As we move closer to the implementation of industry reforms regarding the provision of financial advice, Treasury last week has added to the pile with the re-issuing of draft Corporations Amendment Regulations to provide that limited recourse borrowing arrangements as allowed under superannuation law are financial products.
These reforms were previously announced back in March 2010, with industry consultation in June of that year. In light of the submissions previously made, Treasury has substantially revised these draft Regulations. However, it remains a clear policy objective of Government to move these type of borrowing arrangements into the financial consumer protection framework as there continues to be concerns of targeted activity and inappropriate advice to acquire property using borrowings.
Under these Corporations Act 2001, those providing advice in respect to the limited recourse borrowing arrangement established in accordance with s67A and s67B will be required to have an Australian Financial Services License (AFSL). For those simply providing credit facilities, they are not caught by these regulations.
To be able to provide advice in this area, an AFSL that allows for advice on derivatives or securities meets the requirements to also cover limited recourse borrowing arrangements. This poses an interesting question for many accountants considering their licensing options with the proposed ‘conditional license’ to be implemented to allow for advice likely to be under a ‘class-of-product’. All of the current limited licence solutions won’t provide for them to deal in securities unless they met additional competency requirements of the AFSL holder (and paid the additional licensing cost as well).
Who issues the financial product?
A previous confusion of the regulations related to the issuer of the limited recourse borrowing arrangement. As a borrowing arrangement involves numerous parties, it is difficult to determine which party is the “issuer”, or when the product is “issued”. These concerns posed difficulties for Government and the industry in determining which party, if any, is obliged to disclose information required under the corporations legislation.
These changes now clarify that the limited recourse borrowing arrangement is “issued” when a person enters into a legal relationship that sets up the arrangement and that each party to the arrangement is an “issuer” of the product. It is unclear from these regulations whether related party lenders get caught under these arrangements as an issuer of a financial product?
When do these changes commence?
These proposed regulations would take effect three months after the legislative instrument was exercised by Government.
As we close in on the two-year review period proposed by the Cooper Review with limited recourse borrowings, in my view the Government can only start the clock ticking once these laws take effect. With:
- changes to the definition of limited recourse borrowing arrangements from 7 July 2010,
- details of the final ruling SMSFR 2011/D1 expected in May 2012, and
- changes to make these arrangements financial products
surely the Government’s assessment to date would be baseless? or maybe… just maybe once resolved, consumers and advisers alike will have a framework in which to work with moving forward!! Let’s hope so.