LIMITED RECOURSE LOANS TO SMSF’s – WILL THEY BE A FINANCIAL PRODUCT?

Changes are being proposed to the Corporations regulations that will have significant, if unintended, consequences for SMSF’s looking to enter into limited recourse borrowing arrangements.

Background

The government announced earlier this year that it proposed to amend the Corporations Regulations 2001 to provide that certain borrowing arrangements by superannuation fund trustees permitted by the Superannuation Industry (Supervision) Act 1993 are financial products under the Corporations Act 2001.

The SIS Act, as you know, permits superannuation funds to borrow funds in limited circumstances.  Limited recourse borrowing arrangements, such as instalment warrants, are one of the exceptions permitted under the SIS Act, under subsection 67(4A), but there are others that are widely used, especially in relation to real estate.

Proposed changes

The exposure draft of the proposed Corporations Amendment Regulations issued on 9 June 2010 would make limited recourse borrowing arrangements ‘financial products’ under the Corporations Act when entered into by regulated superannuation funds.

The government says the proposed regulations amend the Corporations Regulations 2001 to provide that:

• Limited recourse borrowing arrangements are financial products under the Corporations Act when acquired by superannuation funds;
• Limited recourse borrowing arrangements are not a credit facility under the Corporations Act when acquired by superannuation funds; and
• An Australian Financial Services Licence covering derivatives is taken to also cover limited recourse borrowing arrangements.

Some concerns

The proposed regulations are drawing comments from industry participants and legal advisers concerned they may be turning SMSF’s into product issuers who will need an AFSL and to issue a PDS when entering into reasonably straight-forward and common-place real estate transactions.

As the regulations are presently drafted, a person issuing or arranging a limited recourse borrowing arrangement to a superannuation fund or providing advice about such a borrowing, will need to hold an Australian financial services licence or need to be the authorised representative of a licensee.

If this is correct then the issuer of the limited recourse borrowing arrangements will be required to prepare a PDS for the “product”. We are not sure this is an intended result of the proposed changes.

One explanation for this is that there are numerous references in the explanatory statement and the draft regulations to “instalment warrants”. The regulations do not appear to have regard to the fact that many limited recourse borrowings are made by superannuation fund trustees to purchase assets other than securities under instalment warrants, in particular real estate. The proposed regulations also ignore the recent proposed changes to the SIS Act which will remove the current reference to instalment warrants.

The key problems that have been identified with the draft regulations are:

• In a limited recourse borrowing arrangements for real estate there is rarely, if ever, an “issuer”.  The explanatory statement suggests that the lender is intended to be the issuer, but the draft regulations are much broader.
• It is not clear what the nature and scope of the financial product proposed to be regulated. If a bank provides a loan on a limited recourse basis to a superannuation fund trustee to purchase real estate, the real estate is clearly a feature of the transaction.  Will the bank need to include information about that in the PDS?  Will the real estate agent require an AFSL?
• The security trustee would be caught by the regulations as currently drafted. There is a concern that it will require an AFSL to issue a financial product and potentially its own PDS.
  

The closing date for submissions is 25 June 2010. 

Please contact Hadyn Oriti should you require any further information..
Hadyn Oriti
February 2010
P: +61 2 6583 0449
E: horiti@dohlaw.com.au