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Personal Property Securities reform in Australia - what should financiers be doing now to prepare for it?

“[PPS legislation] will affect the way security is taken over almost every form of property other than land. It will also affect transactions that are currently not regarded as “securities”, and transactions that are currently not registrable.”

The Personal Property Securities Act 2009 (Cwlth) is now law.

The Personal Property Securities (PPS) legislation will establish a national system for the registration of security interests in personal property. It sets out new rules for the creation, priority and enforcement of security interests in personal property. This will affect the way security is taken over almost every form of property other than land. It will also affect transactions that are currently not regarded as “securities”, and transactions that are currently not registrable. The new system is expected to be in place by May 2011 (Start Date), with a two year transitional period.

Clearly, financiers will be among those most affected by this legislation, and major structural and other changes will be required in their systems, processes, policies, procedures and documentation, well in advance of the Start Date.

Financiers will need to consider, at a minimum, the impact of PPS on or in respect of the following:

  • Standard documents. Existing security documents are compatible with the new regime but will deal with concepts that are largely no longer relevant (for example, the concept of the crystallisation of a floating charge). Changes to many security documents will be required. Moreover, some documents and transactions which are not currently regarded as “security” and thus not registered (or even registrable) will be security interests under the new regime (eg retention of title and some flawed asset arrangements).

The legislation also deems certain transactions to be security interests even if they do not secure the payment or performance of obligations (eg leases of goods for a term of more than one year and transfers of receivables).

  • Credit approval procedures. Financiers will need to consider, as a credit matter, whether the circumstances in which security is required for lending and other transactions will need to change as a result of PPS. The relative risks and benefits of the new security types, and their effect on policies, need to be taken into account. For example, the supply of goods on retention of title terms is a security interest. This means that borrowers who supply goods on retention of title terms will need to perfect their security interests in the goods they supply.

Financiers will need to consider the risk profile of, and how to value assets owned by, such borrowers. Similar issues arise in relation to borrowers who lease goods as some of these leases are deemed to be security interests under the Bill (for example, leases for a term of more than one year). Financiers should also analyse whether the position of a secured party is weaker under the PPS regime and the impact this may have on security coverage, gearing ratios, pricing and regulatory capital.

  • Policies and procedures for execution. Financiers will need to consider whether PPS will change the way in which they currently manage the insource/outsource mix of legal services for documenting and executing transactions and the impact on legal costs going forward.
  • Policies, procedures and systems for registration of security interests. The register will be a single national register which is online internet-based and accessible 24 hours a day, 7 days per week with real time operation. Security interests will be able to be registered by lodging a financing statement (and financing change statements) in electronic form over the internet.

This will be much simpler than the current ASIC form 309. Security interests can be registered before the security agreement is entered into, and a single financing statement can relate to more than one secured party and debtor and more than one security agreement between the same parties. A copy of the security agreement need not be lodged (but certain persons may request a copy of the agreement from the secured party and the secured party must comply with this request unless exceptions apply). Policies, procedures and systems will need to be reviewed to reflect these changes.

  • Policies, procedures and systems for enforcement of security interests. The PPS legislation includes enforcement provisions and some of these cannot be contracted out of.
  • Existing contracts as part of transitional arrangements. Existing security interests will be transitioned to the new regime over a 2 year period. Some security interests registered on existing registers will be migrated to the PPS register (for example, charges registered on the ASIC Register of Charges). Security interests which will not be migrated, or which are not currently registered on any existing registers (eg leases, retention of title arrangements and some flawed asset arrangements), will need to be registered on the PPS register before the end of the transitional period to preserve priority.

Financiers will need to review existing contracts and products to determine if any need to be registered as security interests and consider any other impact on existing transactions. Given the considerable breadth of the categories of interests registrable under PPS, the task of identifying all relevant agreements should not be underestimated.

  • Staff education. Staff will need to be trained on new documents, policies and procedures and compliance manuals will need to be updated or rewritten.
  • External resourcing and assistance. External assistance is likely to be needed to implement the above, in areas such as legal advice, preparation of standard documentation, systems and technology.

Consideration should be given to whether PPS changes can (or should) be implemented together with other changes required because of other market regulatory developments (for example, national consumer credit laws, unfair contracts laws and regulation of margin lending). This will avoid unnecessary re-working of documents and procedures over a short period.

We know from the experience in New Zealand with the implementation of its change to a PPS regime that the period until the Start Date, and the 2 year transitional period, is very short. Dealing with PPS is not something that can be pushed down the priority list.

We can help - both by way of assisting with the development of an overall project plan for dealing with the transition to PPS, and also with particular aspects such as documentation changes.

 

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