Changes to Australia's Regulatory Framework

Changes to Australia's Regulatory Framework

Until recently UK firms regulated by the FCA were able to operate in Australia using licence exemptions. However, the Australian Securities and Investments Commission (ASIC) has recently finalised a new regulatory framework for foreign financial services providers (FFSPs) which has repealed the current Sufficient Equivalence Relief.

This change took effect on 31 March 2020 with a transitional period until 31 March 2022. There were several reasons for these changes, one being that firms who were exempt from operating under licence were felt to have an competative advantage as their compliance costs were lower than firms with Australian Financial Services licences (AFSL). This change brings the licensing regime into line with other Asia Pacific jurisdictions, such as Hong Kong which only offers a temporary license.

Unfortunately for UK firms providing financial services in Australia, this new regime will significantly increase their costs. It is even possible that these costs become so disproportionate that FFSPs decide to stop offering financial services in the Australian market. There are currently 298 UK firms in Australia, of which 285 have AFS licensing exemption (1 has an AFS licence, 5 have an Australian Market licence, 6 have an exception notice and 1 has an Australian clearing and settlement facility licence). All will need an FFSL by the end of the 2 year transition period.

New UK firms will be able to obtain an FFS if they have a branch office in Australia. The application process is onerous, and requires decisions such as whether to register as a foreign company, in which case an annual return and financial statement will need to be submitted once a year. There are many restrictions for branches of foreign banks, such as a limit on initial deposits and even on the words they use (eg bank and banking) without permission from the Australian Prudential Regulation Authority (APRA).

Why is the UK / Australian market so important

Australia offers an important market to the UK, particularly post Brexit. The UK traded over £18bn worth of goods and services with Australia in 2019 and the UK is Australia’s second largest trading partner outside the Asia Pacific. The Australian market offers a gateway to the Asia Pacific market and the chance to leverage existing agreements such as the Asia Region Funds Passport to offer their services to a much larger client base. The recent US and Australia FTA has been very successful and tripled 2-way investment.

Opportunities from the FTA talks

The UK and Australia have begun negotiations on a FTA, and there are hopes that this will include a financial markets agreement. Equivalence or mutual recognition of the Australian regulatory framework would be very beneficial to UK firms.

Whilst the ideal approach would be a UK exception to the new licensing regime, realistically areas to focus on are:

  • Simplifying the application process for a full AFSL, which currently has several bottlenecks.
  • Obtaining a fast track application process with shorter processing time frames and fewer compliance conditions.
  • Clarifying the UK overseas person regime which could help Australian firms gain equivalence to UK regulations