Australia: Raising the bar - new financial requirements for responsible entities

Last Updated: 24 November 2011
Article by Ashleigh Fehrenbach


ASIC has released final details of the new financial requirements to be imposed on responsible entities (REs) of registered managed investment schemes (MISs).

The new requirements follow a consultation process with industry participants, and represent the first significant changes to the rules covering financial requirements for REs since 2002.

The financial requirements relate to the RE's own resources, as opposed to the assets of the scheme(s) managed by the RE.

In brief, the new requirements relate to an RE's:

  • cash flow forecasting;
  • minimum net tangible assets (NTA); and
  • liquidity,

as well as audit sign-off on those matters.

REs have until 1 November 2012 to comply with the new requirements, and ASIC has indicated that extensions will be available only in exceptional cases.

Time for a change?

Apart from the passage of time since the superseded rules were implemented, the changes are driven by two primary - but complementary - objectives, namely:

  • ensuring that REs managing investors' money are backed by appropriate financial substance, particularly as Australia raises its profile as a leading financial centre with the consequent need to ensure that RE capital requirements are comparable with global benchmarks; and
  • responding to recent high-profile MIS collapses where the REs' financial resources made it difficult for the relevant schemes to be wound up in an orderly fashion.

More specifically, the changes are intended to assist to ensure that:

  • there are arrangements to meet operating costs throughout the life of the scheme - this is to be achieved through the cash flow forecasting, capital level and liquidity requirements, and by seeking to ensure that capital levels reflect the operational risk of the particular RE;
  • if the RE does fail, there are funds available for the orderly transition to a new RE or for the winding up of the scheme; and
  • there is an alignment of interests between the RE and the scheme investors, by requiring the RE to have sufficient capital at risk.

Summary of new requirements

The key new requirements are as follows:

  • cash flow forecasting - an RE will be required to prepare a rolling 12 month cash flow forecast. The forecast must:
    • be updated, including whenever there is any material change;
    • set out the calculations and assumptions used to arrive at the forecast;
    • be approved at least quarterly by the board of the RE;
    • demonstrate that the RE will have sufficient financial resources to meet its expected liabilities over the period; and
    • demonstrate that the RE will meet the liquidity requirements (outlined below) throughout the period;
  • net tangible asset (NTA) requirements - where scheme assets are held by a custodian, the RE must hold NTA of the greatest of:
    • $150,000;
    • 0.5% of the average value of scheme property (capped at $5 million) - the average value is determined by reference to a combination of historical and forecast figures for the scheme; and
    • 10% of the RE's average 12 month revenue (with no cap on this amount) - the average revenue is determined by reference to a combination of historical and forecast figures for the RE,
  • and for the purposes of calculating an RE's NTA, the RE's maximum potential liability under guarantees it has given (other than guarantees that are limited to scheme property) must be taken into account as liabilities of the RE.

    If scheme assets are not held by a custodian that itself meets specific custodian financial requirements (which have not changed), then the RE must hold NTA of the greater of $5 million and 10% of the RE's average 12 month revenue (with no cap on this amount);

  • liquidity requirements - an RE must hold at all times:
    • in cash or cash equivalents, at least the greater of:
      • $150,000; and
      • 50% of its required NTA (see above); and
    • the balance of its required NTA as "liquid assets" (being unencumbered assets that can be reasonably expected to be realised for market value within 6 months); and
  • audit requirements - an RE must obtain and lodge an annual audit opinion that, in broad terms:
    • the RE has met the cash flow forecasting, NTA and liquidity requirements for the relevant period (including that the cash flow forecast appears on its face to meet the RE's 12 month requirements); and
    • the auditor has no reason to believe that the RE has failed to manage the risk of insufficient financial resources or has failed to meet the financial requirements of its licence, or that the RE's cash flow forecasts are inadequate or based on unreasonable assumptions.


The new requirements represent a significant raising of the bar in terms of the requirements REs must meet. In arriving at the new standards, ASIC was cognisant of the tension between avoiding unjustifiable barriers to entry for new REs and schemes (on the one hand) and ensuring that market participants do in fact have the necessary financial resources to ensure they can meet their commitments and investors are protected (on the other hand).

The changes are likely to result in an increase in cost of business for REs, which may flow through to the fees charged to, and other recoveries REs make from, schemes. This is perhaps an unavoidable consequence of the disruption and collapses that the sector has faced in the last few years.

It may also lead to consolidation of RE's, whether in-house or through mergers, or increased outsourcing of the RE function by managers.

REs need to be aware of the new requirements and take steps to ensure that they are in a position to comply by 1 November 2012.

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.

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