7. Financial services7.1 Licensing requirementGenerally, an entity carrying on a financial services business inAustralia must hold an Australian Financial Services Licence(AFSL), unless an exemption applies.Statutory and common law tests are applied in order to determinewhether a financial services business is being carried on in Australiaand an entity may be required to hold an AFSL even though it hasno physical presence in Australia.AFSLs are issued by ASIC and licence holders are subject to arange of obligations, including in relation to capital adequacy,organisational competence and reporting.7.2 Financial services and financial productsBroadly 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 Act2001 (Cth); or+ + providing a custodial or depository service.A “financial product” is broadly defined and includes a facilitythrough which, or through the acquisition of which, a personmakes a financial investment, manages financial risk or makesnon-cash payments.Both the definitions of “financial service” and “financial product”are complex and subject to express inclusions, qualifications andexceptions. Examples of transactions which may be affected by theAustralian financial services regulatory regime include:+ + a foreign company issuing securities, shares, stocks, deposits,debentures, bonds, managed investment products (includinginterests in collective vehicles (whether structured on acompany, trust, partnership or otherwise) or insurance topersons in Australia;+ + a foreign company effecting secondary market trades insecurities, shares, stocks, debentures, bonds or managedinvestment products as an agent or trustee of a person inAustralia; and+ + A foreign company holding or managing investments insecurities, shares, stocks, debentures, bonds, managedinvestment products, or interests in such products, on behalfof persons in Australia.7.3 DisclosureThe Australian financial services regulatory regime differentiatesbetween wholesale and retail clients. Numerous exemptions fromthe requirement to hold an AFSL, particularly those that may berelevant for foreign financial services providers, are available inrelation to financial services provided to wholesale clients. Thereare additional conduct and disclosure requirements that applywhere financial services are provided to retail clients (regardless ofwhether an AFSL is also required to be held).7.4 Foreign financial services providersBroadly, the factors that are determinative as to whether a“foreign financial services provider” (FFSP) must hold its ownAFSL, or should seek to rely on an exemption from therequirement to hold an AFSL, are:+ + the extent to which it wishes to establish a presence inAustralia;+ + the financial products and services it wishes to provide toAustralian investors; and+ + the type of Australian investors it wishes to target (i.e.wholesale vs retail).Generally, as each of these factors expands so does the level ofregulation:Limitedconnection toAustralia“Passporting”AFSLholder+ + a foreign company entering into derivative transactions (suchas swaps, options or forward transactions in currency) withpersons in Australia through either the over the countermarkets or through automated dealing systems;PAGE 16
In some cases, FFSPs are able to rely on relief from therequirement to hold an AFSL on the grounds that their financialservices business has a limited connection to Australia. That is, theonly reason they are required to hold an AFSL is because they areengaging in conduct that is intended to induce, or likely to have theeffect of inducing, people in Australia to use their financial servicesand they are not otherwise carrying on a financial services businessin Australia under any of the other applicable tests. In thesecircumstances, and provided that the FFSP is only dealing withwholesale clients, the FFSP is not required to hold an AFSL.There is also regulatory relief available for FFSPs that are regulatedunder regimes in their home jurisdiction that the AustralianSecurities and Investments Commission deems to be comparableto Australia’s regulatory regime, where they provide financialservices to wholesale investors only. Such class order relief hasbeen granted for FFSPs that are regulated under the:+ + US Securities and Exchange Commission;+ + UK Financial Services Authority;+ + Hong Kong Securities and Futures Commission;+ + Monetary Authority of Singapore; and+ + German Federal Financial Supervisory Authority.FFSPs may also apply for relief if they are regulated in jurisdictionsnot covered by existing class order relief, which may be granted ona case-by-case basis.Strict conditions must be met before any class order relief can berelied upon.If the FFSP’s activities in Australia are sufficiently broad, it will berequired to apply for its own AFSL.The application of the Australian financial services regulatoryregime is broad and the scope of exemptions is technical andcomplex.PAGE 17
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