Under exposure draft regulations just released, limited recourse borrowing arrangements issued to superannuation funds will be classed as financial products.
There are various problems with the draft regulations, as outlined in this alert. We encourage you to make a submission to Treasury or to encourage your industry body to do so by the closing date for submissions, which is 25 June.
Under the draft regulations, a person who:
issues a limited recourse borrowing arrangement to a superannuation fund
arranges for the issue of such a borrowing, or
provides advice about such a borrowing,
will need to hold an Australian financial services licence (“AFSL”) or need to be the authorised representative of a licensee. The authority will presumably be able to deal in or provide financial product advice about limited recourse borrowing arrangements as defined in the regulations. No new definition will be introduced into the Act in the way that a definition of margin lending facility was inserted. The issuer of the limited recourse borrowing arrangements will be required to prepare a PDS for the “product”.
Licensees who are authorised to deal in or provide financial product advice about derivatives will not need to apply for a licence or a variation to their licence. It is far from clear why this would be an appropriate authorisation. The explanatory statement says that limited recourse borrowing arrangements are “a sophisticated financial derivative product”. In many cases, the “product” is neither sophisticated nor financial. It is not a derivative and not, yet, a product.
The key problems with the draft regulations are:
There is rarely an “issuer” of a limited recourse borrowing arrangement. The explanatory statement suggests that the lender is intended to be the issuer, but the draft regulations are much broader. They would certainly include the issuer of securities (for instalment warrants for example). It is not clear whether this is intended, nor whether there can or should be multiple issuers of the arrangement.
The precise nature and scope of the financial product is far from clear. In addition to the licensing issues, this will be important for the issuer of the PDS. Where a bank provides a limited recourse loan to a superannuation fund trustee who uses the proceeds to purchase real estate, will the bank need to include information about the real estate in the PDS? It will clearly be a key feature of the arrangement. Will the real estate agent require an AFSL?
The regulation provides that “an arrangement relating to the acquisition of an asset under subsection 67(4A) of the SIS Act [the Superannuation Industry (Supervision) Act 1993 (“SIS”)]” is a financial product. This definition is much broader than the limited recourse borrowing arrangement referred to in the explanatory statement (and the term “limited recourse borrowing arrangement” is, itself, uncertain). As drafted, the arrangements with the security trustee would be caught. Will it require an AFSL, and if so, what for - to issue a financial product? Will it need to issue its own PDS?
One explanation for these problems might be found in the references in the explanatory statement and the draft regulations to “instalment warrants”. The regulations have been drafted without regard to the fact that many limited recourse borrowings are made by superannuation fund trustees to purchase assets other than securities under instalment warrants, in particular real estate. They also ignore the recent Bill which will amend the SIS Act provisions on borrowing. Those amendments will remove the current reference to instalment warrants from those provisions.