Explanatory Statement
Superannuation Industry (Supervision) Act 1993, section 11E
Superannuation Industry (Supervision) (approved guarantee) determination No. 1 of 2008
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) entitled Superannuation Industry (Supervision (approved guarantee) determination No. 1 of 2008, which is dated 19 September 2008.
Purpose of the instrument
The instrument, made by a delegate of he Australian Prudential Regulation Authority (APRA), is intended to require that an approved guarantee given by an approved deposit institution (an ADI) in favour of a trustee which is or proposes to be, the trustee of both registrable superannuation entities under the SIS Act and First Home Saver Account (FHSA) trusts under the First Home Saver Accounts Act 2008, (the FHSA Act) must contain solely the terms set out in the Schedule attached to the Determination.
Background
By instrument entitled Determination of requirements for an approved guarantee made on 25 February 2005 (the 2005 Determination), APRA determined the requirements for an approved guarantee to be given by an ADI in favour of a trustee of registrable superannuation entities for the purposes of subsections 29DA(3) and 29DA(4) of the SIS Act.
The FHSA Act was assented to on 25 June 2008 and provides for first home saver accounts to be offered by certain financial institutions from 1 October 2008 and for their supervision by APRA, the Australian Securities and Investments Commission (ASIC) and the Commissioner of Taxation.
Where a first home saver account is an interest in a trust, the trustee must be an authorised FHSA provider (see section 8 of the FHSA Act). APRA relevantly has the general administration of Part 7, which concerns authorisation of FHSA providers. In Division 2 of Part 7, the FHSA Act provides for the prudential regulation of FHSA providers who are trustees by applying relevant provisions of the SIS Act, rather than regulating them directly under the SIS Act.
A trustee which holds a class of RSE licence which would entitle it to be the trustee of a public offer superannuation entity may be authorised by APRA as an FHSA provider where APRA is satisfied that certain requirements are met, which include capital requirements under section 93 (see section 92 of the FHSA Act).
Section 93 of the FHSA Act relevantly provides that an applicant for authorisation will meet the capital requirements where:
(a) it meets the capital requirements under subsection 29DA(3) of SIS, and the approved guarantee is also in respect of its duties as trustee of each FHSA trust of which it is, or is proposing to become, the trustee (see subsection 93(3)); or
(b) it meets the capital requirements under subsection 29DA(4) of SIS, and the approved guarantee is also in respect of its duties as trustee of each FHSA trust of which it is, or is proposing to become, the trustee ( see subsection 93(4)).
In order to meet the requirements of subsections 93(3) and 93(4), the instrument mirrors the 2005 Determination with the amendments necessary or consequential for the approved guarantee to apply also in respect of the trustee’s duties as trustee of each FHSA trust of which it is, or is proposing to become the trustee, during the term of the approved guarantee.
RSE licensees who hold an existing approved guarantee and who intend to become authorised as an FHSA provider will need to obtain a new approved guarantee in the form provided by the instrument, to meet the capital requirements for the purposes of SIS and for the purposes of the FHSA Act.
The 2005 Determination remains on foot and continues to have application where the RSE licensee is the trustee of public offer superannuation entities but not FHSA trusts.
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 Part 2A which relates to the licensing of trustees of APRA regulated superannuation entities (registrable superannuation entities or RSEs).
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.
‘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 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 which APRA, by legislative instrument, determines.
What the instrument covers
The instrument mirrors the approved guarantee determined in the 2005 determination with amendments to provide for the guarantee to apply, as required by paragraphs 93(3)(b) and 93(4)(b) of the FHSA Act, in respect of the trustee’s duties as trustee of all FHSA trusts of which it is or is proposing to become the trustee.
(a) the parties to the agreement
The guarantee is given by a body corporate that is an ADI as defined in subsection 10(1) of the SIS Act. Under the deed of guarantee, certain covenants are given for the benefit of the trustee (or an acting trustee or other trustee appointed in place of the trustee). The trustee holds the benefit of the guarantee in trust for the beneficiaries of all superannuation entities and FHSA trusts of which it is or is proposing to become, the trustee. In appropriate circumstances a beneficiary or group of beneficiaries may approach the court to enforce the guarantee. The trustee must hold or have applied to APRA for an RSE licence of a class that enables the trustee to be a trustee of a public offer entity on the basis that the trustee meets the capital requirements under subsection 29DA(3) or subsection 29DA(4)_by means of an approved guarantee or a combination of approved guarantee and net tangible assets respectively.
(b) the scope of the guarantee
The guarantee is unconditional, and it covers all liabilities (up to the agreed amount of five million dollars, or a lesser amount where the trustee meets the capital requirements by means of a combination of approved guarantee and net tangible assets) of the trustee in respect of the trustee’s duties in relation to all RSEs and First Home Saver Accounts (FHSAs) of which it is, or becomes, a trustee during the term of the guarantee. The guarantor will pay upon demand made during the term of the guarantee, in accordance with the terms of the guarantee.
A demand may be made where there has been a default on the part of the Trustee.
Default means any failure to perform any duty or obligation imposed upon it under superannuation law or FHSA law which results in any financial loss to any superannuation entity or FHSA trust under its trusteeship. ‘Default’ also covers a breach by the trustee of an enforceable undertaking (under section 262A of the SIS Act, and as that section applies to the FHSA Act) to the effect that the trustee must make a payment of money to any superannuation entity or FHSA trust of which it is the trustee.
The guarantor must be given particulars of the default and the financial loss when a demand is made and those particulars are conclusive evidence of the default and the amount of the loss, thereby avoiding the need for the guarantor to make enquiries to satisfy itself of the default or the amount of the loss. In this way the process of making a demand and the ability of the guarantor to be satisfied as to the obligation to pay under the guarantee, is simplified.
(c) the term of the guarantee
Unless revoked with the written consent of APRA, the term of the guarantee is fixed at five (5) years commencing on the date on which the RSE licence issued by APRA to the trustee comes into effect or the date on which the deed is signed, whichever is later. It is intended that on the first occasion the guarantor issues the deed, it will be executed in escrow, to commence operation on the date on which the RSE licence granted to the trustee comes into effect. After the expiration of the first 5 year term, each subsequent guarantee for a term of 5 years will commence on the date the Deed is signed by the guarantor.
(d) when the guarantee may be called upon and by whom
The guarantee may be called upon by the trustee, or by an acting or other trustee appointed in the trustee’s place. It may also be called upon by an appointed receiver, receiver and manager, administrator, liquidator or provisional liquidator, either of the trustee or of any superannuation entity or FHSA trust operated by the trustee. The guarantee may be called upon in respect of any financial liability arising from breach of a trustee’s duties or obligations. There is no requirement for the trustee or other party claiming in place of the trustee to exhaust any other remedies available to them before calling on the guarantee.
The guarantee provides for a demand to be made upon a default by the trustee, regardless of when that default occurs, provided the demand is made during the term of the guarantee.
A demand on the guarantee must be made in writing and must provide particulars of the default by the trustee, including quantification of the amount. The particulars are conclusive evidence of the default and the claimant’s calculation of the amount claimed is conclusive unless there is a manifest mistake. The guarantor is under no obligation to make enquiries and in this way, can be satisfied that there is an obligation to pay under the guarantee when a demand is made. The guarantor must pay the amount in cash within 30 days of the demand. The guarantor must pay interest on amounts payable but unpaid under the deed.
Although the guarantee may be called upon by a replacement trustee or a receiver or other appointee appointed in the place of the original trustee, the guarantee does not extend to any liability of those parties.
(e) guarantee is absolute and unconditional
The guarantee is absolute and unconditional. Clause 8 specifically provides that the guarantor’s obligations under the guarantee are not prejudiced, released, discharged reduced or otherwise affected by the events listed, which include the variation or novation of the principal agreement giving security for the guarantee or revocation or cancellation of the trustee’s RSE licence or FHSA authorisation.
(f) indemnity clauses
The deed of guarantee provides that any liability occasioned by the trustee to the guarantor is incurred solely in its personal capacity. The guarantor is not entitled to be indemnified out of the assets of any of the superannuation entities or FHSA trusts operated by the trustee, but will secure its rights against the trustee over assets of the trustee itself or its related entities.
(g) limitations on termination and revocation
The guarantee terminates at the end of the 5year term . The guarantee may be revoked only with the written consent of APRA. The guarantee does not provide for variation of its terms as it would by definition then cease to be an approved guarantee.
(h) warranty of capacity to enter into guarantee
The guarantee provides a warranty by the guarantor that it has capacity to enter into and comply with the guarantee.
(i) guarantor cannot rely on representations
The guarantor is required to warrant that is has not entered into the guarantee in reliance on any representations or promises by the trustee or beneficiaries. This should ensure that the guarantor makes appropriate inquiries, and will reduce the scope for the guarantor to repudiate the guarantee at a later time.
Table of amendments of the approved guarantee compared to the 2005 Determination
Provision in the instrument | Description of amendment |
Covenants | The covenants in the deed are amended to refer to the Trustee’s duties as trustee of all superannuation entities and FHSA trusts of which it is or is proposing to become the trustee during the term of the Guarantee. |
Recital B | Amended to refer to the RSE licensee holding or applying for an RSE licence |
Recital C | New recital to refer to the Trustee’s application for authorisation as an FHSA provider under the FHSA Act. |
Recital D | Re-numbered and amended to refer to the approved guarantee being for the purposes of the SIS Act and FHSA Act |
Recital E | Re-numbered. |
Interpretation | New items (i) and (ii) to provide that section of and the definition of terms in, the SIS Act include the sections and definition of those terms as they apply to the FHSA Act by virtue of section 114 of the FHSA Act. |
Interpretation | Definitions of Authorisation, FHSA holder, FHSA Law, FHSA Regulations and FHSA trust included and definitions re-ordered alphabetically as required. |
Interpretation | Definition of principal agreement amended for clarity. |
General | References to ‘this Deed’ are replaced by ‘this Guarantee’ for consistency. |
Clause 2 | Amended to include the trustee’s duties as trustee of FHSA trusts. |
Clause 3 | Amended to include FHSA law (as defined) |
Clause 4 | The words “of this Deed” replaced by “below” |
Clause 5 | The words “regardless of when the default occurs” replaced by “whether or not the default occurs during the term of this Guarantee”, for clarity. The words “and this requirement shall prevail over any provisions to the contrary in any other agreement” inserted to make it clear that the negation of any set off in the approved guarantee is not affected by any other agreement to which the Trustee is a party. |
Clause 5(b) | Amended to include the FHSA Act and regulations |
Clause 5(c) | Amended to include an FHSA trust. |
Clause 7 | Amended to insert the word ‘Australian’ to preface ‘State’ |
Clause 8 | Amended to include an FHSA holder |
Clause 8(b) | Amended to include an FHSA holder |
Clause 8(d) | ‘the’ replaced with ‘any’ |
Clause 8(e) | Amended to include an FHSA holder and FHSA trust |
Clause 8 (h) | Amended to include any requirement imposed by or under law. |
Clause 8(i) and (j) | New paragraphs inserted to include corresponding references to the Authorisation held by the trustee as an FHSA provider, as are provided for in relation to the RSE licence. Remaining paragraphs re-numbered accordingly. |
Clause 8 (l) | Amended to include FHSA trust |
Clause 8(q) | Amended to include FHSA trust |
Clause 9 | Amended to include FHSA trust |
Clause 10 | Amended to make it clear that the guarantee terminates on the expiration of the term provided in clause 4 (5 years) and to remove references to variation of the terms of the approved guarantee. The words “and irrespective of whether any demand has been made by or on behalf of the Trustee under clause 5 or otherwise” deleted for consistency as contingent rights already referred to in clause 10. |
Clause 13 | The word ”Australian” inserted to preface “State or Territory” |
Consultation
The instrument was released on1 August 2008 for consultation with only those RSE licensees that currently use approved guarantees under s29DA of the SIS Act and with the ADIs who provide those approved guarantees, for the period of two weeks (consultation closed on 15 August 2008). No submissions were received.
The instrument is not likely to have a direct, or a substantial indirect, effect on business or to restrict competition.