Minister for Financial Services and Superannuation Bill Shorten today announced that ASIC and APRA will consult in 2013 on proposals to strengthen the regulation of finance companies that issue debentures to retail investors.
The proposals have two broad aims. The first is to improve the financial strength of retail debenture issuing finance companies. The second is to more clearly differentiate debenture issuers from banks, building societies and credit unions that are regulated under APRA's prudential framework.
The proposals involve:
- mandatory minimum capital and liquidity requirements;
- restricting the ability of issuers to offer 'at call' investments and use 'bank-like' terms to describe their products;
- improving on-going disclosure to investors; and
- enhancing the capacity of trustees to monitor the financial performance of issuers and compliance with their legal obligations.
Further details of the proposals are set out in the Attachment below.
Following consultation on the proposals, the Government and regulators will make a final decision on a new framework, including appropriate transitional arrangements.
Finance companies have been a significant source of loan finance in some regional areas. However, the recent collapse of Banksia Securities highlights the need to place the industry on a more sustainable footing and restore investor confidence.
In particular, investors need to appreciate that investments in finance companies carry higher risks and are not the same as deposits with ADIs that are actively supervised by APRA.
22 December 2012
Attachment
Roadmap for Improving the Regulation of Retail Debenture Issuers
The failure of Banksia Securities Limited highlighted issues relating to the activities of finance companies that raise funds from retail clients and use the proceeds to finance lending activities, especially mortgages and property development activities.
Following initial discussion with industry bodies, trustees and other business experts, ASIC's Debenture Taskforce identified a number of proposals to strengthen investor protections in this area. These proposals were broadly endorsed by the Council of Financial Regulators.
The Government has asked APRA and ASIC to each consult more widely on the proposals in the first part of 2013. This consultation process will allow the Government and regulators to assess the impact of the proposals on industry before making a final decision on the most appropriate future regulatory framework for the industry.
While most of the proposals would be able to come into full effect on commencement, any minimum capital and liquidity requirements would likely have to be phased-in to give issuers sufficient time to adapt to the new regime.
1. Mandatory minimum capital and liquidity requirements
The first proposal is that retail debenture issuers be subject to mandatory minimum capital and liquidity requirements that would be incorporated in their trust deeds. These minimum requirements are intended to reduce the likelihood of issuers failing as a result of poor lending decisions or a run by investors. The 7 December 2012 report to debenture holders by the receivers and managers of Banksia Securities noted that a key factor behind its failure was 'very low equity levels, leading to solvency concerns following even minor losses on the loan portfolios'.
It is proposed that debenture issuers be required to meet minimum risk-based capital and liquidity requirements at all times. Failure to do this would result in their closure. The aim is to improve their capacity to absorb adverse shocks while remaining solvent and liquid. Under the current disclosure-based regime, issuers must simply indicate in their prospectus whether or not they meet capital and liquidity benchmarks.
The need for appropriate transitional arrangements will be considered as part of the consultation process on this proposal.
ASIC will consult on these proposals.
2. A clearer distinction between debentures and ADI deposits
The second proposal is to establish a clearer distinction between debentures and deposit products offered by ADIs (banks, building societies and credit unions). At present, debenture issuers must explicitly state they are not ADIs. However, they market their debentures using the same terminology as ADIs (e.g. 'at-call accounts' and 'term deposits'). This has the potential to cause confusion, as the debentures are exposed to capital losses and are not covered by the Government's Financial Claims Scheme.
It is proposed amendments be made to the instrument that exempts Registered Financial Companies from the Banking Act to prohibit debenture issuers using terms like 'deposit' to describe their debentures. It is also proposed they be prohibited from offering these products on an 'at-call' basis and that debentures would have a minimum maturity period such as 31 days. These proposals have two objectives. The first is to facilitate investor understanding that retail debentures have a different risk profile from ADI deposits. The second is to reduce the likelihood of issuers' being subject to large numbers of investors seeking to redeem their debentures at very short notice.
APRA will consult on these proposals.
3. Strengthen disclosure to investors
The third proposal is to strengthen disclosure to investors on the financial performance of debenture issuers. At present, prospectuses of debenture issuers are required to provide important information on their financial performance, including the health of their loan books. While this information must be provided at the time of the initial investment, it does not have to be provided again when investments are rolled-over. This can mean long-term investors are not up-dated on any deterioration in an issuer's financial performance.
It is proposed to require investors be given a prospectus when deciding whether or not to roll-over their investment. This will allow them to make better informed decisions about the health of the issuer.
ASIC will consult on these proposals.
4. Clarify the powers and duties of debenture trustees
The fourth proposal is to clarify the powers and duties of debenture trustees. The role of debenture trustees is to monitor the financial performance of issuers and ensure that they are complying with their legal obligations. If an issuer experiences difficulties, the trustee plays a key role in ensuring the equal treatment of investors by applying to the court to freeze new issues and redemptions.
In discussions with trustees, it has become apparent that some of their responsibilities are implied rather than expressed. There also appear to be difficulties in trustees obtaining information from issuers facing financial difficulties. This is especially problematic where trustees are required to make judgements about issuers' viability and the possible need to request a freeze on issuance and redemption.
It is proposed to clarify the role of debenture trustees and boost their powers in relation to debenture issuers and auditors. Under this proposal, trustees would be given explicit duties to monitor issuers (including in relation to prospectus disclosures). They would also be empowered to receive twice-yearly reports from an issuer's auditor as well as to obtain other information from issuers on request. Issuers would be obliged to comply with trustee requests.
ASIC will consult on these proposals.