ASIC has proposed a new licensing regime for foreign fund managers operating in Australia and their third-party sales and marketing agents. Lawyers say parts of the proposal are impractical. And other parts are incomprehensible.
Under the proposal, exemptions for managers and their agents are available if less than 10 per cent of the manager’s aggregated total gross revenue from Australian sources comes from local investors, calculated on both a backward-looking and forward-looking basis. That’s the incomprehensible bit.
According to lawyers Ashurst, it is interesting that ASIC states: “if the FFSP [foreign financial services provider]forms a view that it will or may breach the aggregated revenue cap in the financial year that it provides the services, the FFSP should not provide the service”. The lawyers say: “In our view, this is highly impractical for fund managers as it requires them to determine the level of business activity with professional investors in Australia on a forward looking basis, and to cease the provision of financial services if the estimate does not satisfy the 10 per cent revenue cap or it would otherwise be at risk of losing the benefit of the relief.”
In a note to clients, Ashurst says fund managers must be wary that the proposed relief would only be applicable to certain types of financial services in relation to offshore funds which are provided to professional investors, and in the case of portfolio management services, only when provided to a limited subset of professional investors being the eligible Australian users. Relevantly, an eligible Australian user includes a person that operates a MIS with net assets of at least $10 million.
“It is not clear how this test will apply to a foreign fund manager seeking to act as a fund manager for a new global investment MIS being established in Australia,” the lawyers say. Furthermore, the draft ASIC instrument as it stands currently would require fund managers to reduce their financial services business activities in Australia to a level such that it could reasonably believe that it would satisfy the 10 per cent revenue cap, if they wish to rely on the relief.
ASIC is currently consulting on the draft and is seeking feedback on the proposed 10 per cent revenue cap. It has considered some alternatives to this threshold, including making the cap contingent on the number of clients serviced by the FFSP, or tying the 10 per cent threshold to specific services.
ASIC proposes that this relief will be available from April 1, 2020, with a six-month transitional period to September 30, 2020 to facilitate compliance with the conditions of the relief.