19 Jul 2012
ASIC's latest on carbon market licensing
by Matthew Daley, Randal Dennings, Erik Setio
INFO 156 gives guidance to those who want a new AFSL or a variation to authorise them to provide financial services in regulated emission units and associated products.
On 27 June 2012, ASIC released an information sheet, "INFO 156 – Regulated emission units: Applying for or varying an AFS license" (INFO 156), to assist those intending to either apply for a new Australian financial services licence (AFSL) or vary an existing AFSL to authorise them to provide financial services in regulated emission units and associated products (eg. derivatives over emission units or managed investments that involve emission units).
Regulated emission units, which are:
carbon units (the units issued by the Clean Energy Regulator);
Australian carbon credit units (the units issued by the Clean Energy Regulator under the Carbon Farming Initiative) (ACCUs); and
eligible international emissions units (the emission units issued and traded in international carbon markets) (EIEUs),
are deemed to be "financial products" as from 1 July 2012 under the Corporations Act 2001 (Cth).
How will INFO 156 affect financial services in relation to regulated emissions units?
Under the transitional arrangement, persons had from 1 May to 30 June 2012 to register their intention to provide financial services in relation to regulated emissions units. Then they had from 1 July to 31 October 2012 to apply for a new AFSL or variation to an existing AFSL.
Where a person did not register their intention by 30 June 2012, they would not be able to provide financial services in respect of regulated emission units from 1 July 2012 (unless they are covered by an appropriate AFSL or are exempt). This transitional arrangement will expire on 31 December 2012, so a person must have an AFSL to provide financial services in respect of regulated emission units from 1 January 2013 (unless they are exempt).
In addition, ASIC has issued ASIC Class Order 12/794, "Emission units: Relief for representatives" (which operates from 1 July 2012 until 31 December 2012), to clarify that financial services representatives are allowed to provide financial services involving regulated emissions units provided they act for either:
If a person carries on a business of:
making a market;
operating a registered scheme; or
providing a custodial or depository service, in relation to the regulated emission units
they will need to be covered by an AFSL issued by ASIC (unless they are able to rely upon an available exemption).
AFSL application and variation process
The same AFSL application and variation process (which is prescribed by ASIC Regulatory Guide 1 to 3) as applicable to other financial products will apply to regulated emission units. Broadly:
an application for a new AFSL consists of the application itself and the accompanying "core proofs" (ie. the statements in which the applicant explains to ASIC how it meets particular aspects of the licensing requirements); and
an application to vary an existing AFSL comprises the variation application itself and two accompanying core proofs: the "A5 business description" and the "B1 organisational competence". An applicant may also need to complete Form FS20 (Change of details for an AFSL) if it would like to add a responsible manager to cover the new authorisation or amend the financial services responsibilities of an existing responsible manager to cover the new authorisation.
Every AFSL holder needs to show its competency in providing its financial services by having responsible manager(s) who:
are directly responsible for significant day-to-day decisions about the provision of the AFSL holder's financial services;
have appropriate knowledge and skills for all of the AFSL holder's financial services and products; and
are of good fame and character.
the Australian carbon market is relatively new; and
ASIC does not believe that there are (currently) degrees, diplomas or industry courses specifically covering the operation of regulated emission units
ASIC encourages applicants to use the option of a written submission (ie. option 5 in ASIC Regulatory Guide 105) to demonstrate that a Responsible Manager has appropriate knowledge and skills in regards to the operation of regulated emission units (ie. product knowledge, market and service experience and regulatory competence relating to regulated emission units).
If ASIC is satisfied with an applicant's organisational competence, but it thinks that the applicant is heavily dependent on the knowledge and skills of one or two responsible managers, ASIC may impose a "key person condition" on the applicant's AFSL.
Retail client requirements
If a person intends to provide financial services (relating to regulated emission units) to retail clients, the person will need to have in place:
compensation arrangements, consisting of either "adequate" professional indemnity insurance (covering all financial services including those involving regulated emissions units), or an alternative arrangement that is specifically approved by ASIC; and
dispute resolution arrangements, consisting of an internal dispute resolution procedure and membership of an external dispute resolution scheme that will accept complaints about the types of financial services the person provides (including those involving regulated emissions units).
It should be noted that derivatives (over regulated emission units) are regulated as distinct financial products to regulated emission units. Hence, the transitional arrangements (discussed above) does not apply to derivatives. Before a person advises, deals or makes a market in relation to derivatives (over regulated emission units), they will need to have an AFSL with a specific authorisation for derivatives (unless they are exempt).
A key issue for applicants in practice is the ongoing review and documentation of their organisational competence to provide the additional authorisation – particularly if this is queried by ASIC. A further challenge encountered is the linkage of these competencies and compliance arrangements to the wider governance, risk and compliance frameworks of the applicant.
We have advised on these issues generally and assisted a number of applicants with the preparation of documentation. In particular, clients have sought our advice on how they can effectively document their compliance arrangements and ensure that they are embedded into their wider governance, risk and compliance frameworks.
Please contact the authors if we can be of further assistance in this regard.
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