ASIC RG 236 — ASIC Regulatory Guide – RG 236 Do I need an AFS licence to participate in carbon markets?

Page 1 REGULATORY GUIDE 236 Do I need an AFS licence to participate in carbon markets? September 2024 About this guide This guide is for:  people involved in carbon abatement activities related to the Australian Carbon Credit Units (ACCU) Scheme;  people who enter into carbon abatement contracts related to the ACCU Scheme;  responsible emitters for safeguard facilities;  other participants in carbon markets; and  people who advise carbon market participants. You can use this guide to help you consider whether you need an AFS licence to participate in or provide financial product advice and other financial services in relation to carbon markets. This guide also indicates what other information ASIC has published that may be useful for you, and where you can find it. Note: From 27 July 2020, applications for relief should be submitted through the ASIC Regulatory Portal. For more information, see how you apply for relief. Page 2 REGULATORY GUIDE 236: Do I need an AFS licence to participate in carbon markets? © Australian Securities and Investments Commission September 2024 Page 2 About ASIC regulatory documents In administering legislation ASIC issues the following types of regulatory documents. Consultation papers: seek feedback from stakeholders on matters ASIC is considering, such as proposed relief or proposed regulatory guidance. Regulatory guides: give guidance to regulated entities by:  explaining when and how ASIC will exercise specific powers under legislation (primarily the Corporations Act)  explaining how ASIC interprets the law  describing the principles underlying ASIC’s approach  giving practical guidance (e.g. describing the steps of a process such as applying for a licence or giving practical examples of how regulated entities may decide to meet their obligations). Information sheets: provide concise guidance on a specific process or compliance issue or an overview of detailed guidance. Reports: describe ASIC compliance or relief activity or the results of a research project. Document history This regulatory guide was issued in September 2024 and is based on legislation and regulations as at the date of publication. In April 2026, we made amendments to reflect updated Regulatory Guide 181 AFS licensing: Managing conflicts of interest (RG 181). Previous versions:  Superseded Regulatory Guide 236, issued March 2012, May 2012, June 2012, July 2013, May 2015 and September 2024. Disclaimer This guide does not constitute legal advice. We encourage you to seek your own professional advice to find out how the Corporations Act and other applicable laws apply to you, as it is your responsibility to determine your obligations. Examples in this guide are purely for illustration; they are not exhaustive and are not intended to impose or imply particular rules or requirements. Page 3 REGULATORY GUIDE 236: Do I need an AFS licence to participate in carbon markets? © Australian Securities and Investments Commission September 2024 Page 3 Contents A Overview ........................................................................................... 4 Emissions units in Australia ............................................................... 4 ASIC’s role in carbon markets ........................................................... 6 Deciding whether you need an AFS licence ...................................... 7 How to use this guide ........................................................................ 8 B The AFS licensing regime ............................................................. 11 Financial products and services ...................................................... 11 AFS licence authorisations and conditions ...................................... 18 C Types of emissions units and related products that are financial products .......................................................................... 21 Australian carbon credit units .......................................................... 21 Safeguard mechanism credit units .................................................. 22 Other types of eligible international emissions units (EIEUs) .......... 24 Financial products related to emissions units .................................. 25 Other emissions and environmental units ....................................... 32 D Providing financial services involving regulated emissions units ................................................................................................ 33 Types of financial services that relate to regulated emissions units 33 Providing financial product advice on regulated emissions units .... 35 Dealing in ACCUs or EIEUs ............................................................ 42 Making a market in regulated emissions units................................. 43 Other financial products and services related to emissions units.... 44 Foreign financial services providers ................................................ 48 E When you need an AFS licence ................................................... 49 ‘Carrying on a financial services business in Australia’ ................... 49 Licensing exemptions ...................................................................... 50 F Getting and holding an AFS licence ............................................ 57 Applying for an AFS licence or variation .......................................... 57 AFS licensee obligations ................................................................. 59 Appendix: Accessible version of Figure 2 .......................................... 64 Key terms ............................................................................................... 66 Related information ............................................................................... 74 Page 4 REGULATORY GUIDE 236: Do I need an AFS licence to participate in carbon markets? © Australian Securities and Investments Commission September 2024 Page 4 A Overview Key points Australian carbon credit units (ACCUs), safeguard mechanism credit units (SMCs) and certain other emissions units are financial products under the Corporations Act 2001 (Corporations Act). This means that you may require an Australian financial services (AFS) licence to carry on a financial services business in relation to these emissions units—that is, to participate in carbon markets. Among other things, ASIC is responsible for assessing and approving AFS licence applications, and ensuring that licensees operate efficiently, honestly and fairly. ASIC also keeps a register of all AFS licensees. You can use this guide to help you determine whether you will need to hold an AFS licence to participate in carbon markets. This guide also outlines other information ASIC has published that may be useful for you, and where you can find it. Emissions units in Australia RG 236.1 The key types of emissions units that can be traded in Australia are: (a) ACCUs; and (b) SMCs, which are a type of eligible international emissions units (EIEUs). RG 236.2 There are other emissions units and environmental units that can be traded in Australia, some of which are financial products under the Corporations Act, and some of which are not. Note 1: This guide refers to emissions units and environmental units that are financial products as ‘regulated emissions units’. Note 2: See RG 236.120 for examples of emissions units and environmental units that are generally not financial products. Australian carbon credit units RG 236.3 An ACCU represents one tonne of carbon dioxide equivalent emissions that are avoided or sequestered by an eligible offsets project. An eligible offsets project is a project carried out in accordance with the Carbon Credits (Carbon Farming Initiative) Act 2011 (CFI Act). RG 236.4 ACCUs can be sold to generate income. They can be sold to the Australian Government through a carbon abatement contract, or to companies and other private buyers (i.e. in the secondary market). Note: ‘Carbon abatement contract’ is defined in s20B of the CFI Act. It is a contract entered into, by or on behalf of the Government, for the purchase of ACCUs. Page 5 REGULATORY GUIDE 236: Do I need an AFS licence to participate in carbon markets? © Australian Securities and Investments Commission September 2024 Page 5 RG 236.5 ACCUs can also be used by operators of certain large industrial facilities to ensure they do not exceed their baseline of emissions: see RG 236.81(b) for further information. RG 236.6 The Clean Energy Regulator is responsible for administering the ‘ACCU Scheme’ (formerly the Emissions Reduction Fund) under which it registers eligible offsets projects and issues ACCUs for carbon abatement achieved by these projects. RG 236.7 The avoidance of emissions, or the removal of one or more greenhouse gases from the atmosphere, is referred to as ‘carbon abatement’: see s5 of the CFI Act. RG 236.8 Since 2015, financial services provided in relation to regulated emissions units in Australia have primarily involved ACCUs generated under the ACCU Scheme. Safeguard mechanism and SMCs RG 236.9 In November 2014, the National Greenhouse and Energy Reporting Act 2007 (NGER Act) was amended to establish the safeguard mechanism, which commenced on 1 July 2016. RG 236.10 Under the safeguard mechanism, responsible emitters of Australia’s largest industrial facilities (referred to in this guide as ‘safeguard facilities’) must ensure that the net emissions number for a safeguard facility does not exceed the baseline emissions number for the safeguard facility at the end of each monitoring period, which is usually a financial year. Note: Under the NGER Act, the responsible emitter is the person with operational control of a safeguard facility. RG 236.11 In April 2023, the NGER Act and legislative rules were amended as part of the ‘safeguard mechanism reforms’. These reforms apply a baseline emissions number to certain facilities, referred to in this guide as ‘safeguard facilities’ (see also RG 236.79(a)), which will decline over time to incentivise those facilities to reduce emissions. RG 236.12 The safeguard mechanism reforms also allow for the creation of a new regulated emissions unit, which is called a ‘safeguard mechanism credit unit’ (SMC). RG 236.13 If a safeguard facility’s covered emissions are below its baseline emissions number for a monitoring period, and if certain other legislative requirements are met, the Clean Energy Regulator can issue the responsible emitter with SMCs. SMCs may be traded between safeguard facilities or with other people. Note 1: Much of the detail of the safeguard mechanism is set out in legislative rules, primarily the National Greenhouse and Energy Reporting (Safeguard Mechanism) Rule 2015 (Safeguard Rules). Note 2: See RG 236.80 to RG 236.84 for further details about the obligations of responsible emitters and when they will be issued with SMCs. Page 6 REGULATORY GUIDE 236: Do I need an AFS licence to participate in carbon markets? © Australian Securities and Investments Commission September 2024 Page 6 Note 3: A responsible emitter can apply for the monitoring period for a safeguard facility to span more than one financial year. See Div 2 of Pt 4 of the Safeguard Rules for more details. RG 236.14 Both SMCs and ACCUs represent one tonne of carbon dioxide equivalent emissions stored or avoided. Other markets RG 236.15 There are also other markets in Australia and overseas through which other emissions units are traded, some of which are financial products in Australia, and some of which are not. These units are referred to in RG 236.88 to RG 236.94 and RG 236.120 to RG 236.123. Note: Our use of the term ‘market’ in this guide encompasses bilateral trading of units not on a facility or a licensed market, as well as trading on a facility or a licensed market. ASIC’s role in carbon markets RG 236.16 ASIC is an independent Australian Government body that regulates registered companies, financial markets and providers of financial services and credit services. We aim to promote fair, orderly and transparent markets, and to support confident and informed participation by investors and financial consumers. Licensing and supervision RG 236.17 Among other things, we licence and monitor financial services businesses to ensure they operate efficiently, honestly and fairly. We refer to this as the ‘AFS licensing regime’, or the ‘AFS licensing system’. Note 1: Further details on the roles and responsibilities of AFS licensees and their representatives are provided in Sections B and F of this guide. Note 2: ASIC is also responsible for the licensing and supervision of operators of financial markets. The regulation of financial markets is beyond the scope of this guide: see Regulatory Guide 172 Financial markets: Domestic and overseas operators (RG 172) for more details. RG 236.18 A financial services business is one that provides services in relation to financial products. Typically, financial services businesses are involved in superannuation, managed funds, shares and company securities, derivatives and insurance. RG 236.19 ASIC also maintains a register of AFS licensees and authorised representatives of AFS licensees. Regulated emissions units and AFS licensing RG 236.20 ACCUs, SMCs and certain other emissions units are financial products under the Corporations Act. This means that you may require an AFS licence Page 7 REGULATORY GUIDE 236: Do I need an AFS licence to participate in carbon markets? © Australian Securities and Investments Commission September 2024 Page 7 if you are carrying on a financial services business in relation to these types of emissions units. Note: See Section C for further information about which types of emissions units are financial products. RG 236.21 Other emissions-related financial products include, for example, derivatives over emissions units and interests in managed investment schemes involving carbon abatement activities or emissions units. You may also require an AFS licence to carry on a financial services business in relation to these financial products. Note: The underlying product for a derivative or the assets of a managed investment scheme do not have to be a financial product for the derivative or the interest in the managed investment scheme to be a financial product. Deciding whether you need an AFS licence RG 236.22 In Figure 1, we provide an overview of the steps you should take to work out whether you need an AFS licence to provide financial services for regulated emissions units. Table 1 explains each of the steps in further detail. Figure 1: Steps in deciding whether you need an AFS licence Note 1: A responsible entity of a registered managed investment scheme is required to hold an AFS licence regardless of whether they provide other financial services as part of a financial services business: see s601FA of the Corporations Act. Note 2: An accessible version of the information in this figure is provided in Table 1. Step 1: Read our guidance on the AFS licensing regime Step 2: Will you be providing financial services? Step 3: Will you be providing financial services as part of a financial services business? You don’t need an AFS licence No Step 4: Does an exemption apply to you? You must have an AFS licence No Yes Yes Yes No Page 8 REGULATORY GUIDE 236: Do I need an AFS licence to participate in carbon markets? © Australian Securities and Investments Commission September 2024 Page 8 Table 1: Description of the steps in deciding whether you need an AFS licence Step Description Step 1: Read our guidance on the licensing regime Read the information provided on the licensing regime in this guide, as well as our range of regulatory guides for licensees: see Table 3. In particular, see:  Regulatory Guide 36 Licensing: Financial product advice and dealing (RG 36) on what constitutes dealing in and advising on a financial product; and  Regulatory Guide 104 AFS licensing: Meeting the general obligations (RG 104) on the conduct that is required of a licensee. Step 2: Determine whether you are likely to be providing financial services Review the kinds of activities you will engage in through your participation in carbon markets and determine if the law requires you to hold an AFS licence. You can use our guidance to help you decide whether these will fall within the definition of ‘financial services’. We also encourage you to seek your own professional advice. If you determine that you are likely to be providing financial services, continue to Step 3. If you are not likely to be providing financial services, you do not need an AFS licence. Step 3: Determine whether you are providing those services as part of a financial services business in Australia You will require a licence to provide financial services while carrying on a business in Australia or operating a registered managed investment scheme: see Section E for more guidance on when you will be carrying on a financial services business. If you determine that you will be providing financial services as part of a financial services business, continue to Step 4. If you won’t, you do not need an AFS licence. Note: A responsible entity of a registered managed investment scheme is required to hold an AFS licence regardless of whether they provide financial services as part of a financial services business: see s601FA of the Corporations Act. Step 4: Determine whether any exemption applies to you Some people who carry on a financial services business are exempt from the need to hold a licence: see Section E for more guidance on exemptions that may apply to you. If an exemption applies to you, you will not need an AFS licence. How to use this guide RG 236.23 You can use this guide to help you decide whether you require an AFS licence to participate in carbon markets. RG 236.24 Table 2 provides an overview of the topics covered in this guide. We have also developed a range of other guidance for AFS licensees that may be useful to you: see Table 3. Page 9 REGULATORY GUIDE 236: Do I need an AFS licence to participate in carbon markets? © Australian Securities and Investments Commission September 2024 Page 9 Table 2: Topics covered in this guide Topic Section Overview of the AFS licensing regime Section B How the financial services laws apply to regulated emissions units and the carbon markets Sections C and D When you are likely to require an AFS licence for regulated emissions units Section E How to apply for an AFS licence, or vary an existing licence, and conduct expected of AFS licensees Section F RG 236.25 Once you hold an AFS licence, you will also need to meet ongoing requirements of the Corporations Act and Australian Securities and Investments Commission Act (ASIC Act): see Section F. Further guidance for AFS licensees and licence applicants RG 236.26 Table 3 lists the guidance we have provided for AFS licensees and licence applicants. We encourage you to seek your own professional advice to find out how the Corporations Act and other applicable laws apply to you, as it is your responsibility to determine your obligations. Table 3: ASIC guidance for AFS licensees and licence applicants Preparing your licence application Regulatory Guide 1 Applying for and varying an AFS licence (RG 1) Pro Forma 209 Australian financial services licence conditions (PF 209) Information Sheet 156 Regulated emissions units: Applying for or varying an AFS licence (INFO 156) Meeting your licensing, conduct and disclosure obligations Regulatory Guide 36 Licensing: Financial product advice and dealing (RG 36) Regulatory Guide 90 Example Statement of Advice: Scaled advice for a new client (RG 90) Regulatory Guide 104 AFS licensing: Meeting the general obligations (RG 104) Regulatory Guide 105 AFS licensing: Organisational competence (RG 105) Regulatory Guide 126 Compensation and insurance arrangements for AFS licensees (RG 126) Regulatory Guide 146 Licensing: Training of financial product advisers (RG 146) Regulatory Guide 166 AFS licensing: Financial requirements (RG 166) Regulatory Guide 167 AFS licensing: Discretionary powers (RG 167) Regulatory Guide 175 AFS licensing: Financial product advisers—Conduct and disclosure (RG 175) Page 10 REGULATORY GUIDE 236: Do I need an AFS licence to participate in carbon markets? © Australian Securities and Investments Commission September 2024 Page 10 Meeting your licensing, conduct and disclosure obligations (cont.) Regulatory Guide 181 AFS licensing: Managing conflicts of interest (RG 181) Regulatory Guide 244 Giving information, general advice and scaled advice (RG 244) Regulatory Guide 255 Providing digital financial product advice to retail clients (RG 255) Regulatory Guide 271 Internal dispute resolution (RG 271) Regulatory Guide 274 Product design and distribution obligations (RG 274) Managed investment schemes Regulatory Guide 80 Managed investment schemes: Interests not for money (RG 80) Regulatory Guide 132 Funds management: Compliance and oversight (RG 132) Regulatory Guide 133 Funds management and custodial services: Holding assets (RG 133) Regulatory Guide 134 Funds management: Constitutions (RG 134) Regulatory Guide 136 Funds management: Discretionary powers (RG 136) Page 11 REGULATORY GUIDE 236: Do I need an AFS licence to participate in carbon markets? © Australian Securities and Investments Commission September 2024 Page 11 B The AFS licensing regime Key points This section provides a brief introduction to the AFS licensing regime. Two key concepts of the regime are ‘financial products’ and ‘financial services’. ‘Financial services’ are services provided to clients in relation to financial products: see RG 236.28 to RG 236.64 and RG 236.124 to RG 236.171. Generally, a person requires an AFS licence to carry on a business of providing financial services in Australia, unless they are exempt. In many cases, a licensee carries out its business through its ‘representatives’: see RG 236.68 to RG 236.71. The financial services regime recognises two different types of clients— ‘wholesale’ and ‘retail’: see RG 236.72 to RG 236.74. Some requirements of the AFS licensing regime apply only if you are providing services to retail clients. Financial products and services RG 236.27 Two key concepts of the AFS licensing regime are: (a) ‘financial products’; and (b) ‘financial services’ (i.e. services provided to clients that relate to financial products). Financial products RG 236.28 A ‘financial product’ is a facility that allows a person to make a financial investment, manage a financial risk or make non-cash payments: see s763A of the Corporations Act. RG 236.29 Financial products are regulated under the Corporations Act. Generally, a person requires an AFS licence if they provide financial services in relation to these products in Australia as part of a financial services business. RG 236.30 ACCUs and EIEUs (which include SMCs) are financial products. In addition to these regulated emissions units, s764A of the Corporations Act specifies that the following, among other things, are financial products: (a) shares; (b) debentures; (c) interests in a managed investment scheme; (d) interests in a notified foreign passport fund; Page 12 REGULATORY GUIDE 236: Do I need an AFS licence to participate in carbon markets? © Australian Securities and Investments Commission September 2024 Page 12 (e) derivatives; (f) foreign exchange contracts that are not derivatives; (g) general insurance; (h) life insurance; (i) superannuation; (j) basic deposit products and other deposit products; (k) retirement savings accounts; and (l) margin lending facilities. Note: The definition of ‘financial product’ is found in s9 of the Corporations Act RG 236.31 A facility or arrangement that is not specified in s764A of the Corporations Act may still fall within the general definition of a financial product if it is a facility through which, or through the acquisition of which, a person makes a financial investment: see s763B of the Corporations Act. RG 236.32 Generally, a person (the investor) makes a financial investment if: (a) the investor gives money or money’s worth (the contribution) to another person and: (i) the other person uses the contribution to generate a financial return, or other benefit, for the investor; (ii) the investor intends that the other person will use the contribution to generate a financial return, or other benefit, for the investor; or (iii) the other person intends that the contribution will be used to generate a financial return, or other benefit, for the investor; and (b) the investor does not have day-to-day control over the use of the contribution to generate the return or benefit. RG 236.33 An arrangement in carbon markets that does not relate to regulated emissions units may still be a financial product if it is a facility for making a financial investment. RG 236.34 Certain products are specified in s765A of the Corporations Act, or declared under regulations made for s765A, as not being financial products. A carbon abatement contract under the CFI Act is not a financial product: see reg 7.1.07J of the Corporations Regulations 2001 (Corporations Regulations). Consequently, you do not need an AFS licence if you provide advice about a carbon abatement contract or deal in a carbon abatement contract. Financial services RG 236.35 The AFS licensing regime is structured around whether a person is providing a financial service. A person requires an AFS licence to carry on a business of providing financial services in Australia, unless they are exempt. Page 13 REGULATORY GUIDE 236: Do I need an AFS licence to participate in carbon markets? © Australian Securities and Investments Commission September 2024 Page 13 RG 236.36 Generally, you are providing a financial service if you: (a) provide financial product advice; (b) deal in a financial product; (c) make a market for a financial product; (d) operate a registered managed investment scheme; (e) operate the business and conduct the affairs of a corporate collective investment vehicle; (f) provide a custodial or depository service; (g) provide a crowd-funding service; (h) provide a claims handling and settlement service; (i) provide a superannuation trustee service; or (j) are a traditional trustee company providing traditional trustee services. Note: Div 4 of Pt 7.1 of the Corporations Act includes provisions about when a person provides a financial service. See also Regulatory Guide 121 Doing financial services business in Australia (RG 121) for further information. RG 236.37 The financial services that are more commonly provided in relation to regulated emissions units are briefly explained below at RG 236.39 to RG 236.65. RG 236.38 Generally, you are not providing a financial service in relation to regulated emissions units if you are, for example: (a) providing mapping and spatial analysis to inform the design of an ACCU Scheme project; (b) providing greenhouse gas measurement or nature capital accounting services, including in relation to ACCU Scheme projects; (c) performing greenhouse gas and energy audits for safeguard facilities or ACCU Scheme projects; or (d) monitoring the co-benefits of an ACCU Scheme project, such as monitoring the positive impacts of the project on biodiversity. Providing financial product advice RG 236.39 A recommendation or a statement of opinion, or a report of either of those things, constitutes ‘financial product advice’ if it is provided with the intention of influencing a person’s decision on a financial product—or could reasonably be regarded as being intended to have such an influence: see s766B of the Corporations Act. RG 236.40 Simply providing factual information will generally not constitute financial product advice. Factual information is information that can be objectively ascertained and generally does not involve qualitative judgement, an evaluation or expression of an opinion or recommendation about the relevant subject matter. Page 14 REGULATORY GUIDE 236: Do I need an AFS licence to participate in carbon markets? © Australian Securities and Investments Commission September 2024 Page 14 Example 1: Factual information vs financial product advice A person is informed of the volume-weighted average price for ACCUs in the carbon abatement contracts entered into at an ACCU Scheme auction. This would constitute factual information rather than financial product advice. RG 236.41 However, it is also important to consider the overall context in which the information is presented. For example, where factual information is presented in a manner that may reasonably be regarded as suggesting or implying a recommendation to buy, sell or hold a particular financial product, it may constitute financial product advice. Note: For more information about what constitutes financial product advice, and examples illustrating the distinction between factual information and financial advice, see Section B of RG 36 and RG 244. RG 236.42 There are two types of financial product advice—personal and general advice: (a) Personal advice is financial product advice given or directed to a person (including by electronic means) in circumstances where: (i) the provider of the advice has considered one or more of the person’s objectives, financial situation and needs; or (ii) a reasonable person might expect the provider to have considered one or more of those matters. (b) General advice is financial product advice that is not personal advice. Note 1: The definition of ‘personal advice’ is set out in s766B(3) of the Corporations Act. Note 2: For further information about the distinction between personal and general advice, see RG 175. RG 236.43 Advice given in some situations is exempt from the definition of ‘financial product advice’: see RG 36. While these exemptions generally apply in limited, specific circumstances, a broader exemption applies to the provision of advice: (a) that is not: (i) about a particular financial product; (ii) personal advice; and (iii) intended, and could not reasonably be regarded as intended, to influence a person in making a decision on a particular financial product; and (b) where the adviser or its associates will not receive any remuneration, commission or other benefit for providing that advice. Note: See reg 7.1.33G of the Corporations Regulations. Page 15 REGULATORY GUIDE 236: Do I need an AFS licence to participate in carbon markets? © Australian Securities and Investments Commission September 2024 Page 15 RG 236.44 General advice (but not personal advice) provided by issuers of financial products (e.g. interests in a managed investment scheme or derivatives) is also exempt from the definition of ‘financial product advice’ in circumstances where the product issuer: (a) prepares general advice about the issuer’s own product(s), but only where a third-party licensee gives the advice to the recipients (see RG 36); or (b) provides general advice about the issuer’s own products in circumstances where the issuer is not licensed to provide financial product advice and, at the time of giving the advice, the issuer advises the client that it is not licensed and, if appropriate, recommends that the client obtain and read a copy of the Product Disclosure Statement (PDS) or Short-Form PDS for the product before making a decision about the product, and notifies the client about any cooling-off period (see RG 36). RG 236.45 If you provide information to other people on a regulated emissions unit that may influence a person’s decision about that emissions unit, this may constitute financial product advice. Similarly, information provided on financial products that are associated with emissions units in some way (e.g. derivatives and managed investment schemes) may also constitute financial product advice. RG 236.46 For information and examples of when information provided in the context of carbon markets may be financial product advice, see Section D. Dealing in a financial product RG 236.47 Unless exempt, the following conduct may constitute ‘dealing in a financial product’: (a) applying for or acquiring a financial product; (b) issuing a financial product; (c) for securities or managed investment schemes, underwriting the securities or interests; (d) varying a financial product; or (e) disposing of a financial product. RG 236.48 However, if a person is simply dealing on their own behalf (e.g. buying a financial product for themselves), this is not an activity that requires an AFS licence, unless they are issuing a financial product. Therefore, the main types of dealing regulated under the Corporations Act are: (a) dealing on another’s behalf, for example: (i) as an arranger of a transaction between other parties; (ii) as an agent binding their principal as a party to a transaction; or Page 16 REGULATORY GUIDE 236: Do I need an AFS licence to participate in carbon markets? © Australian Securities and Investments Commission September 2024 Page 16 (iii) as a principal on behalf of another person with a beneficial interest in the transaction; and (b) issuing a financial product (including issuing a derivative or an interest in a managed investment scheme). Note: For more information on dealing in financial products, including where arranging and acting as an agent, and exemptions from the definition of ‘dealing’, see RG 36. RG 236.49 Some activities undertaken in carbon markets may constitute dealing in a financial product. For information and examples of when activities relating to emissions units may constitute dealing in a financial product, or when they are excluded from the meaning of ‘dealing’, see Section D. Making a market for a financial product RG 236.50 Generally, a person ‘makes a market for a financial product’ if: (a) they regularly state the prices at which they propose to buy or sell financial products on their own behalf; (b) other people can reasonably expect to be able to regularly buy or sell at those stated prices; and (c) the actions of the person do not constitute operating a financial market because of the effect of s767A(2)(a) of the Corporations Act. RG 236.51 It is not necessary for a market maker to quote both buy and sell prices—a person may still be making a market if they quote only the prices at which they propose to buy a financial product, or only the prices at which they propose to sell a financial product. RG 236.52 There is a distinction between making a market for a financial product and operating a financial market. To distinguish between the two, the general test is whether the person operates a facility where the prices for a financial product are quoted on behalf of other people (operating a financial market) or solely on their own behalf (making a market). A person will not be operating a financial market if their conduct consists solely of making or accepting offers on their own behalf, or on behalf of one party to the transaction only: see s767A(2)(a) of the Corporations Act. Note 1: For more information on making a market, see s766D of the Corporations Act. Note 2: The licensing and operation of financial markets are beyond the scope of this guide. For more information on operating a financial market, see Div 5 of Pt 7.1 of the Corporations Act and RG 172. RG 236.53 Offering to enter into a carbon abatement contract does not constitute making a market for a financial product. RG 236.54 See Section D for examples of what may constitute making a market for regulated emissions units. Page 17 REGULATORY GUIDE 236: Do I need an AFS licence to participate in carbon markets? © Australian Securities and Investments Commission September 2024 Page 17 Operating a managed investment scheme RG 236.55 Managed investment schemes often include managed funds, pooled investments or collective investments. Generally, in a managed investment scheme: (a) people are brought together to contribute money or money’s worth to acquire rights to benefits produced by the scheme; (b) these contributions are pooled together or used in a common enterprise to produce financial benefits for the contributors; and (c) some other person operates the enterprise, and those contributing do not have day-to-day control over its operation. Note: The definition of ‘managed investment scheme’ is set out in s9, and Ch 5C of the Corporations Act regulates the operation of managed investment schemes. RG 236.56 An interest in a managed investment scheme—with the exception of schemes that have 20 or fewer members and some managed investment schemes that are not registered—is a financial product. RG 236.57 A managed investment scheme must be registered with ASIC if it includes one or more retail investors and: (a) has more than 20 members; or (b) is promoted by a person who is in the business of promoting managed investment schemes. Note: If we determine that a number of managed investment schemes are closely related, and the total number of members of all of the schemes exceeds 20, those schemes must also be registered: see s601ED(1)(c) of the Corporations Act. RG 236.58 Registered schemes must meet the requirements of Ch 5C of the Corporations Act, including by having a single responsible entity operate the scheme, and having in place a constitution and compliance plan. A responsible entity must be a public company and must hold an AFS licence authorising it to operate the scheme. Under its AFS licence, the responsible entity must meet certain licence conditions, including meeting financial resource requirements: see PF 209 and RG 166. RG 236.59 Operators of unregistered schemes also must generally hold an AFS licence to issue, vary and dispose of interests in the scheme to wholesale investors. They must also hold an AFS licence to provide any other relevant financial services in relation to the scheme and its underlying assets. Note: See Information Sheet 251 AFS licensing requirement for trustees of unregistered managed investment schemes (INFO 251). RG 236.60 Managed investment schemes hold scheme assets in a wide variety of structures and can hold a wide range of asset types, including different types of financial products, land and other assets. Page 18 REGULATORY GUIDE 236: Do I need an AFS licence to participate in carbon markets? © Australian Securities and Investments Commission September 2024 Page 18 RG 236.61 For information and examples of when the arrangements for entities participating in carbon markets or in carbon abatement activities may constitute a managed investment scheme, see Section C. Providing a custodial or depository service RG 236.62 A ‘custodial or depository service’ generally involves a person holding financial products or beneficial interests in financial products on trust for, or on behalf of, another person (usually for a fee). Note: See s766E of the Corporations Act for the general definition of ‘provide a custodial or depository service’ and for exceptions to this definition. RG 236.63 For example, where a registered holder of ACCUs or SMCs under the Australian National Registry of Emissions Units Act 2011 (ANREU Act) holds ACCUs or SMCs on behalf of other people who are the beneficial owners of the ACCUs or SMCs, this may constitute a ‘custodial or depository service’. RG 236.64 A custodial or depository service will not be provided where the provider of the service and its associates have no more than 20 clients in aggregate for all custodial or depository services it provides: see reg 7.1.40(1)(c) of the Corporations Regulations. RG 236.65 For information and examples of when entities may provide a custodial or depository service, see Section C. AFS licence authorisations and conditions RG 236.66 A person requires an AFS licence to carry on a business of providing financial services in Australia, unless they are exempt. The types of financial services provided by a person will determine what specific AFS licence authorisations they require: see Section F for more details about licence authorisations. RG 236.67 Each AFS licence is subject to various conditions. PF 209 sets out the standard licence conditions which, subject to individual circumstances, will usually be applied to licences authorising a person to provide financial services. There are also prescribed conditions for all licences that are set out in reg 7.6.04 of the Corporations Regulations, which apply in addition to the conditions in PF 209. AFS licensees and their representatives RG 236.68 In many cases, an AFS licensee carries on its business through its representatives. Employees and directors of the licensee or a related body corporate of the licensee, are a licensee’s ‘representatives’. Additionally, a licensee may authorise another, otherwise unrelated, person (including a Page 19 REGULATORY GUIDE 236: Do I need an AFS licence to participate in carbon markets? © Australian Securities and Investments Commission September 2024 Page 19 body corporate) to provide financial services on its behalf. This type of representative is called an ‘authorised representative’. Note: See s9 of the Corporations Act for the definition of ‘representative’ and ‘authorised representative’. In this guide, references to ‘representatives’ and ‘authorised representatives’ are references to such people as defined in the Corporations Act, and should be distinguished from people referred to in the ANREU Act as ‘authorised representatives’. RG 236.69 People acting as representatives of AFS licensees are exempt from needing to hold a licence themselves. Additionally, representatives acting for people who are exempt from holding a licence are similarly exempt: see s911A(2)(a) of the Corporations Act. RG 236.70 AFS licensees are ultimately responsible for supervising the conduct of their representatives: see Section F for more details on licensees’ obligations. RG 236.71 We maintain a register of AFS licensees and authorised representatives of licensees. This register can be searched online through ASIC Connect. Note: We also maintain a register of financial advisers that provide personal advice on investments, superannuation and life insurance on our Moneysmart website. ‘Wholesale’ versus ‘retail’ clients RG 236.72 The AFS licensing regime recognises two main types of clients—wholesale and retail. A financial product or service is generally considered to be provided to a retail client, unless the client is classified as a ‘wholesale client’. RG 236.73 A person may fall within the definition of a ‘wholesale client’ if, among other things: (a) the value of the financial products provided to them, or to which a financial service relates, is $500,000 or more; Note: Where a financial service is provided for more than one financial product at a time in a class of financial products, the cumulative value of the financial products is taken into account in assessing whether a client is a retail client: see reg 7.1.17B of the Corporations Regulations in relation to an issuer providing a class of financial products and reg 7.1.19 of the Corporations Regulations in relation to the value of investment- based financial products. (b) they have net assets of at least $2.5 million; (c) they have had a gross income for each of the past two financial years of at least $250,000; (d) they are a ‘professional investor’—this category includes AFS licensees, listed entities, banks, and other specified entities that may be presumed to have the expertise or access to professional advice to justify their being treated as a wholesale client; or (e) they are a ‘sophisticated investor’ being provided with certain financial products and services that are not provided in connection with the client’s business, and: Page 20 REGULATORY GUIDE 236: Do I need an AFS licence to participate in carbon markets? © Australian Securities and Investments Commission September 2024 Page 20 (i) the AFS licensee is satisfied, for reasons given to the client in writing, that the client is experienced in assessing the product or service; and (ii) the client has acknowledged in writing that they have not received a PDS or other information required to be given to a retail client and are not owed obligations that are owed to a retail client by the AFS licensee. Note 1: See s761G and 761GA of the Corporations Act and regs 7.1.11 to 7.1.28 of the Corporations Regulations for provisions on wholesale and retail clients. Note 2: A person that meets the individual wealth tests in criteria (b) and (c) above, will only be classified as a ‘wholesale client’ if an accountant has certified within the last six months that they meet the criteria. RG 236.74 Some requirements of the AFS licensing regime apply only if you are providing services to retail clients. This is because wholesale clients are in a better position to look after their own interests. For example, AFS licensees that provide financial services to retail clients must have in place dispute resolution and compensation arrangements: see Section F. Page 21 REGULATORY GUIDE 236: Do I need an AFS licence to participate in carbon markets? © Australian Securities and Investments Commission September 2024 Page 21 C Types of emissions units and related products that are financial products Key points The emissions units that are financial products are: • Australian carbon credit units (ACCUs) (see RG 236.75 to RG 236.79); • safeguard mechanism credit units (SMCs), which are a type of eligible international emissions units (EIEUs) (see RG 236.80 to RG 236.85); and • EIEUs other than SMCs (see RG 236.88 to RG 236.94). Other types of emissions and environmental units are generally not financial products. A carbon abatement contract is not a financial product. Generally, derivatives over any emissions unit, and interests in a managed investment scheme involving carbon abatement activities or emissions units (including non-domestic units), are financial products. Australian carbon credit units RG 236.75 An ACCU is a unit issued by the Clean Energy Regulator and is a financial product. ACCUs are issued to a project proponent for undertaking activities that result in carbon abatement in an eligible offsets project under the ACCU Scheme (referred to in this guide as an ACCU Scheme project). RG 236.76 The ACCU Scheme, established under the CFI Act, encourages landholders, communities and businesses to undertake activities that: (a) avoid the release of greenhouse gas emissions; (b) remove carbon dioxide from the atmosphere; and (c) sequester carbon in living biomass, dead organic matter or soil. These activities may be registered as ACCU Scheme projects if they are undertaken in accordance with specified methods. RG 236.77 For each tonne of carbon dioxide equivalent emissions stored or avoided by an ACCU Scheme project, the Clean Energy Regulator issues an ACCU to the project proponent. RG 236.78 Project proponents may, among other things: (a) sell ACCUs to the Government through a carbon abatement contract; (b) surrender ACCUs to the Clean Energy Regulator to offset their own greenhouse gas emissions; and (c) trade ACCUs on the carbon market. Page 22 REGULATORY GUIDE 236: Do I need an AFS licence to participate in carbon markets? © Australian Securities and Investments Commission September 2024 Page 22 Carbon service providers are sometimes contracted by landholders or businesses to be the project proponent and bear the responsibility for, and the legal obligation to carry out, the ACCU scheme project. RG 236.79 Other participants in the carbon market for ACCUs include: (a) responsible emitters for safeguard facilities, trading in ACCUs to meet the safeguard facility’s baseline emissions number under the NGER Act; Note: See RG 236.80 to RG 236.84 for more information regarding the safeguard mechanism. (b) other businesses and individuals that voluntarily purchase ACCUs to voluntarily offset the greenhouse gas emissions of their business, product or other endeavour; and (c) financial institutions and other liquidity providers that trade ACCUs as part of their financial services business activities. Safeguard mechanism credit units RG 236.80 An SMC is a type of EIEU, and like other types of EIEUs, it is a financial product. RG 236.81 However, an SMC is quite different from other EIEUs. SMCs are issued in Australia by the Clean Energy Regulator, whereas most other kinds of EIEUs are issued outside of Australia and do not involve the Clean Energy Regulator. Further, responsible emitters for safeguard facilities may be incentivised to trade in SMCs or ACCUs to meet their baseline emissions number, whereas there is no such incentive for other kinds of EIEUs. Note that: (a) a safeguard facility is a facility whose total amount of covered emissions from its operations during the financial year has a carbon dioxide equivalence of more than 100,000 tonnes; and Note: See RG 236.88 to RG 236.94 for a detailed explanation of the other types of EIEUs. The Clean Energy Regulator only issues SMCs under the NGER Act to a responsible emitter for a safeguard facility or eligible facility where the facility’s covered emissions are below its baseline emissions number for a monitoring period. (b) under the NGER Act, all safeguard facilities are given a baseline emissions number, and their responsible emitters must ensure the safeguard facility’s net emissions number does not exceed that baseline emissions number for the monitoring period—otherwise, they may be liable for a civil penalty arising from action by the Clean Energy Regulator. Note: ‘Baseline emissions number’ is the number determined in accordance with the relevant formula in the Safeguard Rules in relation to that facility: see s22XL of the NGER Act and s9 to 12 of the Safeguard Rules. ‘Net emissions number’ means the number of tonnes of carbon dioxide equivalence of the total amount of covered emissions of greenhouse gases from the operation of the facility during the period, less any ACCUs or SMCs surrendered: see s22XK of the NGER Act. Page 23 REGULATORY GUIDE 236: Do I need an AFS licence to participate in carbon markets? © Australian Securities and Investments Commission September 2024 Page 23 RG 236.82 If a safeguard facility or eligible facility’s covered emissions are below its baseline emissions number for a monitoring period, and certain other legislative requirements are satisfied, the Clean Energy Regulator issues its responsible emitter with an amount of SMCs worked out in accordance with Pt 3A of the Safeguard Rules. Note: An eligible facility is a facility whose total amount of covered emissions is less than 100,000 tonnes but was more than 100,000 tonnes in the past. See s58B of the Safeguard Rules for the full definition of an ‘eligible facility’. RG 236.83 Conversely, if the responsible emitter for a safeguard facility considers that its covered emissions will be higher than its baseline emissions number for the monitoring period (referred to as an ‘excess emissions situation’ under the NGER Act), in order to avoid a penalty, it can purchase sufficient ACCUs or SMCs and surrender them to the Government so as to reduce its net emissions number to the baseline emissions number. In this way, the safeguard mechanism arrangements may create an incentive for responsible emitters for safeguard facilities to trade in SMCs and ACCUs. RG 236.84 For a responsible emitter to surrender units to the Government, it can: (a) use any existing SMCs or ACCUs it holds; (b) purchase additional SMCs or ACCUs from another registered holder; (c) purchase additional ACCUs from the Government (in limited circumstances); or (d) arrange to have a third party surrender SMCs or ACCUs to the Government on its behalf. Interaction between the safeguard mechanism and the ACCU Scheme RG 236.85 The safeguard mechanism legislation operates so that a safeguard facility may participate in the ACCU Scheme but its abatement activities in relation to covered emissions are only counted once for the purposes of calculating its net emissions. RG 236.86 Project proponents cannot register new eligible offsets projects after May 2023 that solely abate covered emissions from the operation of safeguard facilities: see s27(4)(l) of the CFI Act and s20 of the Carbon Credits (Carbon Farming Initiative) Rule 2015 (CFI Rules). This is because such abatement could be used to reduce a safeguard facility’s net emissions number as well as to generate ACCUs, thereby counting the same emissions reduction twice. RG 236.87 Responsible emitters for safeguard facilities, other than landfill facilities, can enter into new eligible offsets projects that reduce emissions other than covered emissions, as these kinds of emissions are not covered by the safeguard mechanism. Note: See s15(2)(h) and 27(4)(l) of the CFI Act and s9(8) to (10) of the CFI Rules for more detail. Page 24 REGULATORY GUIDE 236: Do I need an AFS licence to participate in carbon markets? © Australian Securities and Investments Commission September 2024 Page 24 Other types of eligible international emissions units (EIEUs) RG 236.88 This section relates to EIEUs other than SMCs. RG 236.89 EIEUs are defined in section 4 of the ANREU Act as: (a) a certified emission reduction (other than a temporary certified emission reduction or a long-term certified emission reduction); (b) an emission reduction unit; Note: Emission reduction units are issued in accordance with the relevant provisions of the Kyoto rules. It is immaterial whether the unit is issued in or outside of Australia. (c) a removal unit; (d) a prescribed unit issued in accordance with the Kyoto rules; and (e) an SMC (as the legislative rules specify that kind of unit). Note 1: ‘Kyoto rules’ is defined in s4 of the ANREU Act. Note 2: The Australian National Registry of Emissions Units Rules 2023 specifies SMCs as EIEUs in accordance with the ANREU Act. RG 236.90 Unlike SMCs, there is no incentive under a legislative framework to trade in other EIEUs in order to meet Australian legislative requirements involving emissions reduction. RG 236.91 An EIEU cannot be purchased by the Clean Energy Regulator under a carbon abatement contract. RG 236.92 EIEUs other than SMCs cannot be used by a responsible emitter to reduce a safeguard facility’s net emissions number under the Safeguard Rules unless they are specified in the Safeguard Rules. Note: No other EIEUs have been prescribed or specified for this purpose. RG 236.93 EIEUs may be traded in the domestic carbon market. RG 236.94 Each type of EIEU has the status of a financial product in Australia, regardless of whether it is issued, acquired, held or disposed of outside Australia. Accordingly, an Australian person or company conducting a financial services business in Australia in relation to EIEUs held overseas may be required to hold an AFS licence. RG 236.95 In some cases, a person or company from outside Australia may be required to hold an AFS licence to carry on a financial services business in Australia: see RG 121. However, if the only activity you undertake is to hold EIEUs issued outside Australia, registered in a foreign registry, you will not require an AFS licence. Page 25 REGULATORY GUIDE 236: Do I need an AFS licence to participate in carbon markets? © Australian Securities and Investments Commission September 2024 Page 25 Financial products related to emissions units RG 236.96 There are two main types of financial products related to emissions units that are specified in s764A of the Corporations Act. They are: (a) derivatives over emissions units; and (b) interests in a managed investment scheme. RG 236.97 Products that are not derivatives or interests in a managed investment scheme may still be a financial product under the general definition of a financial product: see s763A of the Corporations Act. For example, where a contract in relation to carbon abatement (that generates regulated emissions units) is a facility to make a financial investment, it is a financial product. Derivatives RG 236.98 A derivative is defined as an arrangement where the amount of the consideration or the value of the arrangement is ultimately determined, derived from, or varies by reference to (wholly or in part) the value or amount of something else, subject to certain exceptions: see s761D of the Corporations Act. RG 236.99 Forms of arrangements in carbon markets that are likely to be a derivative over emissions units include arrangements where the value of the arrangement varies by reference to the quantity, price, volume or value of emissions units—for example, an option to acquire emissions units at a fixed price on a future date. Note: A carbon abatement contract is neither a derivative nor a financial product: see regs 7.1.04(8)(c) and 7.1.07J of the Corporations Regulations. Example 2: Options contract for the provision of SMCs A responsible emitter enters into a contract for an option to purchase SMCs from another responsible emitter in six months’ time at the price of $40 per SMC. The contract is a derivative because it is an option to acquire emissions units at a fixed price on a future date. While the price of SMCs is fixed, the value of the arrangement varies by reference to the value of SMCs as at any given time during the life of the options contract. RG 236.100 A derivative over an emissions unit or environmental unit is a financial product regardless of whether the underlying unit is a financial product. For example, forward contracts for each of the following products are derivatives, even though only the first example (i.e. ACCUs) is itself a financial product: (a) ACCUs; Page 26 REGULATORY GUIDE 236: Do I need an AFS licence to participate in carbon markets? © Australian Securities and Investments Commission September 2024 Page 26 (b) Verified Carbon Units; or (c) Victorian Energy Efficiency Certificates. RG 236.101 A contract for the future provision of services is excluded from the meaning of ‘derivative’: see s761D(3)(b) of the Corporations Act. It can often be difficult to determine in practice whether s761D(3)(b) applies. It will depend on the facts of each case and requires consideration of the substance of the contract, objectively ascertained from the contractual terms. The exclusion in s761D(3)(b) will not apply to every contract that involves some provision of services in the future. For example, where the substance of the contract is to provide exposure to an underlying product (such as ACCUs), and the provision of future services are merely incidental or ancillary to that purpose, the exception will not apply. Note: See Joffe v The Queen [2012] NSWCCA 277; Australian Securities and Investments Commission v Web3 Ventures Pty Ltd [2024] FCA 64; and International Litigation Partners Pte Ltd v Chameleon Mining NL [2011] NSWCA 50. Example 3 Arrangement that is neither a derivative nor a contract for the future provision of services A company purchases ACCUs from a carbon trader that holds ACCUs in its ANREU account. The contract is immediately settled on terms where: 1. The company pays the carbon trader cash to purchase the ACCUs on its behalf. 2. The carbon trader immediately retires ACCUs from its ANREU account on behalf of the company. 3. The company has an immediate right to claim that it is attributing the retirement of the ACCUs to a reduction of its net Scope 1 emissions. The arrangement is not a derivative because consideration is not provided at a future time. The arrangement also does not provide future services because the benefit to the purchaser is available immediately upon settlement and no service is proffered in the future. This is the case even if the claim of the benefit occurs at some future time, such as in a sustainability report of the company, lodged two months later. Note: In this arrangement, the carbon trader provides a financial service of ‘dealing’ in ACCUs by retiring them on behalf of the company and