Significant Changes to Regulatory Landscape for Foreign Financial Services - A Warning for Foreign Entrants in the Australian Financial Sector
Foreign entities and individuals assessing if they should enter the Australian financial services market should be aware of updated guidance in ASIC Regulatory Guide 121 (RG 121) which was reissued on 20 September 2024 and which replaces the June 2013 regulatory guidance.
The regulatory update reflects the recent changes to ASIC relief and licensing exemptions and includes revised descriptions of financial products, services, and obligations to align with the current legal and regulatory framework.
Significantly it also references changes to the law and regulatory assessment of what constitutes ‘carrying on a business in Australia’ which is relevant to AFS licensing.
What constitutes ‘Carrying on a business in Australia’
ASIC's modified guidance (RG 121.43 to RG 121.51) incorporates recent judicial interpretation of the meaning of ‘carrying on a business in Australia’ which includes:
general indicators of carrying on a business
other relevant factors which ASIC may take into account
commentary on when a one-off transaction may amount to the carrying on of a business.
In particular, RG 121 reaffirms the following:
there are a number of statutory provisions (sections 18, 19 and 20 Corporations Act) that qualify the general concept of carrying on a business and subject to these statutory provisions, which are not exhaustive, the common law test of ‘carrying on a business’ will also need to be applied to the activity.
the Courts stress that whether a body corporate’s activities constitute ‘carrying on a business in Australia’ is dependent on the factual circumstances.
the acts of an Australian-based agent of a foreign company can be attributed to the company, leading to the conclusion that the company carries on business in Australia through its agent.
the relevant judicial decisions identify the general indicators of carrying on a business in Australia which include:
the degree to which a body corporate’s activities in Australia are conducted with system, repetition and continuity;
the nature of the business being conducted and the statutory context are also relevant factors.
Interestingly, the updated RG 121 has removed Table 1 which appeared in the 2013 guidance and set out some hypothetical practical examples of activities connected with Australia which may constitute ‘carrying on a business in Australia’ for the purposes of the common law.
In its place, RG 121 now cites references to specific legal cases for this purpose, namely Gebo Investments (Labuan) Ltd v Signatory Investments Pty Ltd 54 ACSR 111 and Facebook Inc v Australian Information {2022] FCAFC 9. This has the consequence that it picks up a broader legal test which can potentially be applied by ASIC in assessing if activities domestically or offshore constitute ‘carrying on a business in Australia’.
Recent Judicial Analysis of ‘carrying on a business in Australia’
The factual circumstance of each of these cases and the underlying legislation and statutory provisions which were judicially considered is materially different in each case however fundamentally, the Federal Court considered if the relevant entity ‘carried on a business in Australia’ although not in the context the FS regime governed by Chapter 7 Corporations Act.
Judicial Decisions
Gebo Investments involved the winding up of an registered foreign company which was incorporated overseas and which operated an internet business which solicited credit card payments from Australians via a website. The Court considered if the relevant entity:
was a Part 5.7 body, that is, whether it “has ceased to carry on business in this jurisdiction” and fell within s 583 Corporations Act (in the context of winding up); and / or
it otherwise did “carry on business in Australia” within the meaning of s 21(1).Corporations Act.
Facebook Inc involved proceedings commenced by the Privacy Commissioner alleging that Facebook Inc and Facebook Ireland Ltd acted or engaged in a practice that was a serious or repeated interference with the privacy of approximately 311,127 Australian Facebook users in contravention of the Privacy Act 1988 (Cth).
Amongst other things, the Court considered if Facebook Inc carried on business within meaning of s 5B(3)(b) Privacy Act on the basis that its agent in Ireland (Facebook Ireland) conducted Facebook Inc's business in Australia which included processing activities such as installation, operation and removal of cookies on Australian users’ devices and management of the Facebook login through Graph API.
Overall, the Federal Court undertook a broad assessment of the factors or indicia which might constitute ‘carrying on business’ and found that the following factors would not necessarily exclude the presumption:
the meaning of ‘carrying on a business’ is not reliant on the need for physical presence (being no physical assets, customers, or revenues) in Australia. However, this does not necessarily require a permanent place of business in Australia but "a need for some physical activity in Australia through human instrumentalities, being activity that itself forms part of the course of conducting business" (Gebo Investments (Labuan) Ltd v Signatory Investments Pty Ltd [2005] NSWSC 544).
"the concept of carrying on business must… take its shape from the business being conducted… Whether a particular foreign-based business providing goods or services in this country carries on business here will depend on the nature of the business being conducted and the activity which takes place in this country. There is no one size fits all answer to this question." Facebook Inc v Australian Information. Thus even though a company does not engage in any commercial activity in a foreign jurisdiction, (such as Australia) it may otherwise conduct a business in that foreign jurisdiction, the focus being upon conducting or establishing a commercial enterprise for the purpose of profit.
Given the divergent factual circumstances and that each case did not address what the Corporations Act says about the meaning of ‘carrying on a financial services business in Australia’, that is, in the context of the FS Regime, the application of the judicial tests in context of financial services is uncertain. However, the reference to those legal authorities in RG 121 suggests that ASIC is likely to take a granular approach when making an assessment of the meaning of carrying on a financial services business.
In the context of the Privacy Act it is interesting to note that the OAIC has separately published the following guidance:
‘provided that there are acts within Australia which are part of the company's business, the company will be doing business in Australia although the bulk of its business is conducted elsewhere and it maintains no office in Australia."
This suggests that insofar as the legal test under the Privacy Act is concerned there must be a nexus, that is, some activity in Australia that forms part of the entity’s business and where an entity merely has a website that can be accessed from Australia, this is generally not sufficient to establish that the website operator is ‘carrying on a business’ in Australia.
Conclusion
Under the Corporations Act, an FFSP will require an AFS licence if it ‘carries on a financial services business in Australia’ unless an exemption applies.
Overall, in the context of financial service regulation, the application of the judicial views on the meaning of carrying on business in Australia expressed in Gebo Investments and Facebook Inc is unclear.
However, the reaffirmation in RG 121 that the common law test of ‘carrying on a business’ may also be applied by ASIC in assessing if the activities of an FFSP constitutes carrying on a financial services business, may result in a broader set of criteria being taken into account by ASIC when it assesses if an FFSP requires an AFS licence for its activities in Australia.
Take Away
On a practical level these developments signal:
that digital-based activities rather than technological process within the broader context of a financial services business are relevant to an assessment of whether a FFSP has a nexus with Australia.
a potential extension of Australian law to capture multinational internet-based businesses;
that acts of an Australian-based agent of a foreign company can be attributed to the FFSP.
Accordingly, it may be timely for FFSPs to carefully assess their current or proposed presence and business activities in Australia for compliance under the AFS Regulatory Regime.
For further information, please contact Michael Bracken, our Head of Financial Services Team.
This publication has been prepared for general guidance on matters of interest only and does not constitute professional legal advice. You should not act upon the information contained in this publication without obtaining specific professional legal advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication and to the extent permitted by law, Cowell Clarke does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting or refraining to act in relation on the information contained in this publication or for any decision based on it.