Licensing requirement
An entity carrying on a financial services business in Australia must hold an Australian financial services licence (AFSL), unless an exemption applies.
Statutory and common law tests are applied in order to determine whether a financial services business is being carried on in Australia and an entity may be required to hold an AFSL even though it has no physical presence in Australia.
AFSLs are issued by ASIC and licence holders are subject to a range of obligations, including in relation to capital adequacy, organisational competence, reporting and holding client assets.
Licence holders providing personal advice to retail clients are subject to a duty to act in a client’s best interest, and fee disclosure requirements. Licence holders providing personal or general advice to retail clients are subject to a ban on conflicted remuneration.
Financial services and financial products
Broadly speaking, “financial services” include:
provision of financial product advice;
dealing in a financial product;
making a market for a financial product;
operating a registered scheme under the Corporations Act;
providing a custodial or depository service; or
providing a crowd-funding service
A “financial product” is broadly defined and includes a facility through which, or through the acquisition of which, a person makes a financial investment, manages financial risk or makes non-cash payments.
Both the definitions of “financial service” and “financial product” are complex and subject to express inclusions, qualifications and exceptions. Examples of transactions which may be affected by the Australian financial services regulatory regime include:
issuing securities, shares, stocks, deposits, debentures, bonds, managed investment scheme interests (typically interests in collective vehicles structured as a unit trust or partnership), or insurance to persons in Australia;
entering into derivative transactions (such as swaps, options or forward transactions in currency) with persons in Australia through either the over the counter markets or through automated dealing systems;
effecting secondary market trades in securities, shares, stocks, debentures, bonds or managed investment scheme interests as an agent or trustee of a person in Australia; and
holding or managing investments in securities, shares, stocks, debentures, bonds, managed investment scheme interests, or interests in such products, on behalf of persons in Australia.
Retail vs Wholesale
The Australian financial services regulatory regime differentiates between wholesale and retail clients. Additional conduct and disclosure requirements apply where financial services are provided to retail clients. Some exemptions from licensing, disclosure and conduct obligations are available to entities that provide financial services to wholesale clients only.
Foreign financial services providers
A foreign financial services provider (FFSP) that intends to provide financial services in Australia must hold an AFSL, a Foreign Australian Financial Services Licence (FAFSL) or be entitled to rely on an exemption. The FAFSL regime became effective on 1 April 2020, replacing the previous “passport” relief, and is designed to be more streamlined than the AFSL application process. FFSPs must be regulated overseas by specified sufficiently equivalent regulatory regimes to be eligible to apply for a FAFSL to provide certain financial services to wholesale clients in Australia. The FAFSL regime recognises Denmark, Germany, Hong Kong, France, Luxembourg, Ontario in Canada, Singapore, Sweden, the United Kingdom and the United States as having sufficiently equivalent regulatory regimes. FFSPs from another jurisdiction can apply to extend the FAFSL regime to other regulatory regimes.
Entities currently relying on “passport” relief can continue to do so until 31 March 2022 after which, entities must apply for a FAFSL, AFSL, cease carrying on a financial services business in Australia or rely on another exemption.
From 1 April 2022, limited connection relief will be replaced with funds management relief. Fund management relief exempts certain FFSPs from holding an AFSL to provide funds management services to eligible Australian professional investors, subject to satisfying conditions.
Australia is also a participating economy to the Asia Region Funds Passport (ARFP), which is an initiative designed to facilitate the offer of interests in eligible funds to investors across other participating economies in the region, with reduced regulatory requirements. Broadly, the ARFP requires an eligible fund to apply to its home regulator for a passport and comply with home economy requirements in order to be registered (for Australian funds, this effectively requires registration as a managed investment scheme with ASIC). Once registered, the fund must notify the host regulator and meet host economy requirements relating to disclosure, distribution and complaints handling (for offshore funds wishing to be offered in Australia, this effectively requires compliance with the corresponding obligations for registered managed investment schemes).
This guide is current as of April 2021.