Following in the footsteps of the Financial Conduct Authority in the United Kingdom once again, the Australian Government has recently released their response to the Financial Systems Inquiry which approves increased scrutiny by the ASIC of changes in control of Australian Financial Services Licences (AFSL). In the wake of the failed Playtech and Plus500 deal, where the FCA raised concerns about Playtech’s acquisition of Plus500, Australia appears to be moving towards a similar model which will allow the ASIC the ability to approve or reject changes in control of AFSLs.
This expansion in the ASIC’s power has the ability to affect the margin FX and OTC derivative industry in Australia quite substantially and may see more deals like the Playtech-Plus500 deal terminated.
The Financial Systems Inquiry was established in late 2013 and last month, the Australian Government released their response. Of the 44 recommendations released by the Financial Systems Inquiry, the Government has accepted all but one. The implementation of such recommendations is stated as being beyond 2016, including the recommendation to give the ASIC greater powers in relation to the change of control of AFSLs.
It is well known that the ASIC has not granted a retail OTC derivative broker an AFSL for the past 14 months to 2 years. Prospective investors from the Asia Pacific region, particularly from China, have been directly impacted by the ASIC’s halt in licensing these providers. The ASIC’s reluctance to grant these types of AFSLs has led to an increase in people exploring the opportunity to purchase an existing AFSL in order to enter the market. Purchasing an existing AFSL can be a quick way to commence operations and many international investors consider this an attractive option.
The Government’s response to recommendation 29 of the Financial Systems Inquiry to provide the ASIC with stronger regulatory tools includes the power of ASIC to approve changes of licensee control.
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Deal or no Deal?
The sale of an AFSL essentially involves the sale of the company who holds the AFSL. Upon completion of the sale, the new owner of the AFSL is required to notify the ASIC by providing them with a change of control letter. This is sent to the ASIC after change of control has occurred and the ASIC does not have the opportunity to halt the transfer.
The Government’s response to the Inquiry states that it will develop legislative amendments which enable the ASIC to approve changes of licensee control. Whilst it is not clear at this stage what the ASIC’s powers will entail, it is reasonable to assume that changes in control of AFSLs will be required to meet certain requirements and would be most likely need to be assessed and approved by the ASIC prior to the finalisation of the change in control taking place.
These legislative amendments are a significant change to the level of intervention of government in what would ordinarily be a private transaction (i.e. the sale of a business) and follow in the footsteps of the United Kingdom’s FCA which has been approving change in control of regulated companies for many years now, for example the scrutiny faced by Plus500 and Playtech recently on their UK deal. In addition, this allows the ASIC to further restrict the continued operation of retail margin FX AFSLs and is likely to be another tool used by the ASIC to suspend and cancel these types of AFSLs.
The acceptance of recommendation 29 by the government may also be used to limit and control the instances of international investors purchasing and continuing to operate margin FX AFSLs.
All Adds Up
The ASIC’s extensive focus on the FX industry commenced in late 2013 when it warned retail investors of the dangers of FX trading. Australia’s attention on the FX industry has followed due to scrutiny by other Western regulators such as the U.S. Securities and Exchange Commission, the Financial Conduct Authority in the UK and the Financial Markets Authority in New Zealand.
The introduction of these new legislative amendments to approve the change in control is likely to see a further crackdown on the FX industry.