the controller is a company). The test also applies to ‘senior managers’ in the case of applicants or controllers that are organised as trusts or partnerships.

So far ASIC has been administering the new test by requiring all relevant persons to provide certain “People Proofs”, being a national criminal history check, a bankruptcy check and a tailored 17-question ‘Statement of Personal Information’ questionnaire.

As a concession apparently directed at the practical difficulties posed for large corporate groups, ASIC has updated INFO 240, so that certain persons can be certified as fit and proper by the applicant without the need to provide the “People Proofs”. However the certification option is not available for officers of the applicant, for officers of an ultimate holding company or for controllers who are natural persons.

Importantly, ASIC has reserved its position on permitting fit and proper certifications, and may subsequently request applicants to provide “People Proofs” or other additional information.

The certification option will be welcomed by a range of applicants, particularly large corporate groups with layers of controlling companies between the applicant and the ultimate parent company.

An applicant who seeks to take advantage of the certification process will need to:

  • undertake some careful analysis to identify the entities and persons who may be covered by the certification; and
  • prepare a range of documents to ASIC to give effect to and support the certification,

both of which we can assist with.

Applicants will need to take particular care in identifying relevant “officers” given the subjective nature of the definition. As well as appointed directors and secretaries, “officer” includes a person:

  • who makes, or participates in making, decisions that affect the whole, or a substantial part, of the business of the corporation; or
  • who has the capacity to affect significantly the corporation’s financial standing; or
  • in accordance with whose instructions or wishes the directors of the corporation are accustomed to act (excluding advice given by the person in the proper performance of functions attaching to the person’s professional capacity or their business relationship with the directors or the corporation).

 

Reducing requirement to provide non-core proofs at lodgment

The original INFO 240 introduced a requirement to provide non-core proofs for specified requested full AFSL authorisations at the time of the lodgement of the application (instead of when and if requested by ASIC subsequently).

ASIC has now reduced the number of circumstances in which non-core proofs are required at lodgment. For example, full AFSL applicants who seek a derivatives or foreign exchange contract authorisation are no longer required to provide the following non-core proofs at lodgement:

  • B3: Arrangements for Managing Conflicts of Interests;
  • B3: Compliance Arrangements; and
  • B7: Risk Management System Statement.

ASIC may still require these applicants to provide these non-core proofs at a later stage in the process upon request.

 

Clarifying the application process for foreign AFSL applicants

Through a series of amendments to RG 1, RG 2, and RG 3, ASIC has provided guidance on how it will administer the foreign AFSL application process.

Importantly:

  • foreign AFSL applicants are not required to provide the following core proofs:
    1. the B1: Organisational Competence Proof; and
    2. the B5: Financial Statements and Financial Resources Proof; and
  • foreign AFSL applicants are still required to nominate Responsible Managers in the Form FS01 and provide their respective “People Proofs” (described above), notwithstanding the fact that ASIC has exempted foreign AFSL holders from the ‘organisational competence’ obligation.

 

 

Fiona Smedley
Fiona Smedley
Partner
+61 2 9225 5828
Ewan MacDonald
Ewan MacDonald
Special Counsel
+61 2 9225 5351
Nick Alexander
Nick Alexander
Solicitor
+61 2 9225 5771

Soraya Pradhan
Soraya Pradhan
Graduate
+61 2 9322 4768

Important changes in the AFSL landscape

By Fiona SmedleyEwan MacDonald and Nick Alexander

 

The Australian financial services license (AFSL) landscape has just shifted under your feet. The Australian Securities & Investments Commission (ASIC) now requires all new and current applicants for the grant or variation of an AFSL to satisfy a ‘fit and proper person test’ in relation to the applicant’s officers, all ‘controllers’ of the applicant, their officers and in some cases their senior management.

The Australian financial services license (AFSL) landscape has just shifted under your feet. The Australian Securities & Investments Commission (ASIC) now requires all new and current applicants for the grant or variation of an AFSL to satisfy a ‘fit and proper person test’ in relation to the applicant’s officers, all ‘controllers’ of the applicant, their officers and in some cases their senior management.

ASIC has also been armed with new powers, including the power to:

  • cancel a new applicant’s AFSL if it is not used within the first 6 months of it being granted, and
  • ban specific persons from carrying out their functions within a financial services business.

 

What has changed?  

Hot on the heels of the Royal Commission, the Financial Sector Reform (Hayne Royal Commission Response—Stronger Regulators (2019 Measures) Act 2020 (Cth) has received royal assent, introducing the following changes:

  1. all applicants for the grant or variation of an AFSL must satisfy ASIC that they meet the higher threshold set by the ‘fit and proper person test’ (gone are the days of the ‘good fame and character’ test);
  2. the new fit and proper test is applied well beyond the applicant itself, right up the chain of ownership, to all ‘controllers’ of the applicant and their officers, partners or trustees (as applicable); and
  3. ASIC is now equipped with a number of new AFSL-related powers, including the power to:
    • direct an AFSL holder to provide a statement for the purposes of considering whether or not the fit and proper person test is satisfied in relation to the AFSL holder and the AFSL;
    • make a banning order or apply to the Court for a disqualification order against a person who is not a ‘fit and proper’ person; and
    • cancel an AFSL if the AFSL holder does not provide a financial service before the end of 6 months after the grant of the AFSL.

We provide an overview of the impact of these changes below.

 

Who’s caught under the new ‘fit and proper person’ test?

Previously ASIC has only required the following persons to meet the fit and proper test:

  1. if the applicant is a natural person, that natural person;
  2. if the applicant is a body corporate, its ‘responsible officers’ (being those officers who perform duties in connection with the holding of an AFSL); and
  3. if the applicant is a partnership or trust, its partners or trustees (as applicable).

Now ASIC is now casting its net much wider, to include:

  • if the applicant is a body corporate, all of its officers (as defined in section 9 of the Corporations Act);
  • if the applicant is a partnership or trust, all of its partners or trustees (as applicable) and its senior managers; and
  • for every applicant, all its controllers, being any person who ‘controls’ the applicant (as defined in the newly-inserted section 910B of the Corporations Act), right up the chain of ownership to the applicant’s ultimate ‘controller’, including:
    • where the controller is a body corporate, all of its officers; and
    • where the controller is a partnership or trust, all of its partners or trustees (as applicable) and its senior managers.

 

What matters must ASIC have regard to when applying the new ‘fit and proper person’ test?

In addition to the matters ASIC has had regard to when applying the ‘good fame and character’ test, ASIC must now also have regard to additional matters when considering whether there is a reason to believe that a person is not ‘fit and proper’ including:

  • whether the person’s Australian credit licence or registration has been suspended or cancelled (no longer just a person’s AFSL);
  • whether the person has the been the subject of a banning or disqualification order made under Part 2-4 of the National Consumer Credit Protection Act (NCCP Act) (no longer just orders made under Subdivision B of Division 8 of Part 7.6 of the Corporations Act);
  • whether the person has ever been disqualified under the Corporations Act or any other law of the Commonwealth or of a State or Territory from managing corporations;
  • whether the person has ever been banned from engaging in a credit activity within the meaning of the NCCP Act);
  • whether the person has ever been linked to a refusal or failure to give effect to a determination by AFCA; and
  • whether, in the last 10 years, the person has been convicted of an offence (no longer just an offence that involves dishonesty and is punishable by imprisonment for at least 3 months).

 

How is ASIC administering the fit and proper person test?

As a practical matter, ASIC is administering the fit and proper person test by requiring each person to complete and provide:

  • a national criminal history check;
  • a bankruptcy check; and
  • a  tailored 17-question ‘Statement of Personal Information’ questionnaire. A similar statement was previously only required to be completed by the ‘responsible managers’ nominated by an applicant.

While at first glance this may not appear particularly onerous, for any applicant that is a subsidiary within a large, global corporate group with multiple layers of offshore controllers and officers, generating and collecting this level of information and checks will be a substantial logistical task and increase application costs.

 

Directions, banning orders and disqualification orders

The combined practical effect of ASIC’s new powers to:

  • direct an AFSL holder to make a statement for the purposes of considering whether or not the fit and proper person test is satisfied in relation to the AFSL holder and the AFSL; and
  • make a banning order or apply to the Court for a disqualification order against a person if the person is not a ‘fit and proper’ person,

is that ASIC now has more information-gathering and enforcement powers at its disposal to prohibit a person from providing financial services, from controlling an entity that carries on financial services, and even from performing a specific function involved in the carrying on of that financial services business (including as an officer, manager, employee, contractor or in some other capacity).

 

New ‘use it or lose it’ rule

If an AFSL is granted and the AFSL holder does not provide a financial service covered by its AFSL within 6 months of the grant of the AFSL:

  • it must notify ASIC in a prescribed form; and
  • ASIC may cancel the AFSL by written notice.

Importantly, under the transitional provisions, this change took effect on 18 February 2020 including in relation to AFSLs granted before that date. So if you were recently granted an AFSL, and haven’t used it yet to provide a financial service covered by your AFSL, use it before you lose it!

 

Fiona Smedley
Fiona Smedley
Partner
+61 2 9225 5828
Ewan MacDonald
Ewan MacDonald
Special Counsel
+61 2 9225 5351
Nick Alexander
Nick Alexander
Solicitor
+61 2 9225 5771