“I have sort of made it my mission to be treated less as a foreigner, less as a guest. ”
— Kenny Omega, Head of Platforms and Office Stationery
Foreign clients and the law
It might surprise you to learn that “foreign clients” polarise financial advisers. While some see them as an opportunity to shake off local restrictions, others see them as a dangerous blend of complexity and uncertainty likely to attract regulatory scrutiny.
In some respects, both perspectives are legitimate.
Before we walk into the weeds, let’s start with a simple question “Can an Australian financial services licensee provide financial product advice to foreign clients without drawing the ire of ASIC? “
You may have immediately and confidently answered, or used the time to phone a friend, but the correct answer is “it depends”.
Don’t immediately dismiss our answer as lawyers’ as weasel-words and prevarication.
Clearly, the Corporations Act has extra-territorial application, so you can give advice about superannuation, for example, to Australians currently residing overseas if you comply with Australian law. But what if you’re asked to provide advice on, or acquire, Australian financial products using Australian and foreign funds (or replace foreign products with Australian products)? Unless you are registered or licensed in that other jurisdiction, it becomes murkier and rather depends on whether ASIC have a memorandum of understanding with the local regulator (which, if you comply with Australian regulatory requirements would allow you to avoid breaching foreign regulatory requirements).
But what if you just want to market or distribute Australian financial products to the rest of the world?
Again, it depends on how you approach it. Simply hoping for the best before you provide a financial service is unlikely to help you.
The reality is that ASIC has previously targeted licensees who provide financial services to foreign clients and do not comply with the regulatory obligations of the relevant foreign jurisdiction, particularly in the retail OTC derivative sector, which is why it’s always a good idea to engage a Compliance Consultant in this instance.
There’s some complexity and it’s a more nuanced argument than it might first appear, but let’s start with first principles.
The limits of licensing
Section 912A(1)(a) of the Corporations Act 2001 (Cth) (Corporations Act) states that a licensee must “do all things necessary to ensure that the financial services covered by the license are provided efficiently, honestly and fairly”.
This can be tricky to determine, which is why it’s so important to access AFSL compliance services before you commence providing advice in foreign jurisdictions.
In our view, this obligation cannot be said to apply to the provision of financial services overseas as these services are not covered by the license. Further, section 911A of the Corporations Act states that a person carrying on a financial services business in this jurisdiction must hold an Australian financial services licence covering the provision of the financial services.
Implicit in this statement is that the license only covers the financial services provided in this jurisdiction, being Australia.
ASIC Media Release 19-088, confirmed that ASIC will consider whether breaching overseas law is consistent with the obligation under Australian law to provide financial services ‘efficiently, honestly and fairly’.
The way in which the services and products are offered is critically important. ASIC will also consider whether licensees are making misleading or deceptive statements about the scope or application or effect of an Australian financial services license.
Section 12DA of the Australian Securities and Investment Commission Act 2001 (Cth) (ASIC Act) states that a person must not, in trade or commerce, engage in conduct in relation to financial services that is misleading or deceptive or is likely to mislead or deceive.
Assuming the satisfaction of threshold questions around trade and commerce and the like, if an AFS licensee provides (or asserts that it can provide) financial advice to a person overseas (without local licensing, registration or oversight) then it’s likely that the licensee is engaging in misleading and deceptive conduct because their AFSL does not authorise or permit them to do so.
This perspective aligns with ASIC Media Release 16-134MR regarding Ikon (Australia) Pty Lty (Ikon). In this matter, ASIC raised concerns with retail OTC derivative issuer Ikon regarding Ikons handling of client money. Ikon agreed to separate the client money held for its Australian clients from the client money held for its foreign clients.
ASIC stated that:
“Ikon’s current business arrangements and structure are such that any financial service provided by Ikon to overseas is provided from offshore. Consequently, these services would not be considered to be provided within Australia, and are therefore not financial services provided under its AFS licence…
…Ikon has also made changes to its website as a result of ASIC’s enquiries and agreed to directly inform their overseas clients that the services they provided outside this jurisdiction are not covered by Australian regulations.”
Bringing all of this together, providing advice to overseas clients is unlikely to attract ASIC’s enforcement ire if the clients have a connection to Australia, the process complies with Australian law and appropriate disclosures are made. Appropriate disclosures should include express statements to the effect that an AFSL does not cover the provision of financial services in jurisdictions outside of Australia.
However, deliberately targeting overseas client markets, particularly in the context of derivative trading advice, would likely attract ASIC attention, and enforcement action, particularly where there are inadequate disclosures.
Furthermore, if an Australian licensee contravenes or is likely to contravene the laws of another jurisdiction, ASIC will work with regulators in that jurisdiction in accordance with the International Organisation of Securities Commissions (IOSCO) Multilateral Memorandum of Understanding Concerning Cooperation and the Exchange of Information (MMoU).
Thank God for acronyms.
Ensure you’re compliant.
Beyond the limits of licensing
A case in point is provided by ASIC Media Release 12-267 (MR 12-267) regarding Pepperstone Group Ltd. In this matter ASIC became aware that Pepperstone was advertising retail OTC derivative products through a Japanese mirror website and that it had a number of clients based in Japan to whom it offered margin foreign exchange services.
Pepperstone agreed to cease providing financial services in Japan following inquiries by ASIC that revealed they were not licensed by the Japanese Financial Services Agency.
ASIC Commissioner Cathie Armour said:
“ASIC reminds all holders of an AFS license that they must ensure that, when providing financial service in foreign jurisdictions, they understand and comply with the regulatory requirements of offering a service in that jurisdiction”
Licensees must also be aware of the potential for disgruntled foreign clients to commence private legal proceedings. The procedural law in such proceedings will be the law of the court where the action is brought.
The substantive law to be applied by the court in such proceedings is determined differently in accordance with the cause of action.
Liability in a foreign tort claim, such as for negligence, will be determined in accordance with the law where the tort is committed (Regie Nationale Des Usines Renault SA v Zhang  HCA). An example of a matter where the contract did not specify the jurisdiction, and the courts of Australia were required to determine the substantive laws that applied to a claim of negligence, is the case of Voth v Manildra Flour Mills Pty Ltd (1990) 171 CLR 538.
In this case two companies (collectively, Manildra) in New South Wales received negligent accounting advice from the respondent (Voth) in the United States
Manildra sued Voth for professional negligence.
In Australia, the ‘Distillers’ test is applied in a claim in tort to determine the applicable substantive law (Distillers Co. v. Thompson (1971) AC 458).
This test looks to where the act or omission occurred, that caused damage to the plaintiff. The law of that place is the substantive law that applies to the claim.
In this case, because the advice was constructed negligently in written form in the United States, the law of the United States was applied in deciding the claim.
It should be noted that the Voth case centred on a negligent omission of information. If a negligent misstatement was made, the applicable substantive law may be the law of the jurisdiction in which the advice was received.
In contract law, the applicable substantive law is the law that governs the contract. This can be specified in the terms of the contract, along with the jurisdiction which will apply. For example:
“This agreement is governed by the laws of New South Wales, Australia”
(the laws that apply)
“Each party irrevocably and unconditionally submits to the exclusive jurisdiction of the courts of Australia”
(where legal proceedings must be conducted)
The sweet spot
In a perfect world, advisers would only provide advice consistent with their competency, authorisation, location, licensing or registration. Unfortunately, clients travel, relocate or simply want to explore opportunities beyond those available in their current jurisdiction.
The law can enable you to service these clients, and satisfy their needs, but only in compliance with our laws (and perhaps those of other jurisdictions).
If you are not licensed or authorised in all of the jurisdictions in which you intend to provide services, you need to exercise caution and take a considered approach to these opportunities. Providing advice to overseas clients (“aussie expats”) is unlikely to attract ASIC’s enforcement ire if the clients have a connection to Australia, your advice process complies with Australian law and appropriate disclosures are made. Appropriate disclosures should include express statements to the effect that an AFSL does not cover the provision of financial services in jurisdictions outside of Australia.
However, deliberately targeting overseas client markets, particularly in the context of derivative trading advice, would likely attract ASIC attention, and enforcement action, particularly where there are inadequate disclosures. Deliberately targeting overseas clients about products you are not licensed or authorised to offer, or misrepresenting your capacity to do so, would, on the other hand, invite more regulatory attention than is either prudent or endurable.
As in most things, get advice before you start.
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