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Allens Arthur Robinson

Funds Management - Real Estate & Superannuation

Focus: Funds Management – June 2004

Foreign collective investments in Australia

In brief: ASIC's revamped policy on foreign collective investment schemes – Policy Statement 178 – has been developed to facilitate cross-border access to financial services. The policy proposes class order relief for collective investment schemes from New Zealand and the US and leaves the door open for new jurisdictions to be added to the class order. Partner Susan Burns (view CV) and Lawyer Erin Walsh look at the new policy.

The nature of a foreign collective investment scheme

A foreign collective investment scheme is similar to a managed investment scheme under Australian law. That is, a foreign collective investment involves pooling the contributions of investors for their benefit in circumstances where the investors do not have day-to-day control of the operation of the scheme. ASIC recognises that these foreign collective investment schemes may come in diverse forms including mutual funds and investment companies (which are common in the US).

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The road to Policy Statement 178

Until 31 May 2004 (when ASIC released Policy Statement 178) ASIC's policy on foreign collective investment schemes was set out in Policy Statement 65. In November 2002 ASIC released a policy proposal paper in relation to foreign collective investment schemes and, following public submissions, Policy Statement 178 was released.

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What's new?

The new policy is broadly consistent with what ASIC had suggested in its 2002 proposal paper. Essentially the main differences between the old policy (as set out in Policy Statement 65) and the new policy are:

  • The policy has been updated to address the issues in light of the post-FSR regime for regulating managed investment schemes. It also takes into account new developments in ASIC's cross-border regulation policy.
  • The new policy statement focuses to a greater extent on providing class order relief for foreign collective investment schemes whereas the previous policy required relief to be granted on an individual scheme basis. For example, the United States and New Zealand have already been recognised as being regulatory equivalents to Australia and, as such, relief for schemes from those jurisdictions has already been included in the class order relief.
  • The new policy statement provides more scope for schemes from previously unassessed jurisdictions to be considered for the relief. In contrast, the old policy identified a handful of overseas jurisdictions that were considered to be substantially equivalent in a regulatory sense and only allowed individual applications in respect of those schemes from those jurisdictions. ASIC's new policy provides extensive guidance as to how operators from unassessed jurisdictions can seek to widen the relief to cover schemes from their jurisdiction.
  • ASIC will now grant relief from disclosure obligations on a case-by-case basis (where previous ASIC policy only allowed relief from the procedural requirements in connection with these disclosure obligations).

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Types of relief now available

ASIC's new policy covers the following classes of relief:

  • relief for operators of foreign collective investment schemes; and
  • relief for responsible entities (ie, operators) of Australian-registered managed investment schemes who want to invest scheme property in an unregistered foreign collective investment scheme.

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Relief for operators of foreign collective investment schemes
Why the relief is needed

Operators of foreign collective investment schemes are already subject to the regulatory regime in their home jurisdiction. By operating in Australia, foreign collective investment schemes may also become subject to a host of Australian requirements including the requirements for:

  • some managed investment schemes to be registered and conform with certain structural and compliance requirements (registration requirements);
  • responsible entities (operators) of registered schemes to be licensed (licensing requirements); and
  • certain disclosures to be made to retail investors who invest in registered managed investment schemes (product disclosure requirements).

If the foreign scheme was registered in Australia it would also be subject to further ancillary provisions, such as the Australian financial reporting regime.

The ASIC policy statement, and the related class order, provides conditional relief from the registration requirements, licensing requirements, and product disclosure requirements.

'Sufficiently equivalent' jurisdictions

Central to the ASIC policy is the concept of a 'sufficiently equivalent' regulatory regime. To qualify for the relief, the applicant must demonstrate that its home jurisdiction has 'sufficiently equivalent regulation', that ASIC has effective co-operation arrangements with the regulator in the home jurisdiction and that adequate rights and remedies are practically available to investors resident in Australia.

Operators of foreign collective investment schemes in New Zealand and the United States are already given relief under the relevant class order (CO 04/526) in relation to the registration requirements and licensing requirements. These jurisdictions are included in the class order because ASIC has already assessed the regulatory regime in those jurisdictions as being 'sufficiently equivalent' regulatory regimes and there are currently New Zealand and United States foreign collective investment schemes operating in Australia. If such operators seek product disclosure relief they must demonstrate that their regime is 'sufficiently equivalent' in that respect also.

There is another group of jurisdictions that ASIC considers to have 'sufficiently equivalent' regulatory regimes but, since schemes from these jurisdictions are not currently operating in Australia, ASIC has not included these in the class order relief. These jurisdictions are the UK, Hong Kong, Guernsey, Jersey and the Isle of Man. Operators from these jurisdictions must apply for relief and inform ASIC whether there have been any significant changes to their home regulatory regime after the issue of ASIC Policy Statement 178.

There is further scope for scheme operators from other jurisdictions to apply for relief. In such a case the applicant will need to demonstrate to ASIC that its home jurisdiction provides sufficiently equivalent regulation.

It should be noted that the process of applying (where the class order does not apply) is time consuming. In its policy statement ASIC suggests that it will attempt to process the applications within 16 weeks. The applicant is required to provide a large amount of evidence supporting its application (primarily concerned with how the foreign operator's home jurisdiction regulates its activities).

Is the relief sufficient?

Foreign operators will need to carefully analyse what the relief allows them to do in this jurisdiction. There are some gaps in the relief. For example, ASIC grants relief from the requirement to obtain an Australian financial services licence in respect of the operator:

  • dealing in financial products that are scheme assets on behalf of its investors other than issuing financial products;
  • dealing in derivatives or foreign exchange contracts for the purpose of managing financial risk to the foreign investment scheme; and
  • holding scheme assets that are financial products or beneficial interests in financial products (ie providing a custodial or depository service).

However, ASIC will not grant relief from the licensing provisions for the following activities:

  • the provision of financial product advice (although ASIC will provide relief where general product advice is given in a foreign offer document that is supplied in accordance with any product disclosure relief given); or
  • the issue of the interests in the foreign investment scheme.

As such, foreign operators relying on the relief need to be wary of providing financial product advice. Also, foreign operators will probably have to rely on other licensing exemptions in order to issue the interests in their scheme in Australia (eg, through a licensed intermediary). ASIC does not provide a great deal of commentary as to why these activities are treated differently.

Conditions applying to the relief

As would be expected, ASIC has included a number of conditions to this relief that are primarily directed at ensuring the Australian investors are protected, that the operator complies with its home regime and that ASIC can enforce any remedies available. These conditions include:

  • investor protection conditions, including that there is an adequate internal complaints mechanism and that there are special warnings in any disclosure document given to investors; and
  • regulatory conditions, including that the operator must tell ASIC about any significant changes to its foreign law authorisation or home regulatory regime and that the operator must submit to the jurisdiction of the Australian courts.

These conditions are likely to have significant monitoring costs for foreign operators especially in terms of monitoring their domestic law. In particular, foreign operators may have to make some judgments since ASIC has defined 'significant change' as anything that could affect its previous assessment of the home regulatory regime.

Anti-avoidance

The relief does not apply to funds principally targeted at Australian investors resident in Australia or that source more than 30 per cent of the value of investments in the foreign collective investment scheme from investors resident in Australia.

Changes in foreign law

Changes in foreign law may threaten the relief ASIC grants and this may cause significant problems for foreign operators relying on this relief. ASIC states that if the 'sufficiently equivalent' criteria ceases to be fulfilled, it will generally revoke the foreign operator's relief. If the foreign operator was still operating in Australia at this time it may be forced to start complying with Australian provisions (which may include applying for an Australian financial services licence and registering the scheme) because it may be difficult to withdraw from the Australian market (eg, if Australian residents wish to keep their investment).

Likely applicants

The ASIC policy statement clearly contemplates industry associations initiating the approval process for new foreign jurisdictions. Given the time and cost involved in making an application it may be that industry associations are in the best position to apply for new jurisdictions to be assessed under the policy.

However, we suggest that ASIC will require there to be operators of foreign schemes who are ready to enter the Australian market by relying on the exemption immediately after class order relief is granted. This is because ASIC's monitoring of the 'substantially equivalent' part of the policy depends on conditions to the relief involving the foreign operator notifying ASIC of any changes in the relevant laws of the foreign jurisdiction. ASIC's policy also notes that overseas regulatory authorities may initiate the approval process for schemes from their jurisdiction.

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Relief for Australian entities – investment in an unregistered foreign collective investment scheme

The Corporations Act provides that Australian responsible entities may only invest scheme property, or keep scheme property invested, in another managed investment scheme if that other scheme is registered under the Act. The majority of foreign schemes will not be registered under the Australian Corporations Act.

There are however, different issues when considering what relief should be given to Australian responsible entities who wish to invest in foreign schemes. In contrast to the position of a retail client, a responsible entity (as a sophisticated or professional investor) should have the skills to assess whether it is appropriate to invest in the foreign collective investment scheme and to assert its rights.

Relief is currently available in the form of Class Order 98/55, which permits Australian schemes to make investments in unregistered foreign collective investment schemes from the USA, UK, Hong Kong, New Zealand, Guernsey, Jersey and the Isle of Man. Part of the new policy was to remove the relief sunset date from this class order. As such the relief will continue indefinitely provided there are no substantial changes to the regulatory regime.

Any new jurisdictions that have been assessed and accepted under ASIC's policy will be added to this class order.

We will continue to monitor this new policy but if you have any questions feel free to call us.

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