No-action position to allow right-of-use lease assets to count in satisfying AFS licensee requirements
The no-action position outlined below applies to Australian financial services (AFS) licensees. It is issued on 7 July 2020 and applies until further notice.
Following the introduction of accounting standard AASB 16 Leases (AASB 16), all leases are now reflected on the balance sheet of a lessee by way of a lease liability and a right-of-use asset. For the purposes of applying certain financial resource requirements to an AFS licence, the right-of-use asset may be an intangible asset. Some AFS licensees may face difficulty in complying with their financial requirements because intangible assets (excluding deferred tax assets) are not included in satisfying such requirements.
ASIC will take no regulatory action in relation to a breach of a financial resource requirement (defined below) by an AFS licensee if the breach was caused by the AFS licensee’s inability to use a right-of-use asset to satisfy the financial resource requirement and that inability arises from recent changes to the accounting treatment of lease assets as a result of AASB 16.
ASIC plans to consult in the 2020-21 financial year on proposals to change the financial resource requirements to enable an AFS licensee to include a right-of-use lease asset when calculating whether it meets its financial resource requirements.
For the purposes of the no-action position, the financial resource requirements are:
- A net tangible assets (NTA) requirement, which applies to:
- a responsible entity of a registered scheme or an operator of an investor-directed portfolio service: ASIC Class Order [CO 13/760] – Financial requirements for responsible entities and operators of investor directed portfolio services ([CO 13/760]);
- a provider of a custodial or depository service: ASIC Class Order [CO 13/761] – Financial requirements for custodial or depository service providers ([CO 13/761]); and
- an issuer of margin lending facilities and a trustee company that provides traditional services: items 19A and 19B of ASIC Pro Forma 209 – Australian financial services licence conditions (PF 209).
- A surplus liquid funds (SLF) requirement of $50,000, which applies to an AFS licensee that holds more than $100,000 in client money or property, unless an exception applies: item 21 of PF 209.
- Adjusted surplus liquid funds (ASLF) requirements, which apply to:
- a foreign exchange dealer, who can choose between ASLF and capital requirements: item 20 of PF 209;
- a retail OTC derivative issuer, who must comply with an NTA requirement under ASIC Class Order [CO 12/752] – Financial requirements for retail OTC derivative issuers ([CO 12/752]); and
- a licensee that transacts with clients as a principal where the licensee incurs actual or contingent liabilities of $100,000 or more from transacting with clients: item 22 of PF 209. The ASLF requirement will not apply if the licensee is a retail OTC derivative issuer (see [CO 12/752]).
Financial resource requirements
Under s 912A(1)(d) of the Corporations Act 2001 (the Act), an AFS licensee is required to maintain adequate resources, including financial resources, to provide the financial services the AFS licensee is authorised to provide under the terms of its AFS licence. These requirements are specified in AFS licences, based on PF 209 and various ASIC legislative instruments.
The policy principles that underpin ASIC’s financial resource requirements are set out in ASIC Regulatory Guide 166 Licensing: Financial requirements (RG 166).
ASIC policy on ‘no-action’ positions
ASIC’s general policy on ‘no-action’ positions and their status is set out in Regulatory Guide 108 No-action letters (RG 108). It should be noted that:
- a ‘no-action’ position is an expression of ASIC’s regulatory intention about how it will exercise its powers. The purpose of a ‘no-action’ position is to provide an indication as to the future regulatory action that we might take.
- an ASIC ‘no-action’ position does not necessarily preclude third parties (including the Office of the Director of Public Prosecutions) from taking legal action in relation to the same or similar conduct. Nor does it prevent a court from holding that particular conduct infringes the relevant legislation. A ‘no-action’ position does not express ASIC’s view about whether the relevant conduct contravenes the Act, or whether ASIC will intervene in an action by a third party in relation to the conduct.