The developments in brief

  • ASIC has released a new Class Order which varies and clarifies certain aspects of the new financial requirements for responsible entities which come into force on 1 November 2012.
  • The new Class Order:
    • reduces the net tangible asset capital requirements that will apply to Licensees that are authorised to operate a registered scheme while they are not operating any registered schemes as RE;
    • confirms that the custody test will be satisfied if scheme property and assets are held by a sub-custodian;
    • clarifies which guarantees are excluded from the definition of ‘adjusted liabilities’. This is important because ‘adjusted liabilities‘ are deducted from ‘adjusted assets’ to determine the ‘net tangible assets’;
    • narrows the scope of the exclusion of guarantees from the definition of ‘adjusted liabilities’ for stapled groups, where the Licensee is the responsible entity of a registered scheme outside the stapled group.
  • Affected Licensees have less than a month to prepare for the commencement of these new financial requirements on 1 November 2012.
  • Organisations should revisit the licences of all affected Licensees within the group, including Licensees authorised to operate a registered scheme but not operating any registered scheme as RE, to assess the extent to which the requirements apply to them.

Introduction

ASIC has released Class Order 12/1295 which was registered on 28 September 2012. The Class Order varies and clarifies certain aspects of the new financial requirements for responsible entities (REs) which were introduced under Class Order 11/1140.

ASIC stated that it has introduced these variations to clarify:

  • the net tangible assets (NTA) financial requirement that applies to Australian financial service licensees (Licensees) which are not operating a registered managed investment scheme (despite being authorised to do so); and
  • various definitions which affect the Licensee’s NTA calculations.

Background: the requirements released in November 2011

Following a consultation period in which ASIC considered proposals to increase the financial requirements for REs which are not regulated by APRA, ASIC released new financial requirements for REs under Class Order 11/1140.

Under the new requirements, which commence on 1 November 2012:

  • 12-month rolling cash flow projections will be required;
  • the net tangible asset capital requirements will be increased; and
  • more of the NTA will have to be held in cash.

For more information on the financial requirements introduced by ASIC in November 2011, please see our earlier article.

New changes to the financial requirements  

  1. NTA requirements for Licensees not operating a registered scheme

Under Class Order 11/1140, all Licensees will be required to meet certain NTA requirements.

In the case of a  Licensee  not operating any registered schemes as RE, this will be at least the greater of:

  • $5 million; and
  • 10% of average RE revenue of the Licensee.

Under Class Order 12/1295, ASIC has reduced the NTA requirements that apply to Licensees that are not operating any registered schemes as REs. These Licensees will be required to hold at all times NTA of at least the greater of:

  • $150,000;
  • 0.5% of the average value of scheme property of the registered schemes and investor directed portfolio services (if any) the RE operates (capped at $5 million); and
  • 10% of the average RE revenue (with no maximum).1

These requirements reflect the requirements that apply where a custodian holding $5 million NTA holds all scheme property.

  1. Custody requirements satisfied if scheme property and assets held by sub-custodian

The NTA requirements noted above also apply to registered schemes operated by the Licensee as a RE if all scheme property and assets not held by members are held by a custodian.2

ASIC has clarified that the custody test under sections 912AA(7)(a) and 912AA(7)(c) Corporations Act may also be met if the scheme property and assets are held by a sub-custodian appointed by such a custodian.

  1. Exclusions from the ‘adjusted liabilities’ definition relating to guarantees

NTA is defined as ‘adjusted assets’ minus ‘adjusted liabilities’.3

The definition of ‘adjusted liabilities’ includes assets encumbered as a security against another person’s liability where the Licensee is not otherwise liable, but up to the lower of the amount of the other person’s liability or the value of the assets encumbered.

ASIC has clarified that the definition of ‘adjusted liabilities’ excludes assets encumbered merely to support a guarantee provided by the Licensee.

Under Class Order 11/1140 as originally released, the following guarantees were to be excluded from the definition of ‘adjusted liabilities’ in calculating the NTA requirements:

  • guarantees given by a Licensee limited to an amount recoverable out of any scheme property of a registered scheme operated by the Licensee; and
  • guarantees of the obligations of another member a listed stapled group.

The variations under Class Order 12/1295 now mean that the following categories of guarantees will also be excluded from the definition of ‘adjusted liabilities’ in calculating the NTA requirements:

  • guarantees given by a Licensee which are limited to an amount recoverable out of scheme property of an unregistered scheme operated by the Licensee (being out of contributions, money or property that would be scheme property if the scheme were registered); and
  • guarantees of the obligations of another member of a stapled group whether listed or not, except where the Licensee is the responsible entity of a registered scheme which is not part of the stapled group. 
  • Although the amendment to the definition of ‘stapled issuer’ results in the extension of the exclusion to guarantees relating to unlisted stapled groups, the narrowing of the exclusion so that it does not apply where the Licensee is the RE of a registered scheme that is not part of the stapled group4 will restrict the utility of the exclusion for stapled groups which operate a retail funds management business or a wholesale funds management business which uses registered schemes.

REs that have given guarantees to another member of a stapled group should:

  • review any such guarantees to confirm whether any limitation of liability clause is included in the relevant guarantee; and
  • if they don’t contain a limitation of liability clause, confirm whether they act as responsible entity of any registered scheme which is not wholly owned within the stapled group. If this is the case, then the RE will face increased NTA requirements in connection with the guarantee as a result of this variation.
  1. Clarification of the ‘average RE revenue’ definition>/p>

ASIC has varied the definition of ‘average RE revenue’ so that the relevant financial years are those in which the Licensee is authorised to operate a registered scheme as RE. (Previously, under Class Order 11/1140, this definition applied to the financial years that the Licensee had operated a registered scheme as RE).

For example, where the RE is in its second financial year in which it is authorised to operate a registered scheme as RE, ‘average RE revenue’ will be the aggregate of:

  • the RE’s estimate of its actual RE revenue for the second financial year to-date; and
  • the forecast RE revenue for the remainder of the second financial year.5
  1. Variation of the ‘special custody assets’ and ‘value of scheme property’ definitions

Minor variations have also been made to the definitions of ‘special custody assets’ and ‘value of scheme property’ which clarify that:

  • land and other real property of a time-sharing scheme and levies of a time-sharing scheme which are held in an account with an Australian ADI styled as a trust account must be audited at least once every 6 months to qualify as a ‘special custody asset’ (whereas previously Class Order 11/1140 specified the audit must be conducted at least twice annually); and
  • in calculating the value of the assets of a registered scheme and IDPS property for the purposes of the NTA requirements, there should be no double counting.

When will the new financial requirements take effect?

The new financial requirements under Class Order 11/1140 (as amended by Class Order 12/1295) for Licensees which are not APRA regulated and which are authorised to act as RE come into effect on 1 November 2012.

This means that Licensees have until 1 November 2012 to ensure that they are in a position to comply with these new requirements. ASIC has also indicated that if a Licensee can demonstrate extenuating circumstances, ASIC will provide it with a further transition period of 12 months to 1 November 2013.6