ASIC Guide – Do you need an Australian Financial Services Licence to participate in carbon markets? (updated following release of Corporations Amendment Regulation 2012 (No 1) (Regulation)
Do you need an AFSL?
An Australian Financial Servsices Licence (AFSL) is required if a person carries on a financial services business in Australia unless an exemption applies. The following table sets out some activities which constitute financial services in the context of the Australian carbon marketand indicates whether or not an AFSL (or an AFSL variation)is required. The terms in the table are described in the article below.
Providing an opinion or recommendation about regulated emissions units which may be reasonably regarded as being intended to influence someone to buy or sell regulated emissions units Advising
| Description of activity | Corporations Act activity | AFSL required |
|
Buying units on your own behalf, including:
|
Exemption from dealing s766C(3) | x |
| Selling units on your own behalf | Exemption from dealing s766C(3) | x |
| Buying and selling regulated emissions units for a related body corporate or associated entity that is a liable entity | Exemption from dealing Regulation 7.1.35C | x |
| Buying regulated emissions units for a related body corporate or associated entity that is a liable entity for compliance purposes by that entity and you are not also making a market in derivatives | Exemption from dealing in a derivative Regulation 7.6.01(1)(ma) | x |
| Buying regulated emissions units for a related body corporate or associated entity that is a liable entity for non-compliance purposes by that entity | Dealing | |
| Buying units on behalf of an entity which is not a related body corporate or associated entity | Dealing | |
| Selling units on behalf of another entity or a related body corporate or associated entity which is not a liable entity | Dealing | |
| Derivative trading – Buying regulated emissions units on your own behalf for compliance purposes from a bank or intermediary or an off shore source for delivery at a future date with a cash settlement alternative referable to the market price of the units and where you are not also making a market in derivatives | Exemption from dealing in a derivative Regulation 7.6.01(1)(ma) | x |
| Derivative trading – Buying regulated emissions units on your own behalf for non-compliance purposes from a bank or intermediary or an off shore source for delivery at a future date with a cash settlement alternative referable to the market price of the units | Dealing | |
| Derivative trading – Buying regulated emissions units for compliance purposes for a related body corporate or associated entity that is a liable entity under a forward contract for delivery at a future date with a cash settlement alternative referable to the market price of the units and where you are not also making a market in derivatives | Exemption from dealing in a derivative Regulation 7.6.01(1)(ma) | x |
| Derivative trading – Buying regulated emissions units for non-compliance purposes for a related body corporate or associated entity that is a liable entity, under a forward contract for delivery at a future date with a cash settlement alternative referable to the market price of the units | Dealing | |
| Derivative trading – Buying on behalf of an entity which is not a related body corporate or associated entity | Dealing | |
| Derivative trading – Selling offset project units via a derivative contract on your own behalf or on behalf of another entity (including a related body corporate or associated entity) | Dealing | |
| Arranging for an entity to engage in the conduct referred to above as an intermediary or broker rather than an agent | Dealing | |
| Regularly stating prices at which you will buy or sell regulated emissions units so that other persons can reasonably expect to trade with you at those stated prices (other than stating prices of free carbon units by the holder of such units) | Making a market(Exemption for free carbon units in Regulation 7.1.08A) | |
| Operating a managed investment scheme where pooled funds are used to buy regulated emissions units1 | Managed investment scheme | |
| Holding regulated emissions units or beneficial interests in those units on trust for a third party2 other than holding ACCUs in a special native title account in accordance with section 49 of the Carbon Credits (Carbon Farming Initiative) Act 2011 or a nominee account in accordance with section 141 of that Act | Custodial or depository service unless less than 20 clients exempt under Reg 7.1.40(c) or Carbon Farming Initiative exemption applies under Regulation 7.1.40 |
Need for a financial services licence
An AFSL is required if a person carries on a financial services business in Australia unless an exemption applies3. A financial services business is defined as "a business of providing financial services". Financial services include "dealing", "making a market" and "advising" in relation to "financial products". ASIC has stated that the test for "carrying on a financial services business" is satisfied if a person has a place of business in Australia and the financial services are undertaken with "system, regularity and continuity" and are more than a very minor part of a person's business. ASIC also states that a one off transaction, if substantial, could also amount to "carrying on a financial services business". Given that the lowest threshold for a liable entity under the Clean Energy Act 2011 (Cth) is 25,000 tonnes of attributable greenhouse gas emissions, which equates to a cost of A$575,000 in the first year of the scheme, we expect that all liable entities will fall within the test of "carrying on a financial services business".
Financial products
Regulated emissions units are financial products under the Corporations Act (2001 (Cth)4 from 1 July 2012. From this date an AFSL is required authorising the provision of a financial service in relation to regulated emissions units unless the transition arrangements set out below or an exemption applies.
Dealing
As indicated in the examples above dealing includes buying and selling regulated emissions units and derivatives5 referrable to such units.
Dealing exemption – Dealing in regulated emissions units is a financial service unless the exemption in section 766C(3) (or another exemption set out below) applies which provides that a person is not taken to be dealing if the person is dealing on their own behalf and is not an issuer of the financial product6. The issuer of regulated emissions units is the Regulator of the scheme establishing the creation of those units. Dealing in derivatives referrable to such units is not exempt under section 766C(3) because while a party might be entering the derivative on its own behalf it is taken to have issued the derivative under section 761E(5).
Proposed extension to dealing exemption – Regulation 7.1.35C extends the exemption in section 766C, to provide that a person is not taken to be dealing if the financial product is a regulated emissions unit and the dealing is on behalf of a related body corporate or associated entity that is a liable entity under the Clean Energy Act.
Proposed compliance exemption – Regulation 7.6.01(1)(ma) states that an AFSL is not required to deal if the person only deals in one or more of the following; regulated emissions units, derivatives over regulated emissions units or foreign exchange contracts, where all of the following are satisfied:
- the person is dealing on their own behalf or on behalf of a related body corporate or associated entity
- the dealing is to manage a financial risk in relation to the surrender, cancellation or relinquishment of regulated emissions units by the person or on behalf of a related body corporate or associated entity
- the person is not also making a market for derivatives or foreign exchange contracts referrable to regulated emissions units
- the dealing is not the principal activity of the person's business.
The change of emphasis from the dealing being a "significant" part of the person's business7 to it being the "principal activity" will assist many liable entities fall within the exemption. However, ASIC points out that an entity who holds excess units to their immediate requirements may not fall within the exemption on the basis that such an entity may not satisfy the test that the dealing is required to "manage a financial risk in relation to the surrender, cancellation or relinquishment". In addition anyone selling regulated emissions units via a derivative or making a market in derivatives will fall outside the exemption.
Making a market
A person makes a market if the person regularly states prices at which they will buy or sell regulated emissions units so that other persons can reasonably expect to trade at those stated prices.
Regulation 7.1.08A exempts persons, to whom free carbon units are issued from stating prices for those free carbon units, from the classification of making a market. Other than for this narrow exemption there are no other exemptions from this category of financial service which means that all liable entities who intend to operate a trading desk to buy (or buy and sell) regulated emissions units are likely to require an AFSL covering this activity.
Advising
Advising includes providing an opinion or recommendation about regulated emissions units which may be reasonably regarded as being intended to influence someone to buy or sell those units. The statements are considered in the overall context in which they are made. Pricing predictions given to potential buyers of regulated emissions units or to offset project proponents under the Carbon Farming Initiative would be likely to fall within "advising".
There are no relevant exemptions from this category of financial service which means that all liable entities who intend to advise in relation to regulated emissions units are likely to require a AFSL covering this activity.
Wholesale or retail clients
If an AFSL is required, the obligations on a licensee are significantly more onerous if the licensee wishes to deal with retail clients rather than be limited to only dealing with wholesale clients. A wholesale client is an entity purchasing a financial product whose value exceeds A$500,000, a person with net assets of at least A$2.5 million and professional investors including AFSL licensees, listed entities and banks.
AFSL transition arrangements, process and consequences
If you need an AFSL (or a variation of your existing AFSL)you will need to apply to ASIC and the Guide sets out the tools available to assist an applicant obtain a licence. Applications can be made from 1 July 2012. We have assisted many clients in the energy industry obtain licences and our experience is that the process takes upwards of six months, requires significant management and administrative time and the introduction of a risk and compliance regime from board level downwards. You will need to appoint qualified personnel as "responsible managers" to manage the financial services business.
In recognition of the fact that the licence application process takes a considerable time ASIC has established a transition system which will allow a person to provide financial services in relation to regulated emissions units without being licensed to do up to 31 December 2012 (there is an expectation that ASIC will be able to process the licence applications by 31 December 2012) provided the person:
- registers with ASIC between 1 May 2012 and 30 June 2012 an intention to apply for an AFSL authorisation (or an AFSL variation) covering regulated emission units
- complies with the conditions in Regulation 7.6.02AGA (including being a member of an approved external dispute resolution scheme and having compensation arrangements in place if providing financial services to retail clients)
- applies for an AFSL authorisation (or an AFSL variation) covering regulated emission units by 31 October 2012.
ASIC has issued a Consultation Paper 175 Carbon Markets which sets out proposed training requirements for responsible managers and financial requirements for licensees. The training requirements propose to classify regulated emissions units as Tier 1 products which means that specific training will be required from licensees who wish to be licensed as "advisers". An 18 month transition for training is proposed.
The Consultation Paper also proposes that licensees must meet base level financial requirements which requires the licensee to remain solvent at all times, meet cash requirements in Regulator Guide 166.23 – 166.41 and meet audit requirements. Licensees who are licensed to make a market will also need to meet adjusted surplus liquid fund requirements which require the licensee to hold assets of a specified level and not to enter transactions without board approval if its assets fall below those levels.
Footnotes1 Consideration of managed investment funds is beyond the scope of this article.
2 Consideration of custodial and depository services is beyond the scope of this article.
3 Section 911A(1).
4 Section 764A(ka) (kaa) and (kb) and Regulation 7.01.071
5 Section 761D Corporations Act 2001 (Cth) a derivative is a forward contract for sale of a commodity with cash settlement alternative referrable to a market price.
6 Section 766C(3)
7 This is the requirement in Regulation 7.6.01(1)(m) currently applying to derivatives and foreign exchange contracts.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
