Australian financial services laws started to apply to eligible international emissions units from 8 December 2011. Revised draft Corporations Regulations released for consultation last Friday propose to defer the operation of the Corporations Act until only 1 July 2012 in relation to those units, Australian carbon credit units (ACCUs) and carbon units. The draft regulations will not defer the operation of any other financial services laws.
There is likely to be a strong view from potential market participants that the Government is not allowing traders, operators of ACCUs, projects and others sufficient time to be ready to legally operate by 1 July 2012. If this is correct, then this is likely to negatively affect the efficiency of a carbon unit market in Australia from 1 July 2012.
Australian financial services licence may be required
Many organisations that will need an Australian financial services (AFS) licence or a licence variation will not have enough time to obtain an appropriate licence under the proposed deferral and so a number of activities will not be able to be lawfully carried out.
A person who carries on a business of providing financial services in relation to carbon units, ACCUs or eligible international emissions units in Australia must hold an AFS licence covering the provision of the financial services or satisfy a licensing exemption. Financial services include dealing in units, providing financial product advice, making a market in units and providing custodial or depository services in relation to units.
There are some useful licensing exemptions in the proposed regulations including for organisations who manage the financial risks in relation to the surrender, cancellation or relinquishment of units. However the proposed exemption will not necessarily assist project operators who at the beginning of a project wish to manage financial risks of ACCUs that are issued during the life of project (e.g. by entering into a forward contract).
There is also a proposed exemption for dealing, providing advice or making a market in units if the financial services provider is not in Australia and the services are provided to a professional investor. This will assist offshore counterparties who provide those services but will not assist them if they also provide custodial or depository services in respect of units. This could prevent offshore custodians that currently rely on other AFS licensing exemptions from holding units for clients in Australia unless they obtain an AFS licence.
Obtaining an AFS licence is probably not possible at the moment
Traders, project operators and others who do not currently have an AFS licence and require one, will need to apply for one. This will require the investment of considerable time in preparing a comprehensive licence application and also ongoing financial, compliance and other resources. This includes having responsible managers with experience and qualifications in relation to carbon and other units. Obtaining and varying licences is a well-worn path for financial services organisations but might be novel and challenging for other organisations. Mallesons Stephen Jaques have very extensive experience in assisting organisations to obtain licences.
It usually takes between 3 to 6 months for applicants to obtain a licence or a licence variation and the proposed regulations give less than 4 months. It might take even longer than usual because the Australian Securities and Investments Commission (ASIC) is not experienced in regulating the units. Previously the law has allowed a 1 or 2 year transition for organisations to obtain a licence.
Applicants must convince ASIC to issue or vary their AFS licences to cover their activities in relation to units. However ASIC is yet to change its systems to allow applicants to obtain the necessary authorisations. Further, ASIC is yet to publish its policies on what will be its competence, experience and qualification requirements for responsible managers in relation to units and also in relation to registered managed investment schemes that invest in units. Until ASIC does that, potential applicants will not be able to assess whether they have the necessary responsible managers or need to engage additional managers. Applicants need to nominate responsible managers in their AFS licence applications.
No proposed transitional relief from other financial services laws
Even if an organisation does not require an AFS licence, it must comply with other financial services regulations. This includes complying with the Anti-Money Laundering and Counter-Terrorism Financing Act including reporting obligations to AUSTRAC and a requirement to have an AML/CTF Program. Apart from the Corporations Act, there does not appear to be proposed any regulations to defer the operation of the other financial services laws and so strictly organisations carrying out activities in relation to eligible international emissions units should have been complying with those laws since 8 December 2011.
Further, until the proposed Corporations Regulations become law, organisations carrying out activities in relation to eligible international emissions units should have been complying with the Corporations Act since 8 December 2011 which has been impossible if they needed an AFS licence. Presumably ASIC should be sympathetic to organisations in those circumstances.
Conclusion
The proposed regulations have many welcome aspects and should be made as soon as possible. They should give organisations carrying out activities in relation to eligible international emissions units now some comfort. However they are not as extensive as some might have hoped and time is rapidly running out for any organisation that requires an AFS licence by the proposed deferral date of 1 July 2012. Hopefully the Government will extend that date when the regulations are made.