User Rights Amendment Principles 2011 (No. 3)

EXPLANATORY STATEMENT

Issued by the authority of the Minister for Mental Health and Ageing

Aged Care Act 1997

User Rights Amendment Principles 2011 (No. 3)

The Aged Care Act 1997 (the Act) describes the regulatory framework within which Australian Government subsidised aged care providers (approved providers) must operate in order to obtain funding.

Amongst other things, the Act describes the rules relating to the charging and use of accommodation bonds. An accommodation bond is akin to an interest free loan paid by a care recipient to an approved provider, which must then be used by the approved provider for permitted uses, and refunded to the care recipient upon leaving the service (subject to certain permitted deductions being made).

Section 96-1(1) of the Act allows the Minister to make Principles providing for various matters required or permitted by a Part or section of the Act. Among the Principles made under subsection 96-1(1) are the User Rights Principles 1997 (the Principles). The Principles, combined with the provisions of the Act, deal with the key requirements about the payment and protection of accommodation bonds.

As part of the Government’s Health and Hospital Reform agenda, the Government committed to strengthening consumer protection for accommodation bonds paid to approved providers. The Aged Care Amendment Act 2011 (the Amending Act) delivered on these reforms by amending the Act to:

• limit the permitted uses for accommodation bonds (such that approved providers may use accommodation bonds for capital works, investment in financial products, loans for these purposes and refunding accommodation bonds)
• introduce new criminal offences where misuse of accommodation bonds has been identified and the approved provider has failed financially owing bond refunds
• introduce new information gathering powers to enable the Secretary of the Department of Health and Ageing (the Department) to better monitor approved providers that may be experiencing financial difficulties or using accommodation bonds for non-permitted uses
• remove restrictions on the use of income derived from accommodation bonds, retention amounts and accommodation charges. This allows approved providers greater flexibility in managing their cash flows and assists to offset the restrictions proposed in relation to the lump sum element of accommodation bonds.

The reforms regarding accommodation bonds take effect in relation to bonds taken by approved providers on or after 1 October 2011. A two year transition period has been provided from 1 October 2011 to 30 September 2013 to allow the sector to become familiar with the new permitted use requirements.

During consultation on the changes to the Act, it was flagged that amendments to the Principles were also being considered to strengthen the Prudential Standards in the Principles. Stakeholders agreed that the proposed changes to the Principles would complement the changes to the Act through the introduction of a fourth Prudential Standard, the Governance Standard and improved disclosure provisions. Stakeholders also called for an expansion to the permitted uses of bonds.

The purpose of the User Rights Amendment Principles 2011 (No. 3) (the Amending Principles) is to amend the Prudential Standards to include a Governance Standard; amend the Disclosure Standard to include reporting on the new arrangements; and expand the definition of the permitted uses of accommodation bonds.

Further details on the Amending Principles are provided at Attachment A.

Financial Impact Statement

Funding of $21.8 million over four years was provided in the 2010-11 Budget for a range of enhanced prudential measures of which the proposed changes to the Principles is one.

Consultation

The changes to the regulation of accommodation bonds have been the subject of extensive consultation with consumer groups, peak bodies, approved providers and the financial services sector. Overall, the response has been supportive of the objectives of the legislative reforms, with stakeholders acknowledging the balance that the proposed changes strike between granting approved providers access to capital and protecting the life savings of care recipients.

Information about changes to the Principles will be disseminated by electronic media and targeted communication strategies to approved providers.

The Amending Principles will commence on 1 October 2011, with the Governance Standard to commence on 1 February 2012.

The Amending Principles are a legislative instrument for the purposes of the Legislative Instruments Act 2003.

Regulation Impact Statement (RIS)

A RIS was completed and approved for these amendments to the Principles. This RIS is provided at Attachment B and should be read in conjunction with the RIS for the Amending Act which is available at: http://www.comlaw.gov.au/Details/C2011B00097/Explanatory%20Memorandum/Text

ATTACHMENT A

Details of the User Rights Amendment Principles 2011 (No. 3)

Clause 1 Name of Principles

Clause 1 states that the name of the Principles is the User Rights Amendment Principles 2011 (No. 3).

Clause 2 Commencement

Clause 2 states that the Principles will commence as follows:

• sections 1 to 3 and Schedule 1 will commence on 1 October 2011; and
• Schedule 2 will commence on 1 February 2012.

Clause 3 Amendment of User Rights Principles 1997

Clause 3 states that Schedules 1 and 2 amend the User Rights Principles 1997.

Schedule 1 – Amendments commencing on 1 October 2011

Item 1

This item adds the term ‘formal agreement’ to the boxed note included as part of section 23.3. This note lists expressions used in the Principles that are defined in the Act.

Item 2

This item adds the term ‘permitted (in relation to use of accommodation bonds)’ to the boxed note included as part of section 23.3.

Item 3

This item removes the definition ‘2005-2006 financial year’ from section 23.34 as the provisions which use this term have been removed (see Items 4 and 5).

Items 4 to 9

With effect 1 October 2011, these items make a number of changes to the Disclosure Standard (subdivision 3.4 of the Principles) to remove some redundant provisions and expand the matters that must be disclosed to care recipients and prospective care recipients and to the Department regarding accommodation bonds and their management by approved providers. Some further amendments to the Disclosure Standard are also included in Schedule 2 and commence 1 February 2012.

The changes to the Disclosure Standard as amended by both Schedule 1 and Schedule 2, including the provision of information on expenditure on permitted uses for accommodation bonds, will assist the Department to improve its risk management approach to compliance with the prudential requirements.

In giving care recipients and prospective care recipients access to more information, the changes allow for more informed decision making. The changes will assist prospective care recipients in making informed choices in relation to whether they wish to entrust their savings to a particular approved provider. Moreover, when care recipients do pay an accommodation bond they will have greater insight into the governance arrangements of approved providers and how they use accommodation bonds.

The changes also make much of the information currently provided to care recipients automatically available on request. This ensures that care recipients receive the information they need to inform their decision making, while reducing the compliance burden for approved providers.

Amendments to the Disclosure Standard are described in further detail below.

Item 4

This item removes section 23.39 of the Principles. This section specified the requirements for disclosure statements required by 31 October 2006 on the total number and value of bond balances held as at 1 July 2006. This provision is now redundant.

Item 5

This item amends subsection 23.40(1) to remove a redundant reference to the 2005-2006 financial year.

Item 6

Completion of an Annual Prudential Compliance Statement (APCS) is a requirement of the Disclosure Standard. Within four months after the end of an approved providers’ financial year, the approved provider must give the Secretary an APCS. In line with the introduction of permitted uses for accommodation bonds under the amended Act (from 1 October 2011), this item inserts additional items to be included in the APCS.

These amendments require an approved provider to give the Department an annual cash flow statement which reports on gross accommodation bond receipts, retentions and refunds. The annual cash flow statement will also require reporting on expenditure on permitted uses (as defined by the Amending Act) from any source of funding. This will provide indicative information to the Department using existing reporting mechanisms at a low cost to approved providers.

While the annual cash flow statement will not provide determinative evidence of non-compliance with permitted use provisions, it will allow the Department to improve its risk-based monitoring of approved provider compliance in the context of the new permitted use requirements. For example, should a statement indicate that an approved provider expended less on permitted uses than it received in accommodation bonds (minus retention amounts) throughout the year, this may raise concerns regarding compliance with the permitted use arrangements. These concerns could be pursued with the approved provider through the Act’s information gathering powers. The statement will also assist the Department to monitor risk in response to changing financial climates. For example, monitoring may indicate that particular financial products or classes of products pose greater risks than others. Through the amendments, the Department will be able to monitor investment in these products and engage with approved providers to ensure that investment limits are appropriate.

The entire subsection is outlined below, including new provisions.

Subsection 23.40(1) requires the following information to be reported through the APCS:

• the total number of bond balances held by the approved provider as at the end of the financial year (this is an existing requirement that continues);
• the total value of bond balances held by the approved provider as at the end of the financial year (this is an existing requirement that continues);
• the total value of accommodation bonds received by the approved provider during the financial year;
• the total amount deducted by the approved provider during the financial year from accommodation bond balances received during the year in accordance with section 57-19 of the Act. Section 57-19 specifies the amounts that may be deducted from accommodation bond balances, including:

–    bond retention amounts (as specified under section 57-20 of the Act);

–    any amounts owed to the approved provider by the care recipient under an accommodation bond, resident or extra service agreement; and

–          any interest on the amounts owed to the approved provider under the above agreements.

• the total amount deducted by the approved provider during the financial year from accommodation bonds that were received during the year in accordance with section    57-19 of the Act. The subtraction of this figure from the total value of bonds received gives the amount that the approved provider has received in bonds throughout the year that is available for permitted uses;
• the total value of bond balances refunded by the approved provider during the financial year. As defined by section 23.3 of the Principles, this includes accommodation bond balances and entry contribution balances. This is a permitted use under section              57-17A(1)(d) of the Act;
  • if, during the financial year, bond balances were not refunded in accordance with subsection 57-21(3) of the Act (other than an accommodation bond balance in relation to which the approved provider has made an agreement as mentioned in subsection 57-22(1) of the Act) or an applicable formal agreement – approved providers are required to provide particular details (this is an existing requirement that continues). Subsection     57-21(3) details the requirements for the refund of accommodation bond balances, including the timing of the refund which varies depending on the circumstances under which the care recipient has left the service. Subsection 57-22(1) allows for the delaying of accommodation bond refunds in order to secure re-entry to the service. The details to be provided include the number of bond balances not paid within required timeframes, the reason for the delay and the total number of instances for each reason.
  • if, for the whole or a part of the financial year, the approved provider was not permitted to charge an accommodation bond for entry to any aged care service that it is responsible for operating – the approved provider must state the period or periods during which they were not permitted to charge a bond, and the aged care service to which each period applies (this is an existing requirement that continues);
• the use of accommodation bonds by the approved provider during the financial year. This provision is required to ensure the APCS can be adjusted as required to monitor whether accommodation bond use by the approved provider is in accordance with the Act requirements;
• whether any use of accommodation bonds by the approved provider during the financial year:

–          was not permitted under section 57-17A of the Act, which details the permitted uses of accommodation bonds; and

–          was a use of an accommodation bond in accordance with subitem 12(2) of Schedule 1 to the Amending Act, within two years after the commencement of that subitem. The Amending Act provided a two year transition period for permitted uses to allow approved providers to become familiar with the permitted use requirements and make any necessary adjustments to comply with permitted uses. During the transition period, approved providers can continue to use bonds in line with the regulatory requirements in force before 1 October 2011. This item is required so that the Department is able to monitor approved providers that rely on the transition arrangements for accommodation bonds taken after 1 October 2011 and their compliance with this provision.

• the total amount expended by the approved provider (whether or not obtained from accommodation bonds) during the financial year on capital expenditure for which use of an accommodation bond would be permitted under paragraph 57-17A(1)(a) of the Act.  Paragraph 57-17A(1)(a) permits the use of accommodation bonds for capital expenditure. Capital expenditure is described in subsection 57-17A(2) and includes, but is not limited to, expenditure to acquire land for providing residential or flexible care or to acquire, erect, extend or significantly alter premises used for providing residential or flexible care;
• the total amount expended by the approved provider (whether or not obtained from accommodation bonds) during the financial year on investment in financial products for which use of an accommodation bond would be permitted under paragraph 57-17A(1)(b) of the Act. Paragraph 57-17A(1)(b) allows for the use of accommodation bonds for financial products as provided for by the Act or specified in the User Rights Principles. Subsection 57-17(3) of the Act lists the financial products that are permitted uses. An additional financial product permitted use is introduced through these Amending Principles — that is, unregistered managed investment schemes designed for investment in aged care (see Schedule 1, item 10 below);
• the total amount expended by the approved provider (whether or not obtained from accommodation bonds) during the financial year on loans for which use of an accommodation bond would be permitted under paragraph 57-17A(1)(c) of the Act. Paragraph 57-17A(1)(c) allows for accommodation bonds to be used to make a loan and specifies the conditions which are to be satisfied in relation to the loan;
• the total amount expended by the approved provider (whether or not obtained from accommodation bonds) during the financial year on repaying debt accrued for the purposes of:

–        capital expenditure; and

–        refunding accommodation bond balances. This reports on expenditure on the permitted use under subsection 57-17A(1)(e) of the Act.

• the total amount expended by the approved provider (whether or not obtained from accommodation bonds) during the financial year on repaying debt that accrued before 1 October 2011 if the debt was accrued for the purpose of providing aged care to care recipients. This is so as to report on subsection 57-17A(1)(f) of the Act which provides for this type of expenditure as a permitted use of accommodation bonds;
• the total amount expended by the approved provider (whether or not obtained from accommodation bonds) during the financial year on meeting business losses for which use of an accommodation bond would be permitted under section 23.64B of these Amending Principles. Section 23.64B allows for the use of accommodation bonds to meet reasonable business losses in the 12 month period beginning when the approved provider starts receiving residential or flexible care subsidy for the care provided at an aged care facility and ending 12 months after the approved provider begins to receive either subsidy. Reasonable business losses would include training and retaining staff in anticipation of the facility becoming fully occupied;
• the amount that has been returned to the approved provider during the financial year from the sale, disposal or redemption of financial products covered by paragraphs 57-17A(3)(b) to (e) of the Act (whether or not obtained from accommodation bonds) that the approved provider invested in after 1 October 2011. Subsection 57-17A(3)(b) to (e) outline the financial products that are permitted uses, other than a deposit-taking facility made available by an Authorised Deposit-taking Institution (ADI), including financial products specified in the User Rights Principles. Redemption of these investments must be accounted for in the annual cash flow statement. The amount to be reported only includes the principal capital investment amount following redemption – the profit from such investment is an unregulated source of income and does not need to be disclosed to the APCS;
• the amount identified in the approved provider’s liquidity management strategy, as at the end of the financial year, as the minimum level of liquidity under paragraph 23.37(1)(a) of the existing Principles;
• any other information determined, by legislative instrument, by the Secretary (this is an existing requirement that continues).

Item 7

This item amends the requirements for the APCS to include a requirement that an approved provider must report on compliance with the rule in paragraph 57-2(k) of the Act that an approved provider must not use accommodation bonds unless that use is defined by section 57-17A of the Act as a permitted use.

Item 8

This item updates the Principles to reflect the revised numbering of existing provisions consequential to these amendments.

Item 9

With the introduction of permitted uses for accommodation bonds from 1 October 2011, approved providers are required to disclose information to care recipients and prospective care recipients (or their representatives) on how they use accommodation bonds. This will improve the transparency and accountability of approved providers in relation to the investment of accommodation bonds and assist care recipients, prospective care recipients or their representatives to make informed choices about entrusting their savings to approved providers based on their compliance with permitted uses and governance requirements and how they manage accommodation bonds.

There are currently automatic triggers for care recipients to be provided with particular information. These include on entry to an aged care service, within four months of the end of the financial year and on request. Under these amendments, disclosure to care recipients and prospective care recipients (or their representatives) will occur at the same times as currently, but much of the information will be provided on request, thereby reducing the administrative burden of disclosure.

Information currently available would continue to be available. Additional information would be available including:

• a summary of the permitted uses for which accommodation bonds have been used during the previous financial year;
• information about whether the approved provider has, during the most recent financial year, complied with permitted use requirements; and
• if the approved provider is investing accommodation bonds in a financial product other than a deposit with an ADI, the approved provider’s investment objectives and the asset classes the approved provider may invest in (this requirement commences on 1 February 2012, see item 6 of Schedule 2).

The requirements for disclosure to care recipients (as amended by these Amending Principles) are described in further detail below.

Section 23.42 – Disclosure to care recipients

Noting that a number of existing provisions are retained, section 23.42 of the Principles is remade by these Amending Principles as detailed below.

Under subsection 23.42(1), within 7 days of an accommodation bond agreement being entered into between an approved provider and a care recipient, the approved provider must give the recipient (or their representative):

• a copy of the agreement (this is an existing requirement that continues);
• if an accommodation bond has been paid, or will be paid, a copy of the written guarantee to refund the bond balance (this is an existing requirement that continues);
• a written statement that the approved provider will provide within 7 days of a request:

–          a summary of the permitted uses for which accommodation bonds have been used during the previous financial year;

–          information about whether the approved provider has, during the previous financial year, complied with paragraphs 57-2(1)(k) and (ka) of the Act. Paragraph 57-2(1)(k) provides that approved providers of residential care services must not use accommodation bonds for a use that is not permitted. Paragraph 57-2(1)(ka) provides that approved providers must comply with the prudential requirements.

–          information about the number of bond balances that, in the previous financial year, were not refunded in accordance with subsection 57-21(3) of the Act or a formal agreement (this is an existing requirement that continues). The requirements of subsection 57-21(3) are outlined earlier under Item 6;

–          a copy of the audit opinion mentioned in paragraph 23.40(1)(e) of the Principles for the previous financial year (this is an existing requirement that continues);

–          a copy of either the most recent statement of the audited accounts in relation to the aged care service or, if the service is operated as part of a broader organisation, the most recent statement of the audited accounts of the organisations’ aged care component (this is an existing requirement that continues); and

• a copy of the entry in the bond register that relates to the care recipient, as at the time of the request (this is an existing requirement that continues).

The additional information will already be generated through documenting the governance system, the investment management strategy (see Schedule 2 Item 2) and the APCS. The intent is that no additional information should be required to be generated to meet these requirements.

Subsection 23.42(2) provides that within 4 months after the end of each financial year, the approved provider must give to each care recipient (or to their representative) who has paid an accommodation bond for entry to the aged care service operated by the approved provider:

• a copy of the care recipient’s entry in the bond register for the most recent financial year; and
• a written statement that the approved provider will provide, within 7 days of request, the information and documents as listed above and mentioned in paragraph 23.42(1)(c) of these Amending Principles.

In line with this provision, subsection 23.42(3) requires that within 7 days of a request from a care recipient who has paid a bond to the aged care service, the approved provider must give the care recipient (or their representative) the information and documents as listed above and mentioned in paragraph 23.42(1)(c).

A care recipient or their representative may request any of the above information at any time. This allows care recipients and their representatives who have an interest in an approved provider’s permitted use, governance or financial arrangements, or their compliance with the prudential requirements, to have the information available. It reduces the burden on approved providers by making the information available on request. Approved providers are required to provide the above information to care recipients, prospective care recipients and their representatives within 7 days of a request being made. The information must be correct at the time the request was made. Approved providers should not need to generate additional information to meet these requirements. The information needed will already be created in order to comply with the prudential requirements.

Section 23.43 – Disclosure to prospective care recipients

Under this provision, and in line with the introduction of permitted uses for accommodation bonds and the IMS, an approved provider must provide within 7 days of a request from a prospective care recipient (or their representative), the information and documents detailed in paragraph 23.42(1)(c)(i) to (vi) of these Amending Principles. This includes the following:

• a summary of the permitted uses for which accommodation bonds have been used during the previous financial year;
• information about whether the approved provider has, during the previous financial year, complied with paragraphs 57-2(1)(k) and (ka) of the Act, the purpose of which has been outlined earlier under Item 9;
• information about the number of accommodation bond balances that, in the previous financial year, were not refunded in accordance with subsection 57-21(3) of the Act (the purpose of which has been outlined earlier under Item 6) or a formal agreement (this is an existing requirement that continues);
• a copy of the audit opinion mentioned in paragraph 23.40(1)(e) for the previous financial year (this is an existing requirement that continues); and
• a copy of either the most recent statement of the audited accounts in relation to the aged care service or, if the service is operated as part of a broader organisation, the most recent statement of the audited accounts of the organisations’ aged care component (this is an existing requirement that continues).

If an approved provider has not held any accommodation bonds charged for entry to any service operated by the approved provider in the most recent financial year, the approved provider will be taken to meet the disclosure requirements in subsection 23.42(3) and section 23.43 if they give to the care recipient or the prospective care recipient (or the representative) the information mentioned in subparagraphs 23.42(1)(c)(iv) (see Schedule 2 Item 6), (v), (vi) and (if applicable) (vii), together with a statement to the effect that the approved provider has not held any accommodation bonds in the relevant period.

Item 10

This item inserts a new Division (Division 8A) to specify additional permitted uses of accommodation bonds by approved providers and financial products for the purposes of section 57-17A of the Act.

The Amending Act provided for an expansion of the permitted uses for accommodation bonds and for the specification of additional financial products that are permitted uses by inclusion of these matters in the Principles. These provisions were included in the Act to ensure that the legislative framework does not unreasonably restrict the permitted uses of bonds.  The Act allows for the permitted uses to be expanded in subordinate legislation to support growth and investment in the industry.

The Amending Principles prescribe two additional permitted uses for accommodation bonds:

• to meet reasonable business losses incurred in the 12 month period from when an approved provider commences operation of a residential or flexible care facility (such losses could reasonably be considered a capital investment in aged care); and
• for investment in unregistered managed investment schemes (expanding the list of permissible financial investments set out in the Amending Act). 

Further information on the individual provisions is outlined below.

Section 23.64A – Purpose of the Division (Act, s 57-17A)

This item provides that the purpose of Division 8A is to specify permitted uses of accommodation bonds by approved providers and financial products for the purposes of section 57-17A of the Act.

Section 23.64B – Accommodation bond may be used to meet reasonable business losses in first 12 months

Under this provision, the use of accommodation bonds to meet reasonable business losses is permitted in the 12 month period beginning when the approved provider starts receiving residential care subsidy or flexible care subsidy for the care provided at an aged care facility and ending 12 months after the approved provider begins to receive either type of subsidy. Reasonable business losses would include training and retaining staff in anticipation of the facility becoming fully occupied.

Capital investment is required during the start up of a residential or flexible aged care service including where a new service opens and where an approved provider makes changes to the business operations of a purchased existing service. Once a residential or flexible aged care service becomes operational, the approved provider may begin to charge accommodation bonds. This provision allows approved providers to expend accommodation bonds on reasonable business losses during the first 12 months that an approved provider operates an aged care service.

The introduction of clearly articulated permitted uses, such as to meet reasonable business losses in the first 12 months of operation, is supported by the requirement to report on those uses in the APCS.

Section 23.64C – Unregistered schemes for investment in aged care are financial products

During consultations with industry, the Department was informed that some approved providers invest in unregistered managed investment schemes (within the meaning of the Corporations Act 2001) that are established for the purpose of building, acquisition and development of aged care facilities. The Amending Act allows only for registered managed investment schemes and would, therefore, stop the use of accommodation bond funds for investment in a current legitimate investment unless this existing use is specified in the Principles.

To permit the use of accommodation bonds for this type of investment, this provision defines this type of investment as an ‘aged care investment scheme’ and specifies that these unregistered managed investment schemes are financial products covered by subsection

57-17A(3) of the Act.

Schedule 2 - Amendments commencing on 1 February 2012

Schedule 2 introduces a new Prudential Standard – the Governance Standard. The Governance Standard requires approved providers that hold one or more bonds to have a governance system in relation to bond management. Approved providers that hold bond balances are required to implement and maintain a governance system to ensure that accommodation bond balances are only used for permitted uses and that accommodation bond balances are refunded to care recipients in accordance with section 57-21 of the Act. Approved providers are also required to implement and maintain a written investment management strategy (IMS) if they propose to invest accommodation bonds in financial products other than a deposit taking facility made available by an authorised deposit-taking institution (ADI) in the course of its banking business.

The commencement of the Governance Standard from 1 February 2012 will allow the sector to become familiar with the new arrangements, and allow sufficient time for approved providers to consider and document their governance systems. The later date for commencement of the Governance Standard will allow this consideration to take place following communication activities by the Department. 

Item 1

This item adds the Governance Standard to the existing Prudential Standards identified within section 23.32. The purpose of the Governance Standard is to provide for arrangements by approved providers for the management of accommodation bonds. 

Item 2

The Principles currently describe three Prudential Standards which are designed to assist approved providers to comply with their responsibility to refund accommodation bond balances when they fall due, maintain records for the tracking of and reporting on accommodation bonds, and disclose appropriate information to the Department, care recipients, prospective care recipients (or their representatives).

The existing Prudential Standards are the:

• Liquidity Standard—this requires the maintenance of a liquidity management strategy (LMS) to ensure access to funds to refund accommodation bond balances as they fall due over the following 12 months, and the maintenance of liquidity in accordance with the approved provider’s LMS.
• Records Standard—this requires accurate, comprehensive and up-to-date information on the approved provider’s accommodation bond holdings to be maintained.
• Disclosure Standard—this requires approved providers to give existing and prospective care recipients information about their compliance with the Prudential Standards, their compliance with the requirement to refund accommodation bonds when they fall due, and information on their financial standing; this also requires approved providers to submit to the Department a completed APCS within four months of the end of their financial year (which means by 31 October for the vast majority of approved providers).

Under Item 2 of Schedule 2 of the Amending Principles, a fourth Prudential Standard is introduced – the Governance Standard. The Governance Standard requires approved providers to implement and maintain a governance system for managing accommodation bonds they hold on behalf of their residents. The requirements of the Governance Standard, include

• the requirement for a governance system (see section 23.38A); and
• the requirement for an investment management strategy (IMS) (see section 23.38B).

The elements of the Governance Standard are described in further detail below.

Section 23.38A – Requirement for governance system

The purpose of this section is to ensure that, where an approved provider holds accommodation bonds, there is an appropriate system in place to ensure that the approved provider complies with their prudential responsibilities in relation to accommodation bonds. The intent is not to compel approved providers to have a particular governance system, but rather to ensure that approved providers meet specified outcomes. This gives flexibility to implement governance systems that fit corporate structures while providing surety that governance systems are appropriate to the prudent and accountable management of accommodation bond balances. 

Under this provision, an approved provider holding one or more accommodation bonds must implement and maintain a governance system that ensures:

• accommodation bond balances are only used for permitted uses; and
• accommodation bond balances are refunded to care recipients in accordance with section 57-21 of the Act, which details the requirements for the refund of accommodation bond balances.

While not limiting the overall matters that a governance system may deal with, the system must provide mechanisms for:

• the allocation of responsibilities to the key personnel of the approved provider in relation to the management of accommodation bond balances;
• the monitoring and controlling of any delegation or outsourcing of allocated responsibilities;
• the reporting of allocated responsibilities such that key personnel responsible for executive decisions can effectively monitor and control the use of accommodation bond balances;
• ensuring key personnel, and persons to whom responsibilities are delegated or outsourced, are aware of the requirements of the Act and the Principles in relation to accommodation bonds; and
• detecting, recording and responding to any failure to comply with these requirements.

Under these arrangements, an approved provider must also:

• keep written documentation describing their governance system;
• ensure that the written documentation of their governance system is kept up to date; and
• modify or replace their governance system if they become aware that the system no longer complies with the legislated requirements.

The Governance Standard applies specifically to governance arrangements relating to the management and protection of accommodation bond balances. Broader corporate governance continues to be a matter for approved providers’ commercial judgment and the legislation under which they are incorporated.

Section 23.38B – Requirement for investment management strategy

Under this section, as part of the new Governance Standard, approved providers are required to implement and maintain a written IMS if they propose to invest accommodation bonds in financial products other than a deposit taking facility (made available by an (ADI) in the course of its banking business). If an approved provider invests solely in a deposit-taking facility provided by an ADI then the approved provider is not required to implement, maintain or comply with an IMS in accordance with this section. The IMS is outcomes based and its complexity will depend on the sophistication and risks of the investment approach.

The IMS would include:

• the approved provider’s investment objectives;
• the approved provider’s assessment of the level of risk to their ability to refund accommodation bond balances in accordance with the Act;
• a strategy for achieving the investment objectives while ensuring that the approved provider is able to refund accommodation bond balances in accordance with the Act;
• the asset classes that the approved provider may invest in and appropriate investment limits for each asset class; and
• key personnel with appropriate skills and experience responsible for implementing the IMS.

The IMS must be approved by the key personnel who are responsible for the executive decisions of the approved provider.

The approved provider must ensure that:

• any investment of accommodation bonds is in accordance with the IMS;
• the IMS is current and complies with the requirements set out in subsection 23.38B(1) (this requirement is similar to existing requirements for liquidity management strategies included in section 23.37 of the Principles); and
• modify, or replace, its IMS if the approved provider becomes aware that it no longer complies with the requirements set out in subsection 23.38B(1) (again, this is similar to the existing requirements of section 23.37).

Item 3

These amendments require reporting on further additional items in the APCS, including compliance with the Governance Standard. Some approved providers report their APCS on the basis of a calendar year rather than the more usual financial year.  As the Governance Standard does not commence until 1 February 2012, approved providers in this situation are not required to report on their compliance with the Governance Standard in their APCS for the 2011 calendar year.

These provisions amend the existing requirements of the Disclosure Standard to include additional information in the APCS. The additional information includes disclosure about compliance with the Governance Standard and compliance with the requirement to use accommodation bonds only for permitted uses. The amended paragraph is outlined as follows:

• a statement about whether the approved provider has, during the financial year, complied with:

- the Liquidity Standard (this is an existing requirement that continues);

-       the Records Standard (this is an existing requirement that continues);

-       the Governance Standard (as introduced by these Amending Principles);

-       the Disclosure Standard (as amended by these Amending Principles. This is an existing requirement that continues, however there are additional items outlined above that are now to be included);

-       paragraph 57-2(1)(e) and sections 57-21, 57-21A and 57-21B of the Act (this is an existing requirement that continues). These Act provisions include the rules relating to entering into an accommodation bond agreement, refunding of accommodation bond balance and the payment of interest on accommodation bond balances and entry contribution balances;

-       subsection 23.28(3), and Divisions 2 and 5 of Part 4 of the Principles (this is an existing requirement that continues). These provisions include requirements to provide a written guarantee to care recipients that their accommodation bond balance will be refunded, to provide accommodation bond agreements with content as specified in the Principles and other rules as specified for accommodation bonds in Part 4 of the Principles; and

–       paragraph 57-2(1)(k) of the Act. This requires that approved providers only use accommodation bonds for permitted uses.

Item 4

This item retains the existing requirement under subsection 23.40(1) for the disclosure of reasons for non-compliance with the Disclosure Standard and adds a requirement that, if the approved provider has not complied with the Governance Standard, a statement is to be provided explaining why they have not complied.

The amendment is outlined below, and requires the provision of the following information:

• if the approved provider has not complied with the Governance Standard – a statement about why the approved provider has not complied with the Standard;
• if the approved provider has not complied with the Disclosure Standard – a statement about why the approved provider has not complied with the Standard (this is an existing requirement that continues);
  • an audit opinion provided by the person who provides the independent audit mentioned in section 23.41, on whether the approved provider has complied with this Division in the relevant financial year (this is an existing requirement that continues, with the additional requirement for the audit report to include compliance with the amended Disclosure Standard and the new Governance Standard).

Item 5

This item updates a legislative reference within subsection 23.40(3) to reflect that the information previously required under paragraph 23.40(1)(d) will now be required under paragraph 23.40(1)(e) because of the amendments made by Item 4 of Schedule 2.

Item 6

This item updates the requirements for disclosure to care recipients, prospective care recipients (or their representative) to take into account of the requirements of the IMS which come in to force on 1 February 2012. Further information on the requirements for the IMS is provided under Item 5 and includes all financial products other than deposits with ADIs.

Item 7

This item updates a legislative reference in subparagraph 23.42(1)(c)(v) to reflect that the audit opinion previously required under paragraph 23.40(1)(e) will now be required under paragraph 23.40(1)(f) because of the amendments made by Item 4 of Schedule 2.

ATTACHMENT B

REGULATION IMPACT STATEMENT

1. Background

This Regulation Impact Statement (RIS) should be read in conjunction with the Aged Care Amendment Act 2011 RIS, refer Appendix 1.

This RIS considers amendments to the User Rights Principles 1997 (the Principles) which are intended to complement the changes made to the Aged Care Act 1997 (the Act) by the Aged Care Amendment Act 2011 (Amending Act).

In addition to the broader requirements with which aged care providers (approved providers) must comply (such as the Corporations Act 2001), the Act describes the regulatory framework within which Australian Government-subsidised approved providers must operate in order to obtain funding. The Act prescribes the rules relating to the charging and use of accommodation bonds (bonds).

Bonds are in effect unsecured, interest-free loans paid by care recipients to approved providers, which must be used for permitted uses, and refunded upon the care recipient leaving the service (less permitted deductions). The original policy intent was that bonds be used for capital funding for investment in building stock (and retirement of associated debt).

Since the introduction of the Act in 1997, there has been strong growth in the value of bonds. In the four years between 2006 and 2010, the total value of bonds increased by around 20 per cent per annum, to more than $10.6 billion. As at 30 June 2010, approximately 950 approved providers held bonds on behalf of more than 63,000 aged care recipients (there were 1,150 approved providers of residential and/or flexible aged care services at 30 June 2010). The average bond agreed with a new care recipient in 2009-10 is estimated to be $232,000 and the median new bond amount is estimated to be $220,000. The average total bond holding by an individual approved provider in 2009-10 was $11.2 million. There are a small number of approved providers that hold bonds in the hundreds of millions of dollars.

In response to the growth of bond holdings the Australian Government established three Prudential Standards in 2006. The Prudential Standards, made under the Principles, are designed to assist approved providers to comply with their requirements to refund bonds when they fall due, maintain records for the tracking of, and reporting on, bonds and disclose appropriate information to the Department of Health and Ageing (the Department) and to care recipients, prospective care recipients and their representatives.

In 2006 the Australian Government also introduced the Accommodation Bond Guarantee Scheme (Guarantee Scheme). Under the Guarantee Scheme the Australian Government guarantees repayment of bonds to care recipients if an insolvent or bankrupt approved provider defaults on its obligation to refund bonds. In the event of the Guarantee Scheme being triggered, there is provision for the Australian Government to levy approved providers to recoup the monies repaid and any administrative costs. Since its inception in 2006, the Guarantee Scheme has been triggered five times at the cost to the Australian Government of around $24.5 million. The Australian Government has not elected to levy approved providers to date, however, the aged care industry is aware that the Government has the capacity to do so.

In its 2009 report, Protection of Residential Aged Care Accommodation Bonds, the Australian National Audit Office (ANAO) recommended that the Department improve its regulatory approach to include reviews of whether approved providers are using bonds for the purposes required under the Act.

The combination of the triggers of the Guarantee Scheme and the exponential growth in bond holdings led the Australian Government to announce in April 2010, as part of the More Support for Older Australians component of the National Health and Hospital Network, that it would move to strengthen the prudential arrangements for bonds.

The Amending Act, which received Royal Assent on 26 July 2011, amends the Act to:

–        limit the permitted uses for bonds (such that approved providers may use bonds for capital works, investment in financial products, loans for these purposes and refunding bonds)

–        introduce new criminal offences where misuse of bonds has been identified and the approved provider has failed financially while owing bond refunds

–        introduce new information gathering powers to enable the Secretary of the Department to better monitor approved providers that may be experiencing financial difficulties or using bonds for non-permitted uses

–        remove restrictions on the use of income derived from bonds, retention amounts and accommodation charges. This provides approved providers with greater flexibility in managing their cashflows and assists to offset the restrictions on use of the lump sum element of bonds.

A two year transition period was introduced to allow approved providers to make adjustments to comply with the permitted use requirements.

Provision to expand the list of permitted uses (by way of the Aged Care Principles) was included in the Amending Act.  The Government was acutely aware of the risks associated with creating a definitive list and of having an unintended negative impact on the aged care sector.

During consultation on the Amending Act, additional legitimate permitted uses were identified and it was flagged that strengthening the Prudential Standards through amendments to the Principles was also under consideration.

Stakeholders agreed that the proposed changes in the Amending Act provided greater clarity and expressly allowed activities such as the investment of bonds in financial products (previously a grey area).  It was also understood that further changes to the Principles were necessary to complement the amendments to the Act by way of increased transparency and improved governance requirements.

2. Problem

The original policy intention was that bonds be used for capital funding for investment in building stock (and retirement of associated debt).  Until changes introduced in the Amending Act, this had not been clearly articulated in the legislation.

Aged care regulation provides the only legislative guidance on bonds (as no other legislation contains a notion of ‘bonds’ for the purposes of aged care).  As such, the Government cannot look to the Corporations Act 2001 or any other legislative framework, to ensure these funds are used appropriately.  

As noted above, bonds are, in essence, an unsecured loan paid by care recipients to the approved provider, which the approved provider is required to pay back when the care recipient leaves the home (subject to certain permitted deductions being made).  The legislation requires approved providers to refund bonds as they fall due, however, in 2009-10 approximately 9.7 per cent of approved providers self-reported the late repayment of bonds.

The late repayment of bonds creates problems beyond the potential financial value of the loss to Government (through the triggering of the Guarantee Scheme). For care recipients, who are usually frail and elderly, the uncertainty regarding their life savings can create significant stress. In instances where the Guarantee Scheme has been triggered, this can also result in residents needing to be relocated to a new facility.  In all instances, the late payment of bonds affects confidence in the sector and the source of capital funding that bonds represent.

Analysis of a sample of complaints taken by the Department in relation to bond refunds indicates that these events cause distress to care recipients and their representatives. One care recipient’s representative reported to the Department that a late refund was causing hardship from the stress of not being able to pay the bond amount owed to a new facility and the safety of the bond balance.  Another complaint from a law firm representing a care recipient reported to the Department that the care recipient was incurring legal fees while the firm corresponded with the approved provider about an absent bond refund.

The Department has also received complaints from approved providers regarding care recipients entering a new bond agreement after transferring from a closed service. The nature of these complaints was that the former service had not transferred the bond to the new service. This negatively affects the new service as it does not have the bond at its disposal and creates additional administrative burden to the approved provider through seeking transfer of the bond from the former service.

The Department’s compliance monitoring program has identified ineffective governance as the key driver for both the late repayment of bonds and the triggering of the Guarantee Scheme.

While the changes to the Act commencing on 1 October 2011 put in place additional limits on the use of bonds, they did not require additional governance or monitoring arrangements (because these types of arrangements are generally addressed in delegated legislation (Principles) rather than the Act).

The question arises as to whether the changes to the Act are, on their own, adequate to achieve the policy objectives underpinning the changes. This problem should be understood in the context of compliance and governance failures occurring in the aged care sector, that occurred under the previous less stringent arrangements in the Act and current Principles that led to the need for change.

The question also arises as to whether the opportunity should be taken to promote better targeted information and informed choice on the part of prospective care recipients.

• Governance in Aged Care

Completion of an Annual Prudential Compliance Statement (APCS) is a requirement of the Disclosure Standard. In the 2009-10 financial year, 13 per cent of approved providers reported non-compliance with refund requirements, interest payments, bond agreement requirements and the Prudential Standards in their APCS. The most common area of non-compliance was the late repayment of bonds, with 9.7 per cent of approved providers reporting this. This rate has decreased from 13 per cent in 2007-08 and has stabilised between 2008-09 (10 per cent) and 2009-10 (9.7 per cent). Follow-up action by the Department found that late bond refunds were usually due to approved providers’ inadequate administrative controls regarding the refund processes or a lack of knowledge by staff of refund obligations. These are circumstances where inadequate governance arrangements were the root cause of non-compliance.

Four of the five approved providers that triggered the Guarantee Scheme were single service approved providers and were all companies in which the shareholders were both directors and executive managers. In the majority of these cases the administrators and/or liquidators identified a poor state of record keeping, lack of senior executive oversight, poorly managed loans and investments and poor accounting records as having contributed to the failures. These issues were predominantly attributable to inadequate governance practices.

While the incidence of approved providers triggering the Guarantee Scheme is proportionately low, the effect on care recipients, who have trusted a significant portion of their life savings to the approved provider, is not. The need to find new accommodation, the adjustment to lifestyle from being forced to move away from friends and familiar staff, the process of moving and the uncertainty of the protection of their life savings can create significant stress. This stress does not accord with the objectives of the Act which include: “to protect the health and well-being of the recipients of aged care services.”

Additionally, the refund of bonds through the Guarantee Scheme does little to address the moral hazard and high impact of the closure of residential care facilities on care recipients, their families and staff due to poor governance arrangements, mismanagement of bonds and insufficient disclosure arrangements.

Triggering the Guarantee Scheme should be seen as safety net only, as while the care recipients’ funds are protected via this mechanism, the triggering of the Guarantee Scheme undermines public confidence in the sector and creates uncertainty for approved providers. The threat of the Commonwealth imposing a levy to recoup the costs of the Guarantee Scheme is of significant concern to many approved providers. Based on 2009-10 figures an approved provider holding $359 million in bonds would face a bill in excess of $829,000 should the levy be applied proportionate to bond holdings.

As well as direct effects of service failure, ability to repay bonds is part of a broader matter of financial health of services, which is necessary to ensure appropriate and quality care for older Australians in residential aged care. Good governance underpins good quality of care as well as supporting compliance.

From 1 October 2011 the Act will permit the application of bonds to permitted uses including in a wide range of financial products. Approved providers may invest bonds in financial investments without appropriate consideration of the risks of those investments to liquidity. This may affect the ability of approved providers to repay bonds when they fall due.

From 1 October 2011, where an approved provider becomes insolvent owing bonds and a misuse of bonds has been identified, both the approved provider and its relevant key personnel can face criminal prosecution. A key to avoiding prosecution is to ensure that key personnel with responsibilities in relation to bonds clearly understand their responsibilities. The Department’s monitoring in relation to the late repayment of bonds has found that poor governance is a significant factor that will increase the exposure of approved providers and their key personnel to the risk of criminal sanctions.

As noted above, there is currently no requirement on approved providers to have sound governance arrangements in place to manage bonds.

• Disclosure to Care Recipients

Feedback from the aged care sector and consumer groups has identified issues with the current disclosure requirements, namely that the information provided is not well targeted to the needs of current and prospective care recipients and is not well understood.  At the same time, providing this information to care recipients places a burden on the aged care sector.  Without clearly framed and targeted information residents cannot make informed choices.  In addition, there is currently no mechanism to enable care recipients, prospective care recipients or their representatives to monitor how approved providers invest bonds, their compliance with permitted uses or their governance arrangements. Consequently, the ability of people to make informed decisions about their own exposure to the risk of late bond repayments is limited. 

• Disclosure to the Department

Despite the introduction of permitted uses for bonds from 1 October 2011, there is no mechanism to periodically monitor approved providers in relation to the use of bonds. The improved monitoring powers provided for in the Amending Act only allow for monitoring where the Secretary believes on reasonable grounds that an approved provider is in financial difficulty or has used a bond for a use that is not permitted.

On the face of it, given past compliance and governance failures mentioned above, lack of transparency on bond use increases the risk of, and opportunity for, bond misuse. In order for the Department to monitor compliance and prudential risk under the new arrangements, it is important to gather and analyse information on compliance with permitted use provisions. As noted above, in instances where there is no reason for concern, there is no provision for information on bond usage to be routinely made available to the Department.

• Additional Permitted Uses of Bonds

In addition to the matters detailed above, consultations have identified two potential additional uses of bonds that would support policy objectives for charging bonds, and avoid the need for unnecessary business restructuring to meet the requirements of the Act:

–        some approved providers establish unregistered schemes in order to aggregate funds for the building of aged care facilities. Permitted uses allow only for registered schemes and therefore stop the use of bond funds to be invested in a current legitimate investment.

–        capital investment is required during the start up of an aged care facility, including where a new facility opens and where an approved provider acquires an existing facility. Restricting the use of bonds to not include assisting to cover losses at start-up could be perceived as an unnecessary limitation on their use.

The additional uses potentially pose more risk than those in the Act, and extension to these may need to be balanced against governance, compliance and monitoring arrangements that may be in place.

3. Objectives 

The objective of this RIS is to complement the changes made in the Amending Act to identify the best means by which to:

–        ensure, as far as possible, that approved providers repay bonds when they fall due

–        protect the more than $10.6 billion in bonds being held on behalf of care recipients

–        protect the health and well-being of care recipients of aged care

–        ensure that care recipients, prospective care recipients and their representatives have sufficient, targeted information to inform their decision-making in selecting an approved provider

–        ensure that the Department is able to undertake effective risk-based regulation of the approximately 950 approved providers that hold bonds

–        keep the regulatory burden on approved providers as low as possible

–        promote public confidence in the aged care system

–        ensure that bonds continue to be available as a capital source of funding to support investment in aged care infrastructure.

4. Options

Options considered during the policy development and consultation process included:

–        the provision of education. This would assist key personnel of approved providers who want to comply with the current arrangements to do so. However, it would not address the significant issue of insufficient governance being a key factor in approved provider non-compliance. It would not provide the necessary impetus for change among poorly performing approved providers and would not strengthen the prudential arrangements for bonds.

–        the reporting of permitted use expenditure of bonds through the General Purpose Financial Report (GPFR). Reporting permitted use expenditure through the GPFR process would have required amendments to the Residential Care Subsidy Principles 1997. Those Principles relate to subsidies and not the management and reporting of bonds.

–        reporting of bond expenditure on permitted uses. This was strongly objected to by approved providers as it would require them to track bonds separately from other sources of revenue and would impose significant regulatory burden.

–        the requirement for separate bank accounts for approved providers to deposit all bond funds. Stakeholder consultation showed this option would impose an unwanted financial and administrative burden on approved providers.

The consideration of these issues led to their distillation into two options.

Option A: Do nothing

Option A would maintain current governance and monitoring arrangements under the Principles; in effect not costing any additional requirements or monitoring in relation to the primary legislative changes.

This option would only allow the periodic monitoring of compliance with permitted uses in instances where the Department has reasonable grounds for concern that an approved provider is using bonds for non-permitted purposes or is likely to be unable to repay bonds.

Option B: Improved Risk Management Approach

Option B proposes to amend the Principles so that:

–        a new Governance Standard is introduced, including the requirement for approved providers to have an investment management strategy (IMS) if they invest bonds in particular financial products

–        the Disclosure Standard is amended to improve disclosure to the Department, care recipients, prospective care recipients or their representatives.

–        permitted uses are expanded to allow for appropriate capital expenditure.

Each of these elements is designed to complement the arrangements that take effect as of    1 October 2011. These elements are described in further detail below.

Governance Standard

The proposed Governance Standard would require approved providers that hold one or more bonds to implement and maintain a governance system in relation to bond management.

Approved providers would not be required to adopt a particular governance system, but meet specified outcomes. The system would be outcomes based and ensure that appropriate mechanisms are in place relative to the size, nature and complexity of the approved provider’s business model. This would provide flexibility to implement governance systems that fit all corporate structures.

As a minimum, the system would be required to achieve the following outcomes:

–        allocating roles and responsibilities to the key personnel of the approved provider in relation to the management of bonds held by the approved provider

–        monitoring and controlling any delegation or outsourcing of the allocated responsibilities

–        reporting mechanisms for the allocated responsibilities that ensure the key personnel who are responsible for the executive decisions of the approved provider can effectively monitor and control the use of bonds

–        ensuring that relevant staff are aware of the requirements of the Act and the Principles in relation to bonds

–        detecting, recording and responding to any failure to comply with those requirements.

Approved providers would be required to keep written documentation describing the system and the results of any assessment or review of the system. Approved providers would be required to modify or replace the system if it no longer complied with the requirements.

Where an approved provider invests in financial products, other than a deposit taking facility (made available by an Authorised Deposit-taking Institution (ADI) in the course of its banking business), the approved provider would be required to implement an IMS. The IMS would be outcomes based and depend on the sophistication and risks of the investment approach.

The IMS would include:

–        the approved provider’s investment objectives, including the level of assessed investment risk

–        a strategy for achieving the objectives while also ensuring that the approved provider retains the capacity to refund bonds in accordance with the legislation

–        the asset classes that the approved provider intends to invest in and appropriate investment limits for each asset class

–        key personnel responsible for implementing the IMS.

An approved provider would be required to ensure that any investment of bonds is in accordance with the IMS. It would be required to ensure that the IMS is up to date and complies with the requirements. It would be required to modify, or replace, the IMS if it no longer complied with the requirements.

• Disclosure to Care Recipients, Prospective Care Recipients and their Representatives

Disclosure to care recipients, prospective care recipients and their representatives would occur at the same times as currently – on entry, annually and on request – but much of the information would be provided on request, thereby reducing the administrative burden of disclosure.

Information currently available would continue to be available. Additional information would be available including:

–        a summary of the permitted uses for which bonds have been used during the previous financial year

–        information about whether the approved provider has, during the most recent financial year, complied with permitted use requirements

–        if the approved provider is investing bonds in a financial product other than a deposit with an ADI, the approved providers’ investment objectives and the asset classes the approved provider may invest in.

The intent is for no additional information to be generated to meet these requirements. This information will already be generated through documenting the governance system, the IMS and the APCS.

• Disclosure to the Department

Approved providers provide financial information to the Department annually through an APCS and a GPFR. It is proposed that approved providers would disclose information on expenditure on permitted uses in the APCS.

With the exception of gross bond receipts and refunds, bonds would not be reported separately from other sources of income. Rather, the reporting would be of permitted uses as defined by the Amending Act.

This option would require the reporting of bond receipts and refunds, and expenditure on permitted uses from any funding source, in an annual cash statement in the APCS. The cash statement would include information on the value of bonds received during the year, the value of the bond balances refunded and the value of permitted deductions. This would give a value of bonds available to the approved provider for expenditure on permitted uses. The permitted uses, as defined by section 57-17A of the amended Act, would be line items in the cash statement and expenditure by the approved provider on these items would be reported. A line item would be the value invested in financial products since 1 October 2011 that has been returned to the approved provider from the sale, disposal or redemption of such products.

The following would also be included in the APCS:

–        the total amount identified in the approved provider’s liquidity management strategy (LMS) as being required to ensure that the approved provider has sufficient liquidity for the purposes of repaying bonds

–        the total amount deducted in accordance with section 57-19 from all bonds during the financial year.

In accordance with the transitional arrangements, the permitted uses able to be reported on in 2011-12 and 2012-13 would include the provision of residential and flexible aged care to residential and flexible aged care recipients.

This information would be readily retrievable from existing mechanisms (i.e. the LMS and the bond register, both of which approved providers are required to maintain). Information would be provided in the APCS document stating that presenting the information in the GPFR would be taken as compliance with the reporting requirement.

• Additional Permitted Uses of Bonds

The Department has noted that some approved providers set up unregistered schemes and that these schemes are aggregating funds for the building and operation of facilities. The amended Act allows only for registered schemes and would, therefore, stop the use of bond funds to be invested in a current legitimate investment. Capital investment is required during the start up of an aged care facility, including where a new facility opens and where an approved provider makes changes to the business operations of a purchased existing facility. These are legitimate uses for bonds not currently permitted by the amended Act.

5. Impact Analysis

The following groups are potentially affected by the options outlined above:

• Care recipients, prospective care recipients and their representatives – there are approximately 183,000 operational residential care places in operational Australian Government funded aged care places and 63,000 care recipients occupying these places have paid bonds
• Approved providers– there are approximately 1,150 approved providers of residential and/or flexible aged care services in Australia and over 950 of these approved providers hold bonds
• Government – the Australian Government funds aged care and regulates approved providers of Australian Government funded aged care. It underwrites the repayment of bonds through the Guarantee Scheme.

6.  Summary of impact of regulatory changes

Option A: Do nothing

Care recipients, prospective care recipients and their representatives – The Australian Government would continue to guarantee bond refunds through the Guarantee Scheme. This would continue to ensure that care recipients are not significantly financially disadvantaged where an approved provider fails financially, owing bonds. Doing nothing would not limit exposure to the emotional and physical risks to care recipients from commercial failure and poor governance.

Doing nothing would not provide care recipients, prospective care recipients and their representatives with targeted information about approved providers’ governance arrangements or investment model. This would limit their ability to exercise informed decision making when deciding on an approved provider.

Approved providers – Doing nothing would not impose any additional requirements on approved providers and, as noted below, would avoid a minor additional regulatory burden. It would allow a capital source of funding, and the investment of that funding only in the new particular permitted uses. Approved providers would continue to have access to bonds as a capital source of funding without any requirement to ensure appropriate systems are in place to manage them.

It would be optional for approved providers to have arrangements in place to assess the risks of permitted financial investments to their liquidity or to respond to changing risk.

Approved providers would be required to maintain their own records on expenditure on bonds on permitted uses, but would only be required to provide those to the Department on request.

Doing nothing would ensure that approved providers are compelled to provide care recipients with extensive information automatically. Conservatively estimated at $20 per care recipient per year, this equates to a $1.26 million impost on approved providers.

By limiting permitted uses to those in the amended Act, approved providers would not be able to use bonds to meet start up costs or invest in unregistered schemes for the purposes of building and acquiring aged care infrastructure. This could have the potential to inhibit capital expenditure in the sector and is contrary to the policy intent for bonds.

Government – Doing nothing would not require approved providers to have in place appropriate governance arrangements for managing bonds. Poor governance has been identified as a key factor in non-compliance with prudential requirements and in triggers of the Guarantee Scheme. Retention of the status quo would not reduce the Government’s exposure to the risks of underwriting the sector through the Guarantee Scheme, which has costed the Australian Government $24.5 million since its commencement in 2006.

Under this option, the Department would not receive information on how bonds are being used by the aged care sector and would not be able to monitor compliance with permitted uses.  It would only be able to periodically monitor approved providers that may be experiencing financial difficulties or using bonds for non-permitted uses.  Therefore, this option would not address the deficiencies identified in the context of the previous, less stringent requirements of the Act, by the ANAO and the Department’s own regulatory experience.

In addition, as the Department would not be able to routinely monitor indicators of the misuse of bonds, it would not be able to identify and respond to emerging financial risk.

Option B: Improved risk management approach

Care recipients, prospective care recipients and their representatives - Given that care recipients are entrusting increasingly large amounts of money to their approved providers (approximately $232,000 on average in 2009-10) there is a need to ensure that care recipients, prospective care recipients and their representatives are provided with adequate information to inform their choice of approved provider.

Under Option B, consumers would receive better, more targeted information to be able to make more informed choices. This would assist them to reduce their exposure to the consequences of non-compliance with prudential requirements, including the late repayment of bonds, and the stress caused by absent or late repayment of bonds and the triggering of the Guarantee Scheme.

Option B places a greater emphasis on information being provided upon request while ensuring that the information is received by those who require it. This would allow for access to better information for those who seek it and ensure that those who do not have an interest are not burdened with the information.

Option B also proposes increased scrutiny of how approved providers are using bonds and monitors their compliance with the permitted uses.  This approach will help ensure bonds are used appropriately, which builds care recipients confidence in the aged care sector and has the potential to lead to improvements in the aged care services in which care recipients reside.

Additionally, the changes proposed under Option B aim to ensure, as far as possible, that bonds are refunded to care recipients when they fall due.  This option has the potential to  reduce the risk of late repayment of bonds and the associated impact on care recipients.

Approved providers – Option B would introduce an improved regulatory framework for approved providers that would assist in limiting their exposure to the negative public reaction to the aged care sector from triggers of the Guarantee Scheme and reduces risks to their financial position (through the levy being charged) as well as risks of financial and business failure and, ultimately, potential fines and imprisonment for contraventions of the Act.

The proposed new Governance Standard would have minimal burden for approved providers with appropriate governance practices; for these approved providers it would be a matter of documenting current arrangements.

The Governance Standard would strengthen the business practices for poorly performing approved providers and compel them to adopt governance arrangements commensurate to the risk of managing bonds. Such sound corporate governance practices would be expected of any business managing significant amounts of other people’s money. The Governance Standard has been designed in consultation with the aged care sector to be readily achievable without the need for significant additional expenditure.

Approved providers that do not make financial investments with bonds would have lower compliance requirements through not being required to implement an IMS.

The Department has undertaken extensive consultation with a range of stakeholders, including approved providers, banks, financiers, consumer advocacy groups and others to gain an understanding of potential compliance costs that may be incurred by the aged care sector if Option B is introduced.

Disclosure to the Department was the part of Option B that created the most discussion during consultations. The initial proposal was for the reporting of expenditure of bonds on permitted uses. The principal concern was that many approved providers ‘pool’ their incomes and do not track bonds separately form other sources of income.

In relation to the initial proposal, one approved provider with over 1000 places estimated an additional audit cost of $6,000 to $10,000 per year. Another with over 500 places estimated additional costs of $10,000 per year. Another approved provider with 87 places estimated an increase of $2,000 in annual audit fees. These figures were ‘off the cuff’ estimates and did not contain a sufficient level of detail to allow the Department to accurately gauge the actual compliance burden. The aged care sector was invited to provide details of estimated costs of compliance, but no responses were provided.

In response to the concerns the proposed reporting mechanisms were amended to not be of expenditure of bonds on permitted uses but of expenditure from any source on permitted uses. Aged care sector representatives indicated that the amended proposal in Option B would impose some costs but that compliance would be achievable and costs minimal.

While it is proposed that approved providers report on their permitted use expenditure, this does not override the requirement of approved providers to only expend bonds on permitted uses. An approved provider can be asked to provide evidence of their compliance with this at any time and it is beholden on the approved provider to be able to demonstrate compliance with this requirement.

Through the Business Cost Calculator, the Department has assessed the compliance costs of the proposed changes to the Disclosure Standard. The average cost to approved providers (with the average approved provider holding $11.2 million in bonds) for initial start up was estimated to be $1,000 per business, assuming the approved provider procured the services of a consultant to set up chart of accounts and relevant reports. The average ongoing compliance cost was also estimated to be $1,000 per year. This analysis was based on an average of four hours of a consultant’s time on either the initial start up or ongoing compliance. For approved providers with more sophisticated accounting systems that process a large volume of transactions, the ongoing compliance cost is estimated to be approximately $10,000 per year.

The amendments to the Act remove the restrictions on the use of income derived from bonds, retention amounts and on accommodation charges. The following is a conservative break down of the amount of income derived from a bond and retention amounts at the end of the year from one new bond, should that bond be invested in a one-year term account.

Based on the:

–        average bond for a new care recipient in 2009-10 of $232,000

–        average advertised one-year term deposit interest rate of 6 per cent per annum

–        maximum retention amount at 1 July 2011 of $318 per month

The combination of the anticipated interest rate and the retention amounts would mean an approved provider could conservatively expect to receive in excess of $17,500 in unregulated income derived and retention amounts in the first year of receiving the bond. Similar income is able to be made for the full five years where the approved provider is entitled to retention amounts. Therefore, the income from a single new bond of average size would be more than sufficient to offset the additional cost of compliance with Option B.

For the changes in disclosure of information to care recipients, prospective care recipients and their representatives, no new information would be required to be generated to disclose the information. The information to be disclosed would have already been generated through compliance with the Prudential Standards. By providing for information to be available on request, it would balance the increased reporting with a significant reduction in the administrative burden to approved providers.

From information gathered through the consultation process, Option B is likely to result in a low overall compliance cost impact, comprised of a low implementation impact and a low increase in ongoing costs for the affected group.

Government - The major benefit of Option B to Government is that it would provide the Department with better information for improved monitoring of the use of bonds. Combined with the amendments to the Act, these changes would provide a regulatory framework that is commensurate with the risks associated with the exponential growth of bond holdings. This will assist in improving prudential compliance, give greater confidence in the aged care system and increase the capacity of the Department to intervene before approved providers face financial failure.

The introduction of compulsory governance arrangements for approved providers holding bonds may decrease the likelihood of the Australian Government refunding bonds through the Guarantee Scheme.

There would be costs associated with the implementation of a Departmental communications strategy targeting approved providers and consumer groups.

7. Consultation

Summary of consultation with consumer groups on the proposed changes

The proposed changes to the regulation of bonds have been the subject of extensive consultation with consumer groups, peak bodies, approved providers and the financial services sector. Overall, the response has been supportive of the prudential reforms.

Consultation commenced with the release of an Issues Paper in October 2010. The Issues Paper predominantly sought input on the reforms associated with the Act amendments but also outlined and sought views on reporting to the Department and to care recipients on the use of bonds. A total of 33 submissions were received. There was general consensus on improved reporting requirements to the Department and to care recipients.  The majority of submissions agreed that the APCS was best placed to incorporate any additional reporting required to the Department.

The February 2011 consultation paper Enhanced Prudential Regulation of Accommodation Bonds also outlined the proposed Governance Standard (including the IMS for approved providers investing in financial products), improved financial reporting through the APCS and improved disclosure to care recipients, prospective care recipients and their representatives. Many of the 25 consultation meetings for the consultation paper canvassed the amendments proposed in this RIS.

Consultation for the development of this RIS was undertaken with key stakeholders and sector representatives in Canberra, Sydney, Melbourne, Adelaide and Perth. Twenty three consultations specifically canvassing the proposed amendments to the Principles were held in June to August 2011. The consultations included discussions with:

–        ten not-for-profit approved providers

–        five for-profit approved providers

–        five sector peak bodies

–        four consumer groups

–        three accountants

–        two consultants

–        two banks.

Overall, the response has been supportive of Option B, with stakeholders acknowledging the balance that the proposed changes strike between enabling approved providers access to a capital source of funding and protecting the life savings of care recipients.

In particular:

• Consumer groups were supportive of the proposed changes outlined in Option B. Consumer groups supported the disclosure of additional information to care recipients, prospective care recipients and their families and making much of the information available on request.

• In relation to the proposed Governance Standard – the most common comment across the aged care sector and others was that it was good practice that is already undertaken by approved providers with appropriate arrangements.

• In relation to the requirement for an IMS, stakeholders were also generally positive. Some raised that having an IMS would not prevent risky investments with one commenting that some approved providers may have little knowledge and experience relating to financial investments.

• In relation to disclosure to the Department, it was noted that some approved providers would find it difficult and costly to report on permitted use expenditure of bonds. This is a result of approved providers ‘pooling’ income and not tracking individual dollars as coming from bonds or other sources. 

Option B responds to this by requiring reporting of gross bond receipts and refunds, and requiring the reporting of permitted uses (as defined by the amended Act) from any source of funding. This would provide indicative information to the Department using existing reporting mechanisms at a low cost to approved providers. There were no strong objections to providing additional reporting of bond income and permitted uses in the APCS.

• In relation to reporting to care recipients, prospective care recipients and their representatives, both aged care sector and consumer groups were supportive of the reforms.

• In relation to the proposed permitted uses, the aged care sector was supportive of, and advocated for, the arrangements. No objections were received from any party.

• Many stakeholders expressed the desire for appropriate guidance material for consumers and approved providers.

8.      Conclusion and preferred option

The major disadvantage of Option A is that it does not address the current inadequacies of the legislation or the problems identified in this RIS. Furthermore, amendments were made to the Act in the context of the recognised need for mandatory governance arrangements and the monitoring of permitted use requirements (via amendments to the Aged Care Principles). These are important elements of the bond system and, given the structure of the aged care legislation, were not addressed in the amendments to the Act.

Option A would see a situation where the permitted uses for bonds are clearly articulated (with criminal penalties associated with misuse) but would not provide a method to report against these uses or to monitor compliance.

Option B addresses the problems identified and is therefore the preferred option. This option:

–        reduces the risk of late repayment of bonds when they fall due

–        ensures that appropriate governance arrangements are required to be in place to protect the more than $10.6 billion in bonds being held on behalf of more than 63,000 care recipients

–        ensures that care recipients, prospective care recipients and their representatives have sufficient and targeted information available to them to inform their decision making

–        ensures that the Australian Government is able to undertake effective risk-based regulation commensurate with the risk of its guarantee of the $10.6 billion in bonds

–        ensures approved providers have available a capital source of funding to support investment in aged care infrastructure

–        achieves the above outcomes with minimal regulatory and cost burden.

The risk of commercial failure, the triggering of the Guarantee Scheme and subsequent enactment of the levy is greater with Option A than Option B. Option A would allow current practices that contribute to compliance failures and financial difficulties amongst some approved providers to continue.

The risk to care recipients and their families that their bonds will not be paid when they fall due is reduced with Option B. The risk of triggering the Guarantee Scheme, and the effect of that on well-being, is also reduced.

Option B would promote good corporate governance practices that are essential to ensuring approved providers are able to refund bonds when they fall due. The ongoing compliance cost would be approximately $1,000 per annum for the average approved provider. From 1 October 2011 approved providers will also have unrestricted use of income from bonds, retention amount and the accommodation charge. The approximately $17,000 annual income available from a single average-sized bond invested conservatively more than offsets compliance costs of the proposed amendments. Additionally, good governance supports sustainability, access and quality in the sector.

The requirement for an IMS would ensure that the approved provider and its board or governing body have considered and addressed the prudential and other risks that these investments may pose to the approved provider. The introduction of the IMS would ensure that a broad range of financial investment options continue to be available to approved providers.

Given that the average value of bonds held by an approved provider is $11.2 million, an approved provider of average size triggering the Guarantee Scheme would potentially create a much greater impost through the levy than any of the five that have activated it to date. Based on 2009-10 figures, one approved provider would have a liability of more than $379,000 should such an event occur and the levy be applied proportionate to bond holdings. An approved provider with an average bond holding would be charged approximately $11,800. Under Option B, the risk of the Guarantee Scheme being triggered is reduced - it is arguable that imposition of the levy would represent a far greater impost on many approved providers than the cost of the proposed changes.

Given the significant funds lent by care recipients to approved providers, it is appropriate that there is greater transparency about how approved providers manage those bonds. This would promote consumer confidence in the aged care system.

The proposed measures would support compliance with, and would complement, the new arrangements set out in the amended Act. In addition, the proposed changes are expected to improve financial management in aged care, and ensure greater transparency and accountability for accommodation bonds.

Combined with the amendments to the Act, the changes would provide a regulatory framework commensurate with the risks associated with the exponential growth of bonds and the effect of commercial failure on care recipients and the aged care sector.

Through implementation of these changes and action already taken through amendments to the Act, consumers could have greater confidence in the ability of the aged care sector to manage their funds and in the Government’s ability to effectively regulate the approved providers holding bonds.

Option B delivers the best approach to strengthening consumer protections for bonds at a modest cost to approved providers.

9. Implementation and Review

It is proposed that the changes will start to take effect from 1 October 2011 to coincide with new arrangements set out in the Act, with compliance with the Governance Standard commencing on 1 February 2012. This expectation will be communicated to the sector. Approved providers would be expected to meet the new requirements for bonds taken on or after 1 October 2011. While most approved providers are expected to be well placed to meet the new requirements, there may be some approved providers that will need to make adjustments in order to comply with the new permitted uses requirements.

As part of the Amending Act, a two year transition period is included until the end of September 2013 for compliance with the permitted use provisions. The transition period allows for the sector time to become familiar with the new requirements relating to the permitted uses of bonds. During the transition period, approved providers will continue to be able to use bonds in line with the current regulatory requirements. Approved providers will be required to disclose relevant information on expenditure on permitted uses in the reporting period for 2011-12 as part of their annual APCS reporting. This reporting is due for almost all approved providers by 31 October 2012. As already noted, the option would be available to report this information through the GPFR should the approved provider governing body prefer. The reporting requirements would not override the requirement to expend bonds only on permitted uses (or through the transition arrangements), and evidence of compliance with this requirement can be sought at any time.

In 2010-11 the Department expanded its regulatory intelligence and monitoring capabilities of prudential regulation of bonds. It is envisaged that the proposed amendments to the Principles will form a part of the additional monitoring and enforcement activities. The proposed amendments to the Principles will complement new arrangements in the Act and better position the Department to monitor the use of bonds.

Education and support will be provided to assist approved providers to comply with their prudential obligations. A communication strategy has been developed. Key elements of the communication strategy include:

–        updates to existing information sheets for consumers

–        the development of new information sheets for approved providers

–        information for financiers and auditors

–        updates to the Residential Care Manual

–        the utilisation of communication vehicles including the internet, stakeholder forums and publications

–        electronic delivery of information packages to all approved providers

–        hard-copy registered mail delivery of information packages to high risk approved providers and the 100 approved providers with the largest bond holdings

–        personal liaison with key stakeholders including peak bodies, consumer groups and particular approved providers.

It is proposed that the effectiveness of any changes to the legislation be monitored by the Department. This will include seeking feedback from the aged care sector and consumer bodies and other advisory bodies such as the Ageing Consultative Committee.

A review will be conducted following the two-year transition period for permitted uses detailed in the Amending Act. It is anticipated that the review will be conducted in  2014–15.