Proposal to treat certain limited recourse borrowing arrangements as financial products

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).

Government consultation

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.

What changes will the Proposed Regulations make?

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:

1. limited recourse borrowing arrangements relating to the acquisition of an acquirable asset under section 67A or 67B of the SIS Act are financial products under the Corporations Act when acquired by superannuation funds;
2. limited recourse borrowing arrangements are not a credit facility under the Corporations Act when acquired by superannuation funds; and
3. an Australian Financial Services Licence (AFS Licence) covering securities or derivatives is taken to also cover limited recourse borrowing arrangements.

What arrangements are not covered?

Under the Proposed Regulations, the following are exempted from being financial products:

1. a custodial or depository service within the meaning of section 766E of the Corporations Act;
2. any other kind of custodial or depository arrangements; or
3. an administrative service provided in relation to a custodial or depository service or arrangement.

What is the effect of the proposed changes?

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:

• general advice – being a recommendation or a statement of opinion, or a report of either of those things (that is not made by an outside expert), that:
• is intended to influence a person in making a decision in relation to a particular financial product or class of financial products, or an interest in a particular financial product or class of financial products; or
• could reasonably be regarded as being intended to have such an influence, or
• personal advice - being advice that is given or directed to a person in circumstances where:
• the provider of the advice has considered one or more of the person's objectives, financial situation and needs; or
• a reasonable person might expect the provider to have considered one or more of those matters.

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'.

Remember:

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).

Why are the changes being proposed?

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.

Status of the Proposed Regulations

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.

More Information from Maddocks

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.

More Cleardocs information on superannuation and SMSFs

You can read other articles concerning superannuation and SMSFs here.

Order SMSF related document packages

• Set up an SMSF
• Update an SMSF deed
• Set up an SMSF pension
• Arrange SMSF borrowing lending docs:
  • for when the lender is a bank
  • for when the lender is a related party
• Set up an SMSF corporate trustee
• SMSF Death Benefit Nomination - binding or non binding
• SMSF Death Benefit Agreement - binding and permanent

Download

Download a checklist of the information you need to order a document package.