Entities within a corporate group will be able to satisfy the cash needs requirement under Policy Statement 166: Licensing: Financial requirements (PS 166) without completing individual cash flow projections under alternatives announced by the Australian Securities and Investments Commission (ASIC) today.

‘ASIC has provided these further alternatives in response to industry requests and to promote commercial efficiency, while maintaining safeguards which help give assurance that Australian Financial Services licensees meet the requirement of the Corporations Act to have adequate financial resources and risk management systems’, said Ms Pamela McAlister, Director, Legal and Technical Operations, Financial Services Regulation.

If the licensee's group manages cash on a consolidated basis it can meet the cash needs requirement without doing cash flow projections on an individual entity basis where all of the following conditions are met:

1. the licensee's parent entity complies with option 1 or option 2 under PS 166 in relation to its group (excluding any body regulated by APRA), including preparing cash flow projections on a group basis covering all entities in the group that are not bodies regulated by APRA;
2. a report by the parent entity's auditor is lodged with ASIC with the licensee's annual audit report or on ASIC request with respect to the compliance by the parent entity in relation to the group (other than any body regulated by APRA) with option 1 or option 2, as applicable, reflecting the report that would be required from the auditor of a licensee complying with the relevant option;
3. either of the following applies:
   1. Alternative A - the licensee's parent entity has provided an enforceable and unqualified commitment to pay on demand an unlimited amount to the licensee or to meet the licensee's liabilities (including any additional liabilities that the licensee might incur while the commitment applies) which the licensee reasonably expects will apply for at least the next three months taking into account all adverse commercial contingencies for which the licensee should reasonably plan (see Supporting Documentation Required below); or
   2. Alternative B - the licensee reasonably expects that (based on access to cash from members of its group that it will receive), it will have adequate resources (when needed) to meet its liabilities for at least the next three months (including any additional liabilities that the licensee might incur during that period) taking into account all commercial contingencies for which the licensee should reasonably plan (see Supporting Documentation Required below); and
4. the licensee has no reason to believe that the parent entity has not complied with the requirement at paragraph (c) or has failed to comply in a material respect with its obligations under Chapter 2M of the Act or, if the parent entity is not a company, under any other laws relating to reporting that apply to it.

Subsidiaries of Australian ADIs and foreign prudentially regulated bodies

If the licensee is a subsidiary of an Australian ADI (as defined in the Corporations Act), or a foreign deposit-taking institution that ASIC considers is regulated in accordance with the guidelines promulgated by the Basle Committee on Banking Supervision, then it can meet the cash needs requirement without doing projections if it reasonably expects that (based on access to cash from members of its group) it will have adequate resources (when needed) to meet its liabilities for at least the next three months (including any additional liabilities that the licensee might incur during that period), taking into account all adverse commercial contingencies for which the licensee shouldreasonably plan (see Supporting Documentation Required below).

Supporting Documentation Required

Where reference is made to the licensee forming a ‘reasonable expectation’, a responsible officer of the licensee must document the following:

1. the reasons for forming the expectation;
2. the contingencies for which the licensee considers it is reasonable to plan;
3. the assumptions made concerning the contingencies; and
4. the basis for selecting those assumptions.

This documentation must be retained by the licensee and may be required by ASIC as part of a licensing application, or in the course of surveillance activity. The auditor will also refer to this documentation when preparing its reports.

An example of an adverse commercial contingency for which a licensee might reasonably need to plan is the withdrawal of liquidity support by other members of its corporate group.

Consequential Amendment of Audit Opinion Licence Condition

The form of the requirement for a report by the auditor in the licensee will reflect the means that the licensee is using to meet the cash needs requirement.

Where the licensee is using group cash flow projections to meet the cash needs requirement, on the basis of alternative A, the report will be required to include an audit opinion about whether there is an enforceable and unqualified commitment to pay on demand an unlimited amount to the licensee, or to meet the licensee's liabilities (including any additional liabilities that the licensee might incur while the commitment applies). In addition, the report will be required to contain a statement about whether the auditor has any reason to believe that the documented basis for selecting the assumptions on which the licensee's expectation concerning the period during which the commitment will apply was unreasonable.

Where the licensee relies on alternative B, the report will be required to contain a statement about whether the auditor has any reason to believe that the documented basis for selecting the assumptions on which the licensee's expectation concerning the adequacy of the resources required under alternative B was unreasonable.

Where the licensee is a subsidiary of an Australian ADI or ASIC-approved foreign prudentially regulated body that does not prepare cash flow projections on the basis of its expectation concerning the adequacy of resources, the report will be required to contain a statement about whether the auditor has any reason to believe that the basis for selecting the assumptions documented by the licensee in forming the expectation was unreasonable.

Background

The PS 166 cash needs requirement requires the holder of an Australian financial services licence to ensure that it has sufficient cash to meet its liabilities over at least the next three months, taking into account all commercial contingencies for which it is reasonable to plan.

The standard way for an Australian financial services licensee to meet the cash needs requirement is to prepare cash flow projections that cover a minimum period of the next three months. However, ASIC has recognised that where the licensee belongs to a corporate group that manages its cash flows in a consolidated basis, the preparation of cash flow projections for the individual licensee could be unduly burdensome and may not address the underlying policy objective of ensuring that the licensee has access to the cash it needs to meet its liabilities.

On 24 September 2003 (ASIC Information Release IR 03/26) ASIC announced that it would allow a licensee to meet the cash needs requirement without preparing individual projections if either an Australian authorised deposit-taking institution (ADI), or a foreign deposit-taking institution that ASIC considers is regulated in accordance with the guidelines promulgated by the Basle Committee on Banking Supervision provides an enforceable and unqualified financial commitment to pay an unlimited amount on demand either to the licensee, the licensee's creditors or a trustee for the licensee's creditors. The commitment must apply for at least the next three months (taking into account all commercial contingencies for which the licensee should reasonably plan). This is currently reflected in licence condition 11(d)(iii) of Pro Forma 209 (Australian financial services licence conditions).

Today’s developments provide further alternatives. Licensees can choose to comply with the alternative that best suits their circumstances in demonstrating they have adequate plans to ensure their short-term liquidity.

Implementation

ASIC intends to include the further alternatives in its next update of PF 209. This will not be before 11 March 2004. Until the update, ASIC will vary the conditions of an AFS licence if the licensee applies for the variation. ASIC will also grant an AFS licence on conditions that reflect these variations from PF 209, if the applicant asks for the variation.

End of release

Download a copy of:

Pro Forma 209: Australian financial services licence conditions

Policy Statement 166: Licensing: Financial requirements