Proposed amendments to the Corporations Regulations will provide that certain borrowing arrangements entered into by superannuation fund trustees are financial products under the Corporations Act 2001 (Corporations Act).Viviane Karoumbalis
The Corporations Amendment Regulations 2012 (Proposed Regulations) are still in draft form. A previous draft of the Regulations was released for public consultation in June 2010. 17 submissions were received from affected stakeholders. The Regulations were substantially revised in the light of submissions and industry feedback.
Superannuation funds are regulated primarily under the Superannuation Industry (Supervision) Act 1993 (SIS Act) among other legislation.
Generally, superannuation funds are not permitted to borrow money except in limited circumstances, such as limited recourse borrowing arrangements (also known as 'instalment warrant' arrangements) permitted under sections 67A and 67B of the SIS Act.
The Proposed Regulations amend the Corporations Regulations 2001 to provide that:
Under the Proposed Regulations, the following are exempted from being financial products:
For those 'advising'
The effect of the Proposed Regulations for advisors will be that only advisors with an AFS Licence covering securities or derivatives will be able to provide 'financial product advice' in relation to limited recourse borrowing arrangements to clients.
Financial product advice in this context is defined by the Corporations Act as:
Advice given by a lawyer, registered tax agent or BAS agent (within the meaning of the Tax Agent Services Act 2009), in his or her professional capacity in the ordinary course of activities is not financial product advice under the Corporations Act.
The disclosure obligations under the Corporations Act will also need to be met when a product is issued to a retail client.
For those 'issuing'
The Proposed Regulations provide that a limited recourse borrowing arrangement is 'issued' when a person enters into a legal relationship that sets up the arrangement. In that case, each party to the arrangement is an 'issuer' of the product.
This may mean that all the parties from the borrower, the lender and any custodian could be considered 'issuers'.
The adviser or issuer must run a 'financial services business' to be caught by financial services laws and be required to obtain an AFS Licence.
If a party, such as a SMSF trustee, only undertakes a SMSF borrowing on a once-off basis, then the trustee will not be conducting a 'financial services business' and will not need a licence. However, it could still mean that the trustee and custodian need to prepare a product disclosure statement which summarises the arrangement for the benefit of members (for this purpose, the Proposed Regulations will 'deem' that these parties have a financial services business).
The Government considers that superannuation funds may be receiving inappropriate or unqualified advice when entering into limited recourse borrowing arrangements.
The intention is that by only allowing holders of an AFS Licence to advise on and issue limited recourse borrowing (instalment warrant) arrangements, the Corporations Act consumer protection provisions will be extended to superannuation funds.
Product disclosure, indemnity insurance and dispute resolution requirements under the Corporations Act will become applicable to such advice.
The Government released the exposure draft of the Corporations Amendment Regulations 2012 (No.) - Limited Recourse Borrowings by Superannuation Funds (Instalment Warrants) (Exposure Draft) on 13 February 2012.
Submissions on the Exposure Draft closed on 12 March 2012.
The Exposure Draft and Proposed Regulations can be viewed here.
For questions or more information about the above article, please call Maddocks in Melbourne (03 9288 0555) and ask for a member of the Superannuation Team.
You can read other articles concerning superannuation and SMSFs here.
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