ASIC today put forward a number of proposals to strengthen the regulation of the debenture sector, including introducing minimum capital and liquidity requirements.

The move follows a number of high-profile collapses in the sector, including Banksia Securities Ltd, the subsequent ASIC debenture taskforce and the Government’s December 2012 announcement about law reform for this $4 billion sector.

ASIC will consult on:

• mandatory minimum capital and liquidity requirements for debenture issuers

• proposals to strengthen disclosure to investors about debenture issuers

• clarifying the powers and duties of debenture trustees, and the role of auditors.

‘At the time of the failure of Banksia ASIC made it clear we had pushed the existing conduct and disclosure regime to its limit, and debenture issuers who accept retail investments and then on-lend that money like a bank should be required to have a more sustainable financial position,’ ASIC Commissioner John Price said.

‘This is consistent with growing international interest in regulating ‘shadow banking’ more effectively. We also consider debenture trustees may need greater powers so they can perform their supervisory role more effectively right across the debenture industry.’

More information about the proposals are set out in the attachment to this media release.

Mr Price said while the proposals would help ensure debenture issuers are more financially resilient, ‘they will not prevent failures’.

‘For this reason, it is important to understand debenture investments are higher risk than a deposit with a bank, building society or credit union that is prudentially supervised by APRA,’ Mr Price said.

Banksia Taskforce

ASIC’s investigation into the failure of Banksia Securities Limited is continuing. ‘If we find any wrongdoing we will seek to hold people to account,’ Mr Price said.

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Consultation Paper 199 Debentures: Reform to strengthen regulation (CP 199)

Background

On 22 December 2012 the Minister for Financial Services and Superannuation, the Hon. Bill Shorten, announced ASIC and APRA will consult on proposals to strengthen the regulation of the debenture sector.

APRA will separately consult on proposed reforms to more clearly differentiate debenture issuers from banks, building societies and credit unions that are prudentially regulated. This includes a proposal to prohibit debenture issuers from using terms like ‘deposit’ and a proposal to restrict ‘at-call’ accounts by imposing a minimum maturity period.

Following consultation, the Government and regulators will make a final decision on the new framework, including transitional arrangements.

Attachment to 13-024MR: ASIC consults on reforms to regulation of the debenture sector

Minimum capital and liquidity requirements

1. Certain debenture issuers that accept retail investments and then on-lend should have a minimum capital ratio of 8% of their total risk-weighted assets. This ratio would be calculated as:

2. We are also proposing that these debenture issuers should maintain a minimum holding of 9% of their liabilities in high-quality liquid assets. It is important that issuers have sufficient liquidity to meet short-term obligations to investors.

3. If issuers breached the capital or liquidity ratios, then they would be prevented from raising further funds.

4. We are also proposing that ASIC should have a discretionary power to raise or lower the 8% capital ratio on a case-by-case basis. This is because, unlike ADIs, debenture issuers will not be subject to close prudential supervision.

5. We are proposing a four year transition period for these requirements.

Powers and duties of trustees

6. Trustees are important gatekeepers responsible for monitoring the financial position of the debenture issuer.

7. Trustees will be required to regularly express a view in writing on the debenture issuer's financial position and on-going viability. This would apply to all types of debenture investments involving retail clients.

8. Trustees will be given express powers to obtain information from an issuer on an 'as needed' basis.

Auditors reporting to trustees

9. Debenture issuers will be required to engage their auditor to report directly to the trustee twice per year and answer any reasonable questions put to it by the trustee. This would apply to all types of debenture investments involving retail clients.

10. The report provided would be the audited annual report and reviewed half yearly report, and the auditor would have to report directly to the trustee any matters that are likely to be prejudicial to debenture holders or relevant to the exercise of the trustee's powers.

Disclosure to Investors rolling over their investment

11. We are proposing that certain debenture issuers that accept retail investments and then on-lend be required to provide prospectus disclosure when existing retail investors make further debenture investments or ‘roll over’.