Australia: Proposed licensing requirements for super fund borrowing arrangements

Superannuation Update

Limited recourse borrowing arrangements involving superannuation funds are set to be regulated under proposed new rules to the Corporations Act 2001 (Act).

The proposed measures will deem a limited recourse borrowing arrangement (LRBA), under section 67A of the Superannuation Industry (Supervision) Act 1993 (SIS Act), to be a financial product under Chapter 7 of the Act with the result that:

  • people advising on these arrangements will need an appropriate Australian Financial Services Licence (AFSL), or need to be the authorised representative of a licensee with appropriate authorisations, to provide advice on the arrangements;
  • the issuer of the LRBA will need an appropriate AFSL licence if they issue the LRBA as part of a financial services business; and
  • the persons involved with the LRBA will need to consider whether they need to comply with the disclosure provisions of the Act, such as giving a Statement of Advice or issuing a Product Disclosure Statement for the LRBA.

Who is the issuer of the LRBA?

The definition of 'issuer' under the proposed legislation is exceedingly broadly and includes each party to the arrangement. The practical effect is that the fund trustee, lender and security trustee are all deemed to be issuing the LRBA.

The effect of this provision is likely to be far reaching, given the Act requires that the person who issues a financial product is responsible for preparing the Product Disclosure Statement for the financial product. The fact that all parties to an LRBA are deemed to issue the LRBA is likely to cause a significant amount of confusion as to which 'issuer' under the arrangement, if any, must comply with the disclosure requirements under the Act to prepare and issue the Product Disclosure Statement for the LRBA.

As a superannuation fund trustee is generally treated as a retail client for the purposes of the Act, unless the fund has assets of at least $10 million, the 'issuer' of the LRBA will be required to provide the fund trustee with a Product Disclosure Statement because the LRBA will be a financial product. Given that LRBAs are specifically issued to fund trustees and regulated under the SIS Act, the fund trustee will generally be a retail client.

Are there any exclusions?

Under the proposed regulations, an LRBA is declared to be a financial product. However, if an AFSL holder has a securities or derivatives authorisation it will be deemed to have the necessary authorisations to comply with the proposed licensing requirements. Most advisers will have authorisations to advise and deal in securities on their AFSL (and many will also have derivatives authorisations), so they will be able to give advice on LRBAs.

The proposed regulations specifically exclude custodial or depository services provided as part of LRBA arrangements from the application of the licensing requirements. Therefore, the security trustee holding the asset on trust for the fund trustee will not be required to be licensed under the Act to enter into the arrangement.

Further, a LRBA is deemed not to be a credit facility under the proposed legislation. Lenders have previously been able to take some comfort from the fact that if they were merely providing the loan, they were providing a credit facility, which is excluded from the licensing arrangements. However, lenders that put together or market an instalment warrant type product are likely to be caught under the proposed legislation, particularly given that all parties to an LRBA are deemed to be issuers.

We expect that most banks would have an authorisation under their AFSL to issue securities and/or derivatives, so they will have the necessary authorisations to be involved in the LRBA as lender (given they will be a deemed issuer of the LRBA). However, smaller lenders that don't engage in other financial services business may not have these authorisations on their AFSL, or may only have an Australian Credit Licence rather than an AFSL.

Lawyers involved in the provision of legal advice and the preparation of legal documents will also be excluded from the operation of the proposed legislation under the general exemption in the Act.

The licensing provisions in Chapter 7 of the Act only apply to the extent that a person carries on a financial services business. In our view, a self managed superannuation fund trustee entering into an LRBA on a one-off basis would not be carrying on a financial services business so would not need to comply with the licensing provisions. Similarly, where a related party is lending to a fund trustee on a one off basis, they will generally not be caught by the proposed licensing provisions as they are not in the business of providing financial services.

What are the implications for accountants?

The proposed legislation will have the greatest impact on accountants who would otherwise assist fund trustees in setting up an LRBA. If the legislation is passed in its current form, accountants will be required to be licensed to provide advice relating to the structure of, and assets being acquired under, a LRBA.

An option for accountants is to become an authorised representative of an AFSL holder with the appropriate authorisations. Under this option, accountants will be required to provide clients with a statement of advice and comply with the disclosure, education and reporting requirements under the Act. The impact of the proposed measure on the business model adopted by accountants and the independence of accountants is likely to be a source of contention.

What to do going forward?

The provisions are designed to bring superannuation fund borrowing arrangements within the scope of the financial consumer protection framework to prevent fund trustees being given inappropriate advice from unlicensed and unqualified dealers. However, the provisions are likely to have a much wider impact.

If the proposed regulations are passed in their current form, we recommend that accountants reassess whether advising fund trustees on LRBAs is a service offering they wish to continue to provide and if so, take steps to become an AFSL holder in their own right or an authorised representative of an appropriately authorised licence holder. If accountants elect to go down this route, it is important they understand the broader obligations imposed on representatives under the Act, such as disclosure and reporting requirements.

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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