Explanatory Statement
Superannuation Industry (Supervision) Act 1993, section 11E
Determination of requirements during the licensing transition period for an approved guarantee for the purposes of paragraphs 26(1)(b)(ii), 26(1)(b)(iia) and subsection 26(1A) of the
Superannuation Industry (Supervision) Act 1993
The instrument to which this explanatory statement relates
This explanatory statement relates to the instrument (the instrument) made under paragraph 11E(1)(a) of the Superannuation Industry (Supervision) Act 1993 (the SIS Act) which is entitled Determination of requirements for an approved guarantee, which is dated 16 August 2005.
APRA’s authority to determine the requirements for approved guarantees
The SIS Act provides for the prudent management of certain superannuation entities and for their supervision by APRA, ASIC and the Commissioner of Taxation. Under section 6 of the SIS Act (as amended by the Superannuation Safety Amendment Act 2004 (the SSAA)), APRA has the general administration of (relevantly), Part 2 and Part 2A. Part 2 provides for the approval of trustees for the purposes of the SIS Act and operates concurrently with Part 2A which provides for the licensing of trustees of APRA regulated superannuation entities (registrable superannuation entities or RSEs).
Under section 26 of the SIS Act, APRA must approve an applicant as a trustee for the purposes of the Act if certain conditions are met. APRA must be satisfied that the applicant can be relied on to perform, in a proper manner, the duties of trustee of any relevant entity of which the applicant is or becomes the trustee and that at least one of the subparagraphs of paragraph 26(1)(b) applies, namely,
(a) subparagraph 26(1)(b)(i), that APRA is satisfied that the value of the net tangible assets of the applicant is not less than the prescribed amount; or
(b) subparagraph 26(1)(b)(ii), that APRA is satisfied that the applicant is entitled to the benefit of an approved guarantee for the prescribed amount; or
(c) subparagraph 26(1)(b)(iia), that APRA is satisfied the applicant passes the test set out in subsection 26(1A); or
(d) subparagraph 26(1)(b)(iii), that the applicant has agreed to comply with written requirements given to the applicant by APRA before the granting of the approval, relating to the custody of the assets of a relevant entity or entities of which the applicant is or becomes the trustee.
The prescribed amount for the purposes of subparagraphs 26(1)(b)(i) and 26(1)(b)(ii) is $5 million in each case.
The test provided for in subsection 26(1A) is that the applicant is entitled to the benefit of an approved guarantee and the sum of the amount of the approved guarantee and the value of the net tangible assets of the applicant is not less than the prescribed amount, which is $5 million.
An application for approval under section 26 must have been made before the start of the licensing transition period, which commenced on 1 July 2004.
A trustee approved under section 26 may apply during the licensing transition period, for a variation of its approval under section 27A of the SIS Act.
Paragraph 27A(1)(a) provides that an approved trustee may apply to APRA for variation of the approval by requesting a variation of the designation of the subparagraph of paragraph 26(1)(b) on the basis of which the trustee is approved.
Under section 29D of the SIS Act, APRA must grant an RSE licence if certain conditions are met. Where an application is for a licence that enables the licensee to be trustee of public offer entities, APRA must be satisfied that the applicant is a constitutional corporation that meets the capital requirements in one of the ways set out in section 29DA.
Subsection 29DA(3) provides that a constitutional corporation meets the capital requirements in the section if APRA is satisfied that the corporation is entitled to the benefit of an approved guarantee that is of an amount equal to or greater than the amount prescribed in regulations and is in respect of the corporation’s duties as trustee of each RSE of which it is, or is proposing to become, the trustee.
Subsection 29DA(4) provides that a constitutional corporation may also meet the capital requirements by a combination of net tangible assets and an approved guarantee that together amount to the amount prescribed in regulations.
In both cases, the prescribed amount is five million dollars.
Prior to enactment of the SSAA, the only requirement specified in the SIS Act for the approved guarantee was that it be given by an approved deposit-taking institution or on behalf of the Commonwealth, a State or a Territory. Consequently, APRA was unable to determine the form of the guarantee and there was no uniformity in the provisions contained in an approved guarantee.
‘Approved guarantee’ is defined in subsection 10(1) of the SIS Act (as amended by the SSAA) to have the meaning given by section 11E.
Section 11E, which was inserted into the SIS Act by the SSAA and commenced on 1 July 2004, provides that, in the SIS Act, an approved guarantee is one given by an approved deposit-taking institution (ADI), or given on behalf of a State, a Territory, or the Commonwealth, that meets the written requirements determined by APRA. Such a determination is a disallowable instrument for the purposes of section 46A of the Acts Interpretation Act 1901.
During the licensing transition period, where a trustee requests APRA under subsection 27(1A) to vary the designation of the subparagraph of paragraph 26(1)(b) on the basis of which the trustee is approved, to a subparagraph which requires the trustee to be entitled to have the benefit of an approved guarantee, that approved guarantee must comply with the provisions of section 11E of the SIS Act.
Purpose of the instrument
The instrument, made by a delegate of APRA, is intended to require that for the purposes of subparagraph 26(1)(b)(ii), subparagraph 26(1)(b)(iia) and subsection 26(1A) of the SIS Act, an approved guarantee given by an ADI during the licensing transition period in circumstances where an approved trustee applies to APRA under paragraph 27A(1)(a) of the Act for variation of the approval of the trustee by requesting a variation of the designation of the subparagraph of 26(1)(b) as the subparagraph on the basis of which the trustee is approved, must contain solely the terms set out in the Schedule attached to the Determination.
Background
The capital requirements for trustees of public offer superannuation entities have a threefold purpose. They provide some financial resources to act as a buffer against risk; they evidence a commitment on the part of a trustee to its superannuation business; and they act as an incentive to the trustee to manage the entity well. The inclusion of options other than net tangible assets of not less than a prescribed amount prevented lack of capital from being a barrier to entry for smaller trustees at the commencement of the SIS legislation in 1993.
The options available to trustees of public offer superannuation entities include having the benefit of an approved guarantee of a prescribed amount. A guarantee is a binding promise by one party to be answerable for the debt or obligation of another if the latter defaults.
Prior to enactment of the SSAA, the only requirement specified in the SIS Act for the guarantee was that it be given by an approved deposit-taking institution or on behalf of the Commonwealth, a State or a Territory. Consequently, APRA was unable to determine the form of the guarantee, for example, to specify the minimum term of the guarantee; the events or circumstances which might occasion the guarantee being called upon, including where APRA might require that the trustee call upon the guarantee; or provisions by which the trustee would acknowledge that the assets of the fund were not available for the purpose of meeting any indemnity to the guarantor.
Various forms of guarantee were submitted to APRA and its predecessor the Insurance & Superannuation Commission. APRA was unable to impose requirements reflecting its view of what should be acceptable, and there was a real doubt that a relevant guarantee could always be invoked in a manner that would achieve the intent of the policy of protecting beneficiaries in the event of trustee default. There was a real risk that the guarantor might be able to recover amounts paid under the guarantee from the beneficiaries’ funds held by the trustee, and no practical way to ensure that the guarantor had recourse only against the assets of the trustee itself. Overall, there was a concern that all the purposes for which regulatory capital is required would not necessarily be met by an approved guarantee as defined in SIS.
The SSAA introduced changes to the SIS Act aimed at strengthening the regulation of superannuation in Australia. The SSAA established, among other initiatives, a licensing regime for trustees of all APRA regulated superannuation entities. The means by which trustees of public offer entities may meet capital requirements are largely unchanged, in light of the Government’s decision to leave unchanged the persons to whom the capital requirements apply and the amount required. However, the SSAA amendments made provision for APRA to determine the requirements for an approved guarantee and so address the identified deficiencies.
APRA determined on 25 February 2005, (the 25 February Determination), the requirements for an approved guarantee for the purposes of subsection 29DA(3) subsection 29DA(4) of the SIS Act. The 25 February Determination is available from the APRA website at www.apra.gov.au.
Applicants for an RSE licence intending to be a trustee of a public offer entity and who intend to meet the capital requirements through an approved guarantee, must have the benefit of an approved guarantee that meets the requirements set out in the 25 February Determination.
During the licensing transition period, existing approved trustees who have an approved guarantee that meets the requirements of the SIS Act prior to its amendment by the SSAA are not required to change the terms of their existing approved guarantees until they apply for an RSE licence, when they must have an approved guarantee that meets the requirements of the 25 February Determination.
However, during the licensing transition period, where a trustee requests APRA under paragraph 27(1A)(a) to vary the designation of the subparagraph of paragraph 26(1)(b) on the basis of which the trustee is approved, to a subparagraph which requires the trustee to be entitled to have the benefit of an approved guarantee, that approved guarantee must meet the requirements set out in this Determination.
The approved guarantee provided for in the 25 February Determination commences when the trustee’s RSE licence comes into effect or the date the approved guarantee is signed, whichever is later (see Clause 4).
The approved guarantee set out in this Determination is drafted so that it will terminate when the approved guarantee that meets the requirements of the 25 February Determination comes into effect, or when the licensing transition period ends, or on the 5th anniversary of the date it is signed, whichever is earlier (see Clause 4).
What the instrument covers
The instrument mirrors the provisions of the approved guarantee set out in the 25 February Determination, with the exception that Clause 4 provides for the guarantee in the instrument to terminate automatically:
(a) at the moment an approved guarantee in the form of the approved guarantee for the purposes of subsection 29DA(3) and subsection 29DA(4) of the Act, (that is, the guarantee set out in the 25 February Determination) which is given for the benefit of the Trustee, comes into effect in accordance with the provisions of that approved guarantee; or
(b) at the end of the licensing transition period; or
(c) on the 5th anniversary of the date it is signed;
whichever is earlier.
In this way, the guarantee in the instrument will terminate automatically when a guarantee which meets the requirements of the 25 February Determination comes into effect in accordance with the provisions of that guarantee.
In the event that the trustee does not apply for an RSE licence, the guarantee in this instrument will terminate at the end of the licensing transition period, as a trustee cannot operate after that date without a licence.
In the event that the licensing transition period is extended beyond the current date of 1 July 2006, the guarantee in this instrument will terminate on 5th anniversary of the date it is signed. In the unlikely event that the licensing transition period extends beyond that date, a trustee may obtain a further guarantee at that time.
Clause 4 operates independently of and is not subject to Clause 10 of the guarantee. Clause 10, which is in the same terms as clause 10 of the 25 February Determination, provides for the variation or revocation of the guarantee and requires APRA’s consent before the variation or revocation of the guarantee can occur.
Consultation
APRA is currently aware of only one trustee who has applied to APRA to vary its approval under paragraph 27A(1)(a) of the SIS Act, by varying the designation of the subparagraph of paragraph 26(1)(b) as the subparagraph on the basis of which the trustee is approved , from paragraph 26(1)(b)(i) to paragraph 26 (1)(b)(ii), and who will therefore be required to have the benefit of an approved guarantee which meets the requirements set out in this Determination.
APRA has consulted with that trustee and its legal advisers and with the legal advisers for the ADI who proposes to issue the guarantee provided for in this Determination to the trustee, concerning the drafting of this instrument.
It is the opinion of APRA that wider consultation is unnecessary in the circumstances.