Offshore Fund Managers: are you ready for the new AFS licensing regime?

There has been considerable regulatory uncertainty around exemption relief for offshore fund managers since 2020. With a probable decision looming in April 2025, Chris Mee of CNM Legal runs us through what’s expected to change when it comes to relief instruments, and how offshore fund managers should prepare. 

Quick Overview:

In 2020, ASIC removed two exemptions for offshore fund managers providing services to Australian clients: sufficient equivalence relief, and limited connection relief. A decision on this matter is expected in early 2025, with a fair level of certainty about the expected outcome. 

Chris Mee has been following this matter closely, and has recorded a podcast on the expected decision, as well as what it might mean for offshore managers who have either previously relied on the exemptions to operate in Australia, or who are new to the market. 

Why did ASIC act to remove these relief instruments in the first place? What might sufficient equivalence relief look like as of April 2025? Will limited connection relief remain in any form? 

And what do fund managers need to do to prepare for this change? Will operating in Australia still make financial sense?

All this and more on our podcast. 

Prefer to read than listen? Read the transcript of the podcast below. 

Welcome back to the CNM Legal podcast, the podcast where Principal of CNM Legal Chris Mee joins us to talk about the news affecting the Australian financial services industry. Chris will bring his 20-plus years of experience as a financial services lawyer, breaking down the developments in the industry, ASIC decisions and other interesting things that come across the sector as they arise. 

Today we’re going to talk about some hypotheticals but I promise they have some relevancy to our Australian listeners. If I run a fund in Hong Kong, what do I need to know about selling my fund in Australia and why is that relevant?

So if you’re in a jurisdiction outside of Australia, the question for you is that ‘how do you comply with Australian financial services laws and do you have to’ is the first question. So the primary licensing obligation is that if you operate a financial services business in Australia, then you need to hold an AFS licence unless an exemption applies. 

So, if you’re offshore, the question for you really is, you know, ‘are you operating in this jurisdiction’? And that question is really relevant if you don’t have any people here or you don’t have an office in Australia, so are you effectively in this jurisdiction? 

And the way our law works is that you actually can get caught by our laws, even if you’re not physically present here in Australia. 

In most jurisdictions, their securities laws operate in the same way. So, we have a deeming provision, effectively, which deems you to be providing your services in Australia if you’re actively inducing people to use your services. So, if I operate a fund in Hong Kong and I’m regulated by the Hong Kong regulator and I want to market my fund here and I get access to an Australian, a database of Australian clients and send out an email with flyers, etc., then I am inducing those people to use my services. I’m not in Australia and doing it, I’m doing it from my computer and my own jurisdiction. But because of the laws that we have here, I’m effectively deemed to be providing those services in Australia and therefore I actually get caught by Australia’s laws. 

So in my language that would be marketing or targeting Australians. 

Marketing or targeting Australians. And so some people can do that by having a person here in Australia on the ground who they might engage or they have an employee here, they might not have an office here, or they might. And if certainly those things sort of exist then they’re definitely in Australia and so they’re caught. But even if they’re not here physically but they are inducing people to get their products in Australia then they are obliged to hold an AFS licence or act under an exemption. 

So tell me about these exemptions. For someone who works in the industry, what should they know? 

So, typically speaking, there are two relevant relief instruments that ASIC has issued since 2003 to assist foreign regulated offshore people to provide services to Australian clients without having to go to the bother of getting their own AFSL. The first one of those is called the sufficient equivalence relief. So if you are in a jurisdiction, one of six, that ASIC says has an equivalent regulatory oversight to Australia, then you can provide your services to Australian wholesale clients, provided that you notify ASIC effectively that you are doing so and you hold the relevant licence in your own jurisdiction. 

So that was put in place in 2003, and there are a lot of fund managers that are offshore that rely on that instrument of relief. 

So is that just saying if the country that you come from has sufficient regulatory auditing in place, then the Australian Government or ASIC will accept that level of audit? 

That’s right, and there are six countries that I’ve identified, and Hong Kong is one of those. So if you’re Hong Kong regulated, then that’s a deemed equivalent jurisdiction. So that has been in place since 2003. Now just before 2020, this has been going on for a while now, ASIC said, look, we want to change, we think we need to change what we’re doing, and so went into a period of consultation about how these changes might occur, and then they effectively decided to remove the sufficient equivalence relief as at 1 March 2020. 

So that was sort of taken away and I’ll explain what’s happened since and we’re in a sort of regulatory uncertainty since then and there’s been some changes in the government. But I want to talk about the other typical form of exemption that also has applied being the second one, we’ve spoken about sufficient equivalence relief. The second one is called limited connection relief and that basically says that you don’t have to hold a licence to provide your services in Australia to Australian wholesale clients. I just want to make the point that it’s wholesale only. 

If you want to provide services to Australian retail clients you effectively really just need to get an AFSL. There is no relevant exemption. 

But the limited connection relief says that if the only reason you need a licence is because of that deeming provision that I mentioned that you are inducing people to use your services in Australia because of that deeming provision then provided the services are only provided to Australian wholesale clients you have relief. from the requirement to hold your AFSL. 

So that’s the two significant instruments. Both of those effectively were revoked by ASIC in 2020. The government didn’t like it, and so Josh Frydenberg in one of his budget statements actually said that no, we’re going to go back to the old system because there’s been feedback from the industry that this is no good for Australia, no good for allowing foreign companies to come in here and effectively export their services to Australian clients. So we want to go back to the old regime and that’s why we’ve had a period of regulatory uncertainty since that time. 

And what’s the status of that now? Is it still in parliament? 

They have put new suggestions forward but it’s been rolling around in parliament for about four years. It’s currently a bill that’s gone through a Senate Economics Committee, and so the expectation is that that’s got the tick of approval from the Senate Economics Committee and that hopefully we’ll get some law later this year. 

Yeah, okay, so that’s a big step. It is a big step. 

So we’re going to have a new system that’s going to effectively replace the old system, and that’s coming, and we expect it to start on the 1st of March 2025. 

Do we know what we could be expecting? 

We do, we do know, and because it’s been rolling around for a long time, it’s changed over the course of time in terms of what will happen. 

But effectively what is going to happen in the future is that they’re going to expand the sufficient equivalence relief so that if you’re regulated in country, there was one of six, now there’s going to be one of ten, or ten countries that you can now be regulated in and receive the benefit of that relief. But part of the reason that ASIC wanted to take away the relief instruments was because firstly they didn’t know who was actually here in Australia providing services because only one of those instruments of relief— that’s the sufficient equivalence relief—actually required notification to ASIC that you’re actually doing things here. The second one, which is the limited connection relief, didn’t actually require any notification requirements so actually didn’t know who was actually here. 

You didn’t have to tell them what you were doing. 

And they have no powers in relation to that entity. Obviously they can make referrals to foreign regulators but they’ve got no powers in relation to them and they’ve got no duties in Australia either. 

So, the proposition is that the law will change so that the sufficient equivalence relief will effectively continue. It will be expanded to 10 countries and not 6, but conditions will apply to that. So, for example, they will have to comply with some of Australia’s financial services laws in relation to their own activities, which is things like providing your services honestly, fairly and efficiently, supervising your representatives, those sorts of things that Australian Financial Services licensees have to comply with. And there are notification requirements to ASIC. 

That doesn’t seem unreasonable. 

No, no. It seems fair and it won’t be a large change from what already is existing and in place and probably satisfies the criticisms that people put… about ASIC taking those relief instruments away and making it harder for people to come to Australia. 

The sufficient relief instrument will continue but with the conditions you mentioned, what else should we be expecting from the decision? 

So the second important thing to know about the changes in the law is that the limited connection relief is not going to exist anymore. 

Okay, so that’s gone. 

That’s gone. We expect. 

We expect. 

So anyone who’s relying on that relief at the moment will need to work out another avenue about how to come to Australia and provide services. And if you’re not in one of those ten jurisdictions, so for example, if you had a fund in the Caymans, which is quite common, now that’s not an equivalent jurisdiction. You’re not going to be able to rely on that relief. So you’re going to have to go down some other path. 

That other path might be getting your own AFSL or a foreign AFSL, which you can apply for. You could be an authorised representative of an Australian financial services licensee, which is something we talked about in the last podcast. That is an exemption in the case of ASIC and BPS Financial. You could also, they’re also expanding services, sorry, the exemptions for services to professional investors in Australia. 

So professional investors are a subcategory of wholesale clients. They’re people who manage $10 million or more in funds. 

And so you might be able to use that exemption if you’re in a different jurisdiction that is not equivalent to Australia’s. But you need to start acting now to work out what you’re going to do if you can’t rely on the new relief. Now even if you can rely on the new relief, you still have to go and implement that new relief and make the relevant notifications. 

So in 2020, when ASIC took these instruments away and we moved to a new regime, effectively everyone who was relying on those, that sufficient equivalence relief, they have been extended, that relief has been extended up until the 1st of March, 2025, when it will be replaced by a new regime. And so you’ll have to start implementing your systems and processes to comply with that new regime. Anyone who’s acting under the limited connection relief, that relief will then expire on the 1st of March, 2025, and we expect will not be renewed. There is a limited form of that for funds managers, but it’s not gonna apply to every jurisdiction, and again, it will be limited to just people who are relying on that instrument if they are just inducing people to engage with them. So not if they’re actually here and actively marketing. in Australia. So you have to act now to start doing things. 

So things are changing regardless of your current exemption and depending on where you’re from you’ll need to act differently? 

That’s absolutely right. 

But it is coming?

It is, it is. Because we’ve been through this regulatory uncertainty, it’s been about six or seven years at least. The instrument of the new laws have been rolling around in parliament for four years or so. And so it will change and it sounds like, and it feels like, the first of March 2025 is finally going to be it. 

Great. 

So you mentioned a couple of times that this really only affects people who are selling a wholesale product. Is it going to affect the relationship that they have with the people who on-sell that product? 

Yeah, certainly, it’s the case that if you’re in Australia now and you’re acting for an entity or you’re a distributor of a product, an offshore product and if you have any responsibilities for compliance or advising your folks about what to do, how to comply with Australian laws, then you need to let them know that these laws are changing and the new regime will be applying and that systems and processes need to be put in place by them to continue the kind of relationship they have with you if you’re acting for them here in Australia. So for example, if you’re a distributor of an offshore product that’s acting under the sufficient equivalence relief, you’ll need to move to the next new regime and make sure that the entity that you’re acting for offshore is doing this work ahead of the changes. 

And is that Australian entity at risk as well if they don’t? 

Yep, the risk is if you don’t have the relief then you need to be licensed here. And so that’s the issue for an Australian entity that’s connected with the distribution of a product, then those people then will be effectively acting unlicensed and therefore at risk of regulatory action by ASIC etc. 

Okay, so we’ve got six, eight months before this happens. How does someone go about getting organised? 

So they’ve got to decide how they’re going to move forward. So if you’re relying on the limited connection relief which is disappearing, can you fit under the other relief exemption? If not what are your other choices? So it comes down to am I going to get my own AFSL, am I going to become an authorised representative of an Australian financial services licensee, am I just going to deal with professional investors, how is my business going to operate post- 1 March 2025?

And there are a series of choices that you then need to make and each of them have their own advantages and disadvantages that you need to consider before you adopt one over the other. 

It might be the case that for some people the sufficient equivalent relief isn’t available so it’s not an option. So out of the other three, what can I do? 

And which one is gonna be better for my business? If I go down the path of getting my own AFSL, what does that look like? What is it gonna cost? What’s the time commitment? What extra resources do I have to apply? 

Now for people who are offering their services in multiple jurisdictions, they’re normally operating within exemptions or with licences in various different countries. So it just means the general council of fund managers that are offshore and their advisors need to understand that what processes and procedures would I need to put in place to comply with the Australian laws under the various different options and how much is that gonna cost the business? 

So the question is always, is it worth doing it? Is the Australian market big enough? That’s a commercial question not a legal one, but how much is it going to cost me to actually promote my product in Australia now that the laws are changing and your costs for that might change as well depending on what you were relying on in the past, if you’re relying on anything. 

And for new entrants, well it’s a new start from 1 March 2025, so if you’re thinking about coming to Australia, you need to understand what are the options for me getting into Australia and how much are those options going to cost the business. 

Yes, but something must be done.

Something’s going to have to be done.

You need to consider that. It’s going to be a commercial consideration of the cost of compliance moving forward and whether or not that’s going to be worth it for your business if you’re deciding to seek to market to Australian wholesale clients. 

Australia. Retail client land is infinitely more difficult and you really need your own AFSL or have your fund hosted by a trustee for hire in Australia to be able to market that product in a regulated way. 

Yeah and that’s something we’ll probably discuss in another podcast. Thanks very much Chris. 

Thank you.