Australian Investment Industry to Benefit from Financial Licensing Determination

Australian investors are set to benefit from a determination made by the Full Federal Court of Australia last month which has provided much need clarity around financial services licensing requirements for businesses using debt finance for their commercial operations in Australia.

In the Full Court judgement in ASIC v Web3 Ventures Pty Ltd, the three appeal judges unanimously held that ordinary loans do not constitute a regulated activity requiring an Australian Financial Services License because they are not financial products.

As a United States-based private investment firm with operating subsidiaries in Australia which offer interest-bearing facilities, this represents a significant win for Marbanc International’s clients, the private investment industry, and the Australian business community as a whole.

How investors will benefit

The significance for investors who are attracted to fixed interest products is that they and their counterparties now have greater clarity over features which will help determine whether entering into certain contractual arrangement is (or is not) a licensable activity.

Regulatory intervention is generally an unspoken investment risk facing all investors which makes the Full Court’s determination helpful for investors in making their assessment of the many investment options in the market.

How businesses will benefit

For investment industry participants and businesses, it boosts confidence in what has to-date been a murky regulatory environment. Until now, the local securities regulator has been focused on characterizing various forms of loans as financial products which would have standard lender/borrower arrangements framed as licensable activities.

This has meant that, until now, Australian businesses borrowing money to fund their commercial activities have been at risk of regulatory intervention due to the blurred lines which the recent judgment has helpfully since clarified.

Defining features of a loan

One such defining feature is a whether the monies contributed (loaned) are “in consideration for the acquisition of rights [to] benefits produced by the scheme”. In the instance of a lender/borrower relationship, the lender’s right to be paid interest from benefits produced by the scheme and not other commercial activities, such as refinancing, are to be taken into account in determining whether the contractual relationship requires licensing.

The Full Court was instructive in stating that:

“For a “borrower” to represent that it is able to pay a lender what it promises to pay because of the benefit produced by a scheme describes an ordinary loan.”

In recent years, Marbanc International has successfully scaled its portfolio by developing a suite of competitive fixed income offerings with the assistance of its legal advisers. These offerings appeal to investors seeking fixed returns and capital stability, and are popular in the current economic climate as interest rates are declining.

From time-to-time these types of offerings have come under scrutiny from industry participants unfamiliar with the regulatory regime governing debt instruments and private lending arrangements of this nature. The Web3 Ventures determination makes it abundantly clear that an Australian Financial Service License is required to be held by some, but not all, companies operating in the investment industry which is consistent with the group’s legal advice.

Australia's banking environment

The Australian banking environment has been marred in recent years by the Government’s clamp-down on investment scams led by MP Stephen Jones. This has led to innocent consumers and businesses experiencing problems when transferring money, and in some instances temporary bank account suspensions, when seeking to engage in normal commercial transactions including standard lender/borrower arrangements.

The recent determination around financial services licensing requirements is helpful for Australian banks and their specialist departments as it recognizes that an Australian Financial Services License is applicable only to some investment relationships but not all. This is particularly the case where a business enters into an arrangement which might be characterized as an ordinary loan or a series of loans for its own commercial purposes.

Whilst there are a series of investment arrangements which require licensing such as managed investment schemes (i.e. managed funds) and debentures (a requirement of which is a debenture instrument), other commercial arrangements such as ordinary loans, credit facilities and bills of exchange are methods through which companies can also offer investment opportunities to private clients without a requirement for a license which applies to other types of fundraising activities.

Why this distinction is important

This distinction between regulated and exempt or non-regulated fundraising activities is important for any economy to function efficiently. Private investors are an integral part of the economy and supporting them with clear regulatory, legislative and judicial guidelines is critical to encouraging confidence in the business and investment community.

We’re investing in technology to protect investors

Marbanc International is actively investing in cybersecurity initiatives aimed at protecting consumers from the risk of fraud in banking, finance and other sectors. The group has a number of initiatives it has funded with the potential to help millions of consumers globally identify their counterparties before transacting. This is in line with Marbanc International’s global investment focus on social impact-related initiatives at scale.