Passport to success

The Financial Services Reform Act 2001 (FSRA) extended significantly the territorial scope of the Australian financial services licensing regime. After a two-year transitional period ending on 10 March 2004 and a lengthy period of consultation and review, the Australian Securities and Investments Commission (Asic) has recognised that this extended territorial scope may place an unnecessary regulatory burden on foreign financial service providers that provide financial services to wholesale clients in Australia.

Asic has accordingly released a series of instruments of exemption (known as ‘class orders’) to modify the Australian financial services licence (AFSL) requirements in certain circumstances. This includes the provision of limited ‘passport’ rights for certain regulated entities – including those authorised by the UK Financial Services Authority (FSA) and the US Securities and Exchange Commission (SEC).

Activities having a limited territorial connection with Australia Class Order 03/824 was the first class order released by Asic, which gives relief to foreign financial service providers dealing with Australian wholesale clients. It operates as an exemption from the requirement to hold an AFSL for a foreign person who provides services in Australia to wholesale clients only, where the only reason that the person is considered to be carrying on a financial services business arises by virtue of Section 911D of the FSRA. Section 911D is a deeming provision, which states that if an entity engages in conduct that intended, or is likely to induce, people in Australia to use its financial services, it will be considered to be conducting a financial services business, even if there is no other relevant connection with Australia.

In order to qualify for this exemption, it is necessary to satisfy three conditions: first, the person seeking to rely on the exemption must provide financial services in Australia to wholesale clients only; second, the only reason that the person is considered to be “carrying on a financial services business in Australia” is due to the operation of the deeming provision contained in Section 911D of the FSRA; and third, the person seeking to rely on the exemption does not hold an AFSL covering the provision of the service.

It is condition two that most limits the usefulness of this exemption for foreign financial service providers. In order to satisfy this condition, the relevant foreign financial service provider must not conduct any other activities in Australia that would amount to carrying on a financial services business.

Although a detailed examination of what constitutes “carrying on a financial services business” is beyond the scope of this article, as a general proposition, the greater the scale, complexity and frequency of the activities that the entity conducts in Australia, the more likely it is that it will be considered to be conducting a financial services business in Australia, even without the operation of Section 911D. This means that only foreign financial service providers which have a very limited territorial connection to Australia will be able to take advantage of Class Order 03/824.

The new ‘passport’ rights
In late December 2003, Asic published a further ‘suite’ of class order relief allowing entities regulated by certain overseas regulatory authorities to provide specified financial services to Australian wholesale clients without the need for an AFSL.

The regulatory authorities to which these ‘passport’ rights apply are the FSA, the SEC, the US Federal Reserve or Office of the Comptroller of the Currency, the Monetary Authority of Singapore and the Hong Kong Securities and Futures Commission.

It is important to note that the new class orders do not provide relief in relation to all financial services or all financial products that a foreign financial services provider may wish to provide to Australian wholesale clients. An entity seeking to rely on one of these class orders will need to assess carefully whether the financial services it proposes to provide fall within its terms.

In summary, the provisions that are common to all of the class orders are as follows:

Eligibility for relief
To be eligible for relief:

  • The body must hold a relevant authorisation from its home regulator (ie one of the approved regulatory authorities listed above).
  • The services and financial products to which they relate must fall within the scope of the class order.
  • The services must only be provided to wholesale clients in Australia (ie not to retail clients).
  • The organisation must be an incorporated body or a partnership formed in the jurisdiction of the relevant overseas regulator, and be either a registered foreign company under Division 2 of Part 5B.2 of the FSRA or have appointed an agent for service of process in Australia.
  • The body’s primary business must be the provision of financial services.

Preconditions for reliance
Before relying on the class order, the body must have provided Asic with:

  • A copy of its authorisation from the relevant overseas regulator.
  • A notice that it will provide financial services in Australia in reliance on the class order.
  • An irrevocable deed for the benefit of Asic containing various covenants and undertakings which relate to submission to jurisdiction of the Australian courts and matters of enforcement.

Ongoing compliance conditions
Each class order contains several ongoing notification and compliance obligations which the body must meet in order to continue to rely on the class order relief, including providing the relevant financial services in accordance with the laws of its home jurisdiction and notifying Asic of regulatory action taken against the body in its home jurisdiction.

Class Order 03/824 or apply for passport rights?
The new class orders operate in addition to Class Order 03/824, and in a situation where an entity qualifies for relief under both it will be necessary to assess which class order should be utilised.

The new class orders have the disadvantage that they require notification to Asic that an entity is relying on the class order and execution of a deed of reliance in Asic’s favour in order to take advantage of the relief. There are also other ongoing compliance conditions, although these are not of a particularly onerous nature.

Class Order 03/824 may be relied upon without any notification or lodgment with Asic, but has a much more limited scope and will cease to apply if the entity undertakes any activities in Australia that would constitute carrying on a financial services business, even if Section 911D did not apply.

It is therefore prudent for a foreign financial services provider seeking to rely on Class Order 03/824 to obtain legal advice specific to its circumstances.

Time to assess your compliance
The transitional period that applied to the reform of the Australian financial services regime implemented by the FSRA has now expired. It is therefore timely for entities that provide services to Australian clients to reassess their compliance position and confirm that they are in accord with the new regime.

Legislative background
Under the Australian Corporations Act 2001 (the act), a person who carries on a financial services business in Australia must hold an Australian financial services licence (AFSL) covering the provision of the financial services.

In determining whether an AFSL is required, it is therefore necessary to consider three questions: does the person provide ‘financial services’? If the answer is yes, are the financial services provided with enough system, repetition and continuity to constitute a financial services business? If the answer if yes, does that financial services business have the necessary territorial connection to Australia?

While most foreign service providers that provide services to Australian wholesale clients will already be aware that they provide ‘financial services’ within the meaning of the act, foreign service providers are often surprised to discover just how slight a connection with Australia is required before they will be considered to be conducting their financial services business ‘in Australia’, and therefore be required to hold an AFSL.

Before the Financial Services Reform Act 2001 (FSRA) amendments came into effect, the definition of ‘carrying on business’ contained an express exclusion, so that an offshore entity that solicited an order from a client in Australia which only became a binding contract if accepted outside Australia was not considered to be conducting business in Australia merely because of that solicitation. However, as a result of the FSRA amendments, this exception has been removed in relation to licensing matters, and instead a specific provision to the opposite effect has been inserted. Section 911D states that if an entity “engages in conduct which is intended or likely to induce people in Australia to use its financial services”, it will be considered to be conducting the relevant financial services business in Australia even if all other financial services business activities are conducted offshore.


Tim Blue is a partner in Mallesons Stephen Jaques’ London office. He was assisted with this article by senior associate Larissa Pickford