Superannuation Industry (Supervision) (approved guarantee) determination No. 2 of 2008

Explanatory Statement

Superannuation Industry (Supervision) Act 1993, section 11E

Superannuation Industry (Supervision) (approved guarantee) determination No. 2 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) for the purposes of sub-paragraphs 123(1)(b)(ii) and 123(1)(b)(iii) of the SIS Act, which is entitled Superannuation Industry (Supervision) approved guarantee determination No 2 of 2008, and dated 19 September 2008.

Purpose of the instrument

The instrument, made by a delegate of the Australian Prudential Regulation Authority (APRA), is intended to require that an approved guarantee given by an approved deposit institution (an ADI) for the purposes of paragraph 123(1)(b)(ii) and paragraph 123(1)(b)(iii) of the SIS Act  and for the purposes of section 118 of the First Home Saver Accounts Act 2008 (the FHSA Act), must contain solely the terms set out in the Schedule attached to the instrument.

Background

By instrument entitled Superannuation Industry (Supervision) (approved guarantee determination) No. 1 of 2006 made on 26 October 2006 (the 2006 Determination), APRA determined the requirements for an approved guarantee to be given by an ADI for the purposes of 123(1)(b)(ii) and paragraph 123(1)(b)(iii) of the SIS Act, that is, in circumstances where a custodian seeks to rely on the approved guarantee to meet the eligibility requirements to be a custodian for trustees who hold an RSE licence of a class that would entitle the trustee to be the RSE licensee of a public offer entity under the SIS Act.

The 2006 Determination is drafted in such a way as to permit a custodian which holds an Australian Financial Services Licence (AFSL) under the provisions of the Corporations Act 2001 to rely upon the approved guarantee for the purposes of complying with the requirements of the Australian Securities and Investments Commission (ASIC) under its Policy Statement 166 (now Regulatory Guide 166).

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).

Where an applicant for authorisation as an FHSA provider seeks to meet the capital requirements under section 93 through the use of a custodian, the custodian must meet the eligibility requirements under section 123 of the SIS Act as it applies to the FHSA Act. Where the custodian satisfies those requirements by means of an approved guarantee, section 118 of the FHSA Act requires that the trustee of the FHSA trust must also be entitled to the benefit of the approved guarantee in respect of the due performance by the custodian of its duties as custodian of the FHSA trust.

In order to meet the requirements of section 118 of the FHSA Act, the instrument mirrors the 2006 Determination with the amendments necessary or consequential for the approved guarantee to apply also in respect of the custodian’s duties as custodian of FHSA trusts.

Custodians who hold an existing approved guarantee and who intend to act as custodians for trustees of FHSA trusts, will need to obtain a new approved guarantee in the form provided by this instrument, to meet the eligibility requirements to be a custodian for the purposes of the FHSA Act.

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(5) provides that a constitutional corporation may satisfy the capital requirements by agreeing in writing to comply with written requirements given to it by APRA relating to the custody of the assets of each of the RSEs of which it is the trustee.

An applicant for an RSE licence of the public offer class who seeks to meet the capital requirements through use of a custodian may only be granted a licence if the custodian meets the eligibility requirements set out in section 123 of the SIS Act. 

A custodian is defined in subsection 10(1) of the SIS Act, to mean a person (other than the trustee of an entity) who, under a contract with a trustee or an investment manager of the entity, performs custodial functions in relation to any of the assets of the entity.

A contract between a trustee and a custodian must meet the requirements set out in  the Operating Standard for Outsourcing Arrangements of RSE Licensees (the Outsourcing Operating Standard) contained in sub-regulation 4.16(4) of the Superannuation Industry (Supervision) Regulations 1994 (the SIS Regulations). The contract must:

• be in writing; and
• state the commencement date of the agreement; and
• contain default arrangements and termination provisions; and
• provide for dispute resolution; and
• contain liability and indemnity provisions; and
• provide for confidentiality, privacy and security of information; and
• contain a pricing, fee and payments structure in relation to the performance of the material business activity; and
• contain audit, monitoring and assessment procedures in relation to the performance of the material business activity; and
• provide for business continuity planning, including transfer protocols relating to the handover of functions from the service provider to either a successor service provider or the RSE Licensee on the cessation of the material business activity.

For RSE licensees who are authorised as FHSA providers under the FHSA Act, the outsourcing requirements are contained in Prudential Standard FPS 100, (the Prudential Standard) made under paragraph 121(1)(a) of the FHSA Act. The requirements under the prudential Standard mirror those under regulation 4.16(4) of the SIS Regulations.

Section 123 of the SIS Act sets out the eligibility requirements for a custodian. The “person” must be a body corporate. Paragraph 123(1)(b) sets out the financial criteria. The body corporate must either have net tangible assets of the value prescribed by the regulations, or the trustee of the entity must be entitled  to the benefit, in respect of the due performance of the body corporate’s duties as custodian of the entity, of an approved guarantee of an amount not less than the amount prescribed by the regulations; or the combined value of an approved guarantee and the value of net assets of the body corporate must be not less than the amount prescribed by regulations. In each case, the regulations prescribe the amount of five million dollars.

A custodian would generally be the holder of an Australian Financial Services Licence (AFSL) and be subject also to regulation by ASIC under the provisions of the Corporations Act 2001. ASIC’s requirements in respect of custodians are set out in Regulatory Guide 166 (RG 166).

‘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 2006 Determination with amendments to provide for the benefit of the approved guarantee to apply also to trustees of FHSA trusts, as required by section 118 of the FHSA Act.

(a) the parties to the agreement

The guarantee is given as a deed poll by a constitutional corporation that is an ADI as defined in subsection 10(1) of the SIS Act.  The covenants in the guarantee are given for the joint and several benefit of all trustees of all superannuation entities in respect of which the custodian is or has at any time been the custodian, all trustees of FHSA trusts in respect of which the custodian is or has at any time been the custodian, and the custodian itself.

(b) the scope of the guarantee

The guarantee is unconditional, and it covers all liabilities as defined (up to the agreed amount of five million dollars in the aggregate, or a lesser amount where the custodian meets the capital requirements by means of a combination of approved guarantee and net tangible assets) of the custodian in respect of the custodian’s duties in relation to all RSEs and FHSA trusts of which it is, or has at any time been the custodian under a custodian agreement.  The guarantor is required to 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 is a liability (as defined) on the part of the custodian or where the custodian makes a written demand for payment under the guarantee. The ability of the custodian to make a demand for payment is included to meet ASIC’s requirements under RG 166 and is not restricted to the custodian’s liabilities to RSEs or FHSA trusts.

A liability is defined as either an amount payable by the custodian pursuant to a judgment or order of any court or tribunal, or an amount which the custodian has agreed in writing to pay, in respect of a failure to perform the duties or obligations arising under or pursuant to a custodian agreement.

A demand must be made in writing and attach a copy of the judgment or order or the custodian’s written agreement to pay or, in the case of a demand by the custodian, a certificate signed by certain officers of the custodian. The trustee is not required to claim or enforce any remedies it may have against the custodian or any other person in relation to the liability of the custodian under a custodian agreement.

The demand is conclusive evidence of the liability and the guarantor is not obliged to make enquiry to satisfy itself of the liability or the amount to be paid.

(c) the term of the guarantee

Unless revoked with the written consent of APRA (and, where the custodian is the holder of an AFSL, with the written consent of ASIC), the term of the guarantee is fixed at five (5) years commencing on the date on which the guarantee is signed.

(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 in respect of any liability of the custodian as defined in the guarantee.

The guarantee requires the written demand to attach a copy of the judgment or order of a court or tribunal or the written agreement of the custodian to pay, reflecting the fact that the relationship between the trustee and the custodian is contractual and consistent with the requirements in the Outsourcing Operating Standard and in the Prudential Standard respectively, for custodian agreements to have liability and indemnity provisions and dispute resolution procedures.

The guarantee may also be called upon by the custodian itself upon providing a certificate signed in accordance with the guarantee.

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 during the term of the guarantee, irrespective of when the liability arises. This provides a measure of protection for trustees where the failure to perform is not discovered until some time after the event or time is taken to obtain a judgment or order or agreement of the custodian to pay, but also ensures that the guarantor’s security for the guarantee is still available when the guarantee is called upon.

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 guarantee.

(e) the 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 a variation of the custodian agreement or revocation or cancellation of the trustee’s RSE licence or FHSA authorisation.

(f)  indemnity clauses

The guarantee provides that any liability occasioned by the custodian to the guarantor is incurred solely in its personal capacity.  The guarantor is not entitled to be indemnified out of the assets of the superannuation entities for which the custodian acts as custodian, but will secure its rights against the custodian over assets of the custodian itself or its related entities.   

(g)  limitations on revocation

The guarantee may be revoked only with the written consent of APRA and, where the custodian is the holder of an AFSL, with the written consent of ASIC.

(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 custodian.  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 2006 Determination

Consultation

The instrument was released on1 August 2008 for consultation with only those custodians that currently use approved guarantees under section 123 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.