Under revised exposure draft regulations just released, limited recourse borrowing arrangements issued to superannuation funds will be classed as financial products.
There were various problems with the original draft regulations, which were released in June 2010. The problems were identified in our alert on the original draft which can be accessed here.
To a large extent, those problems have not been fixed in the revised draft regulations. Further, new problems have been created by the revisions.
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 12 March.
Background
Under the revised draft regulations (as under the original draft), a person who:
issues a limited recourse borrowing arrangement to a superannuation fund
arranges for the issue of such an arrangement, or
provides advice about such an arrangement,
will need to hold an Australian financial services licence or need to be the authorised representative of a licensee. The issuer of the limited recourse borrowing arrangements will be required to prepare a PDS for the “product”. As discussed below, there are likely to be multiple issuers of any particular arrangement.
Licensees who are authorised to deal in or provide financial product advice about securities or derivatives will not need to apply for a licence or a variation to their licence. It is not clear why these would be appropriate authorisations, particularly in the case of a derivatives authorisation. A limited recourse borrowing arrangement will not necessarily be a sophisticated product in the way that derivatives often are. The appropriateness of a securities authorisation is also questionable – why would such an authorisation be relevant where, for example, the limited recourse borrowing arrangement is entered into for the purposes of acquiring real estate?
Key problems
The key problems with the revised draft regulations are:
multiple issuers of financial product - security trustee: Each “party” to a limited recourse borrowing arrangement will be deemed to be an “issuer” of the product. This means there will likely be multiple issuers of the product. There is a provision to the effect that a custodial or depository service or arrangement, or an associated administrative service, is not declared to be a financial product. However, despite the apparent intention this will not prevent a security trustee from being an issuer of the financial product that is the limited recourse borrowing arrangement;
multiple issuers of financial product - lender: There is also a provision stating that a limited recourse borrowing arrangement is not a credit facility. This reinforces that the lender is an issuer of the financial product that is the limited recourse borrowing arrangement. The terms and effect of the regulation are in contrast to a statement in the explanatory statement that the regulation prevents someone who “merely provides credit as part of a limited recourse borrowing arrangement from being caught by the new requirements”;
timing of issue of product: A limited recourse borrowing arrangement will be deemed to be issued “when a person enters into a legal relationship which sets up the arrangement”. The application of this deeming provision is unclear, particularly where the arrangement involves, as it normally will, more than two parties;
nature and scope of financial product: As with the original draft regulations, the precise nature and scope of the financial product (the “arrangement”) is not entirely clear. In addition to the licensing issues, this will be important for the issuers 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 – being the asset which is acquired under the arrangement. Will the real estate agent require an AFSL?
timing: The regulations are proposed to commence 3 months after registration. This would leave very little time to deal with the licensing and disclosure implications.
In short, further refinements to the regulations are needed before they are made.