The government has proposed that limited recourse borrowing arrangements — for SMSF borrowing — be classified as 'financial products' under the Corporations Act 2001. This would require anyone in a 'financial services business' who deals in, or advises on, (or who does both for) SMSF borrowing arrangements to hold an Australian financial services licence.Nicole Siemensma
The draft Corporations Amendment Regulations 2010 would amend the Corporations Regulations 2001 so that a limited recourse borrowing arrangement to enable a superannuation fund — including Self-Managed Superannuation Funds (SMSF) — to acquire an asset:
It is important to note that these amendments are only in draft form and have not yet been legislated.
If the changes become law, then anyone in a 'financial services business' who deals in, or advises on, SMSF borrowing arrangements would need to hold an Australian Financial Services Licence (AFSL). However, anyone holding an ASFL that covers derivatives would be taken to also be licensed in relation to limited recourse borrowing arrangements for SMSF borrowing.
What is not yet clear is:
Limited recourse borrowing arrangements for SMSF borrowing are not considered financial products under the current Corporations Regulations 2010.
This means that anyone carrying on a business of dealing in, or advising about, limited recourse borrowing arrangements is not required to have an Australian Financial Services Licence (AFSL).
To 'deal' in a limited recourse borrowing arrangements means to:
A person who carries on a business of dealing in financial products must meet obligations which include:
Currently, Cleardocs offers document packages to set up a limited recourse borrowing arrangement, including a declaration of custody trust, trustee minutes, compliance letter and a loan agreement if the lender is a related party.
The developments in the law will be monitored to assess their impact on this product.
The Corporations Regulations Amendments 2010 were published as an Exposure Draft. Submissions were due by 25 June 2010. Parliament is still reviewing all submissions received and has not yet made an announcement as to whether the Exposure Draft will be legislated as drafted, or varied based on the submissions.
The Federal election is likely to delay any action.
If the new category of financial product is introduced for limited recourse borrowing arrangements, then AFSL holders may need to seek ASIC authorisation to advise on, or deal in that category.
However, one piece of good news is that someone who already holds an AFSL for arrangements relating to derivatives can also deal in limited recourse borrowing arrangements, without the need to apply for a new authorisation on their AFSL.
For more information, contact Maddocks on (03) 9288 0555 and ask for a member of the Maddocks General Commercial Team.
You can access various ClearLaw articles for more relevant information relating to superannuation issues:
Order Cleardocs superannuation products
Download a checklist of the information you need to order a document package.
 See publication on Treasure website at: http://www.treasury.gov.au/contentitem.asp?NavId=037&ContentID=1829.
 Allowed under subsection 67(4A) of the Superannuation Industry (Supervision) Act 1993
 Section 766C(1) of the Corporations Act 2001 refers to dealing in financial products.
 Section 911A(1) of the Corporations Act 2001.
 Division 2, Part 7.9 of the Corporations Act 2001.
 Part 7.7 of the Corporations Act 2001.
Julian Smith is a partner in the Maddocks Commercial team.
Julian advises extensively in the following areas:
Julian advises clients ranging from public companies servicing the wholesale financial services market to high net worth individuals and their advisers.
Julian has been with Maddocks since undertaking articles in 2001.
The legal information and commentary on this site is general only. Documents ordered through Cleardocs affect the user's legal rights and liabilities. To assess their suitability for the user, legal accounting and financial advice must be obtained.
For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of their team.