7 May 2009

Safe and Consistent Regulation of Debentures

Senator Nick Sherry, Minister for Superannuation and Corporate Law, has today released the Corporations Legislation Amendment (Financial Services Modernisation) Bill 2009 that delivers on the Rudd Government's commitment to significantly improve protection for retail investors who invest in debentures and promissory notes, by creating a safer and consistent regime for their regulation, backed by a new national register.

The initiative is part of the Rudd Government's plan to modernise Australian financial services regulation in a regime fit for the 21st century.

Debentures are debt instruments used by the issuer to raise funds from investors in return for the payment of interest. Debenture issues are governed by a trust deed and a requirement for the appointment of a trustee who undertakes a range of investor protection functions on behalf of debenture holders.

Promissory notes are very similar in function to debentures, however, they are regulated according to their value. Promissory notes issued with a value less than $50,000 are regulated as debentures; while promissory notes issued with a value greater than $50,000 are not subject to debenture regulation and treated as financial products.

As such, some issuers have sought to manipulate this loophole and have priced what are essentially debentures at above the threshold definition of a promissory note. This has the effect of avoiding having to comply with the consumer protection requirements under trustee arrangements.

"There have been several high profile cases involving promissory notes where retail investors have lost significant amounts of their savings."

"Inconsistent legal regulation of dentures and promissory notes has allowed the exploitation of loopholes and it's mum and dad investors who have lost out all too frequently," said Minister Sherry.

"I have been deeply concerned about this issue since before coming to Government. The losses of investors in companies such as Westpoint saw no response from the former government."

The Financial Modernisation Bill will harmonise the legal regime to require all retail debentures and promissory notes to be subject to the full range of consumer disclosure and protection measures currently only applicable to debentures. This will include the requirement to have a trust deed and trustee arrangements, and to issue a full prospectus.

"These changes are a decade overdue and will reduce the risk of another Westpoint," Minister Sherry said.

Additionally, the new laws will boost transparency in the debenture issuing sector for the benefit of investors by establishing a public register of debenture trustees, to be established and maintained by the Australian Securities and Investment Commission (ASIC).

The register, which will be established during 2009, will be available for review by investors online. ASIC will shortly issue guidance for debenture trustees on the process for registration and the information required as part of this process.

"Debenture and promissory note issuances are an important part of the Australian financial services landscape, but there have been several issues of concern."

"Together, the harmonisation of protection and the new publicly available register of trustees will significantly enhance the level of consumer protection in an area of our financial services that needed reform," said Minister Sherry.

Today's new measures build on recent work undertaken by ASIC to improve protections for investors in unlisted and unrated debentures and boost disclosure and advertising standards.

The Exposure Draft of the Corporations Legislation Amendment (Financial Services Modernisation) Bill 2009 is available at www.treasury.gov.au. The public exposure period ends on 29 May, 2009 and the Bill will be introduced into Parliament in June