The Government has announced that ASIC and APRA will consult in 2013 on proposals to regulate non-ADI finance companies that issue debentures to retail investors.

The proposals have two broad aims. The first is to improve the financial strength of retail debenture issuing finance companies. The second is to more clearly differentiate debenture issuers from banks, building societies and credit unions that are regulated under APRA’s prudential framework.

The proposals involve:
• mandatory minimum capital and liquidity requirements;
• restricting the ability of issuers to offer ‘at call’ investments and use ‘bank-like’ terms to describe their products;
• improving on-going disclosure to investors; and
• enhancing the capacity of trustees to monitor the financial performance of issuers and compliance with their legal obligations.

It is proposed amendments be made to the instrument that exempts Registered Financial Companies from the Banking Act to prohibit debenture issuers using terms like ‘deposit’ to describe their debentures. It is also proposed they be prohibited from offering these products on an ‘at-call’ basis and that debentures would have a minimum maturity period such as 31 days.

These proposals have two objectives. The first is to facilitate investor understanding that retail debentures have a different risk profile from ADI deposits. The second is to reduce the likelihood of issuers’ being subject to large numbers of investors seeking to redeem their debentures at very short notice.