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Thursday, 24 June 2010
Page: 4301


Senator LUDWIG (Special Minister of State and Cabinet Secretary) (11:51 AM) —I move:

That this bill be now read a second time.

I seek leave to have the second reading speech incorporated in Hansard.

Leave granted.

The speech read as follows—

The Superannuation Industry (Supervision) Amendment Bill 2010 introduces amendments to the Superannuation Industry (Supervision) Act 1993 (the act) to reduce the risks for superannuation funds investing in limited recourse borrowing arrangements.

The government recognises that for many Australians their superannuation savings will form a major part of their retirement income. The government considers it vital that members of the community have complete confidence that the regulatory framework surrounding superannuation is robust and that superannuation funds are managed prudently in a way which maximises Australians’ income in retirement. This bill enhances the regulatory framework governing superannuation fund investments in leveraged products to ensure that the borrowing exemption under section 67 of the act is not used in a manner that places the superannuation savings of everyday Australians at undue risk.

This bill contains amendments that reduce the risk to superannuation fund trustees created through arrangements involving personal guarantees, on-lending or related borrowings, multiple assets and where the asset is replaced.

The definition of ‘asset’

Some limited recourse borrowing arrangements targeted towards superannuation funds have been designed on the basis that ‘asset’ should be interpreted as including the plural. Borrowing arrangements over multiple differentiated assets could expose superannuation funds to greater risk than if a trustee took out a number of discrete loans, each relating to, and only enforceable against, a single asset.

This bill ensures that the term ‘asset’ should now be read in the singular, so that it is not interpreted as permitting borrowing arrangements over multiple non-identical assets. However, the definition permits borrowing arrangements over assets that are known collectively as a single asset, or a single collection of identical assets.

Related expenses and refinancing

Consultations with industry stakeholders on the bill revealed considerable uncertainty regarding whether the existing borrowing exemption allowed refinancing or related expenses to be incorporated into instalment warrant arrangements. Refinancing may allow the superannuation fund trustee to minimise the risk of default on a borrowing resulting from a temporary inability to make a repayment (for example, where the fund is facing solvency issues due to benefit payment obligations). Some expenses, such as conveyancing fees, stamp duty, and loan establishment costs, are so readily associated with the borrowing that it would be difficult and costly to dissociate them from the borrowing itself. Consequently, this bill amends the act to clarify the circumstances under which refinancing and related expenses are permitted.

Replacement assets

In prescribing the terms to which a borrowing arrangement must adhere, the act provides that the borrowing must be used or maintained to acquire ‘the original asset, or another asset (the replacement)’.

The broadness of this definition may result in arrangements that allow the lender to require a trustee to replace an asset within an arrangement if its value falls below a certain level with an asset of greater value than the outstanding loan.

To prevent replacements that increase the risk to fund assets, this bill amends the act to list the specific circumstances in which a replacement asset is permitted. The amended legislation provides for the regulations to expand on the list of eligible assets should the need for further exemptions arise.

This bill also amends the act to make clear that the original asset can be ‘maintained’ or ‘repaired’ to ensure that its functional value is not diminished, but that the asset cannot be ‘improved’, as this would fundamentally change the nature of the asset used as security by the lender, potentially increasing the risk to the fund. The bill also amends the act to allow for regulations to provide for further clarification should the need arise.

Personal guarantees and related borrowings

Several providers of limited recourse borrowing arrangements are requiring trustees, or third parties including fund members, to provide guarantees of the borrowing to underwrite the provider’s risk from the limited recourse nature of an instalment warrant. Similarly, persons may enter into on-lending arrangements or associated borrowings that may circumvent the limited recourse nature of borrowing arrangement.

This bill introduces amendments to ensure that the rights of the lender or any other person against the superannuation fund trustee are limited to rights relating to the acquirable asset. No guarantee arrangement or other related borrowing can be enforceable against the superannuation fund trustee other than the rights relating to the acquirable asset. This guards against guarantees and risks associated with any other charges not associated with the direct borrowing. These amendments will ensure that other superannuation fund assets are protected in the event of a default on a limited recourse borrowing arrangement.

Conclusion

The government is bringing forward these amendments to ensure the regulatory framework governing exempted borrowing by superannuation funds reduces the risks for superannuation funds.

The amendments respond to issues with the regulatory framework surrounding superannuation investment in limited recourse borrowing arrangements (such as instalment warrants) raised by the Australian Taxation Office (ATO), Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC).

Full details of the amendments are contained in the explanatory memorandum.