ASIC Class Order [CO 11/1140]


Prepared by the Australian Securities and Investments Commission

Corporations Act 2001

 The Australian Securities and Investments Commission (ASIC) makes ASIC Class Order [CO 11/1140] under paragraph 926A(2)(c) of the Corporations Act 2001 (the Act).

Paragraph 926A(2)(c) provides that ASIC may declare that provisions to which section 926A applies apply in relation to a person or financial product, or a class of persons or financial products, as if specified provisions were omitted, modified or varied as specified in the declaration.

 1. Background

Section 912A sets out the obligations of an Australian financial services (AFS) licensee including that the licensee have available adequate resources (including financial) to provide the financial services covered by the licence and to carry out supervisory arrangements and adequate risk management systems. This does not apply to bodies regulated by the Australian Prudential Regulation Authority (APRA).

ASIC imposes specific financial requirements on AFS licensee that are not regulated by APRA in accordance with ASIC Regulatory Guide 166 Licensing: Financial requirements.

Meeting the financial requirements will assist AFS licensees in ensuring that they have adequate financial resources as required by paragraph 912A(1)(d) and an adequate risk management system as required by paragraph 912A(1)(h).

The financial requirements that apply to AFS licensees vary depending on the nature of the financial service activities conducted by the licensee. The operation of registered managed investment schemes in particular has specific financial requirements. These financial requirements take into account:

  1. The financial requirements set out in the old Corporations Act;
  2. The diversity of the types of schemes;
  3. The need for investor confidence and assessment of comparable regulatory regimes in leading financial centres; and
  4. Comparable regulatory regimes, such as the Superannuation Industry (Supervision) Act 1993 (SIS Act) for public offer superannuation funds.


2. Purpose of the class order

Since the introduction of the current financial requirements in 2002, there have been a number of significant developments in relation to responsible entities, including a substantial increase in the amount of assets managed by responsible entities in Australia, significant growth in the number of registered schemes, diversification in the size, complexity and nature of the types of schemes managed by responsible entities and a number of recent high-profile collapses of responsible entities where arguably the quantum of financial resources held by the responsible entity has made it difficult for the scheme to be wound up in an orderly fashion.

These developments have highlighted the need for significant review of the current financial requirements for responsible entities (set out in ASIC Regulatory Guide 166: Licensing: Financial requirements) to ensure sufficient rigour in the financial risk frameworks of businesses seeking to manage money or assets on behalf of members as a responsible entity.

The purpose of the Class Order is, to expand on the requirement in the Corporations Act for responsible entities to have adequate financial resources, and to assist in ensuring that for responsible entities of registered managed investment schemes:

  1. There are arrangements to meet operating costs (e.g. costs of ensuring compliance with the Corporations Act) throughout the life of their registered schemes through robust cash flow forecasting, adequate levels of capital and liquidity, and capital levels reflecting the operational risk of a responsible entity;
  2. There is some level of assurance that, if the responsible entity does fail, there is money available for the orderly transition to a new responsible entity or to wind up the scheme; and
  3. There is alignment of the interests of responsible entities and scheme investors by imposing adequate minimum capital requirements so that responsible entities are entities of some substance with sufficient capital at risk to provide responsible entities with a real financial incentive to successfully manage scheme assets.


3. Operation of the class order

Paragraph 4 of the Class Order varies paragraph 912A(1)(d) of the Act as it applies to certain responsible entities by requiring those responsible entities to comply with modified provisions in the Class Order as part of satisfying the obligation to have adequate financial resources under that paragraph. Responsible entities that are market participants or clearing participants are not subject to the requirements, as other requirements apply under ASIC policy.


Paragraphs 3 and 4 provide that the Class Order applies to a Australian financial services licensee who holds an authorisation to operate a registered managed investment scheme (ie a responsible entity) on and from the commencement date as specified in paragraph 3 of the Class Order.


Paragraph 4 of the Class Order contain the terms of the modifications. In order to comply with the requirement to have adequate financial resources under paragraph 912A(1)(d) of the Act, responsible entities must at least comply with the requirements under the following provisions of section 912AA that are notionally applied under the modified provisions of the Act applying under the Class Order:

a) Cash needs requirements

i. Paragraph 912AA(4)(a) requires a responsible entity to prepare a cash flow projection covering at the least the next 12 months based on what is reasonably likely to occur.

ii. Under paragraph 912AA(4)(b) responsible entities must update the cash flow projection when:

  • the cash flows cease to cover the next 12 months; or
  • there is a material change; or
  • the licensee has reason to suspect that an updated projection would show that the licensee was not meeting paragraphs 912AA(4)(e) or (f).

iii. The responsible entity must document the calculations and assumptions on which the projection is based, and describe why these assumptions are the appropriate assumptions (see paragraph 912AA(4)(c)).

iv.  The directors of the responsible entity must approve the cash flow forecast at least quarterly that the forecast satisfies the requirements of the cash needs requirement (see paragraph 912AA(4)(d)).

v. The responsible entity must demonstrate, based on the cash flow forecast, that over the projection period it will have access to sufficient resources to meet its liabilities (see paragraph 912AA(4)(e)), and sufficient resources to comply with the cash or cash equivalents component of its NTA requirement (see paragraph 912AA(4)(f)).

b) NTA requirement

Paragraph 912AA(5)(a) requires a responsible entity, in certain circumstances, to hold an amount in net tangible assets (NTA) defined in subsection 912AA(11) which is a measure of assets less liabilities subject to certain adjustments to make it an appropriate measure for the purpose. The amount required is the greater of:

  1. $150,000;
  2.  0.5% of the average value of scheme property of the registered scheme(s) and investor directed portfolio services (IDPS) the responsible entity operates, up to$5 million NTA; or
  3. 10% of the average RE revenue with no maximum NTA.


The NTA requirement under paragraph 912AA(5)(a) is partly based on revenue because revenue broadly reflects the risk related to the responsible entity‟s businesses, including non-scheme revenue streams. In particular, for responsible entities with high revenue and low funds under management (e.g. agribusiness schemes), the revenue component of the NTA requirement results in a greater and more appropriate to risk level of required capital for the responsible entity than the funds under management component of the NTA requirement. For responsible entities with risky business models that tend to earn higher returns to reflect the higher risk levels, the NTA requirement will better reflect their operating risk.

Average RE revenue

The “average RE revenue” is defined in subsection 912AA(11). In summary, the definition refers to an amount based on the average of the RE revenue for up to the last two preceding financial years (starting from when the RE was first authorised to operate a registered scheme) and an estimate of the forecast RE revenue for the remainder of the financial year.

Responsible entities are expected to base their forecast on reasonable assumptions and should take into account the actual revenue over that financial year to date in making a forecast.

Responsible entities may outsource performance of some of their obligations in operating a registered scheme. Under section 601FB of the Act a responsible entity is to operate the registered scheme and is liable to members for any acts or omissions of agents or other persons the responsible entity engages to do anything that the responsible entity is authorised to do in connection with the scheme. A responsible entity may or may not be taken in accordance with Australian Accounting Standards to earn revenue and incur an expense in relation to payments to providers of outsourced services. However a responsible entity‟s financial position is subject to risk by such activities being performed by such agents or persons, whatever the accounting treatment.

To ensure that responsible entities maintain NTA that covers all aspects of scheme operations, the definition of RE revenue includes payments out of scheme property (whether or not such payments are classified as revenue of the responsible entity under the Australian Accounting Standards) that relate to fulfilling a responsible entity‟s obligations under the Corporations Act, even if some of those obligations are outsourced to other entities.

Average value of scheme property

The average value of scheme property is defined in subsection 912AA(11). In summary, the definition refers to an amount which is the greater of:

  1. The current value of scheme property; and
  2. An amount derived from the averaging of the actual value of scheme property for up to the last two preceding financial years (starting from when the RE is first authorised to operate a registered scheme) and the forecast value of the scheme property for the remainder of that financial year.


This averaging is to ensure that a responsible entity‟s NTA requirement is not reduced because of a drop in the value of scheme property, which might itself indicate the potential for the responsible entity‟s financial resources to be strained.

Where requirements relating to custody of scheme property and other assets of the scheme are not satisfied (paragraph 912AA(5)(b))

 Under the Class Order, unless the circumstances set out in subsection 912AA(7) are satisfied, the responsible entity must hold the greater of $5 million NTA as defined for this purposes or the amount required under paragraph 912AA(5)(a). In effect, this means that the responsible entity must hold the greater of $5 million NTA or 10% of average gross revenue (see paragraph 912AA(5)(b)) where the circumstances in subsection 912AA(7) are not satisfied.

The circumstances set out in subsection 912AA(7) are, in summary, where scheme property and other assets of the scheme are:

  1. Held by a custodian who holds $5 million NTA or is an eligible custodian as defined in subsection 912AA(11);
  2. Tier $500,000 class assets as defined in subsection 912AA(11) held by the responsible entity or a custodian or sub-custodian (each holding a certain amount of NTA) or eligible custodian; or
  3. Special custody assets as defined in subsection 912AA(11) held by the responsible entity, members or certain custodians,


Note, the above circumstances (ie paragraphs 912AA(7)(a) – (c)) have not changed from what was set out in the existing requirements relating to custody of scheme property and other assets.

Paragraph 912AA(6) clarifies that responsible entities relying on an eligible undertaking from an eligible provider (as defined in this Class Order), for the purpose of the NTA requirement, of an unlimited amount, will be deemed to comply with the NTA and liquidity requirement in the Class Order.

c) Liquidity requirement

Under the liquidity requirement there are two components.

Under paragraph 912AA(8)(a), the responsible entity must hold the greater of $150,000 or 50% of the NTA requirement that would be required to be held under paragraph 912AA(5)(a) (as if subsection (7) applied) as cash or cash equivalents. „Cash or cash equivalents‟ is defined as assets that are:

  1. Cash on hand, demand deposits and money deposited with an Australian ADI that is available for immediate withdrawal; and
  2. Short-term, highly liquid investments that are readily convertible to known amounts of cash that are subject to an insignificant risk of changes in value; and
  3. The value of any eligible undertaking provided by an eligible provider; and
  4. A commitment to provide cash from an eligible provider that can be drawn down within 5 business days and has a maturity of at least 6 months.


Paragraph 912AA(8)(b) requires responsible entities to hold the amount of NTA (that would be required to be held under paragraph 912AA(5)(a) as if subsection (7) applied) in liquid assets. „Liquid asset‟ is defined in subsection 912AA(11). The definition includes cash and cash equivalents (other than paragraph (iv) above), eligible undertakings from an eligible provider and an asset that can reasonably be expected to be realised for its market value within six months. In excludes any asset that not free from encumbrances or, in the case of receivables, free from any right of set-off.

A primary objective of the liquidity requirement is to ensure that a responsible entity‟s NTA is in a form that can be called upon when required. The liquidity requirement requires that a portion of a responsible entity‟s NTA be held as cash or cash equivalents to help it meet any immediate and unexpected expenses.

d) Audit opinion

Subsection 912AA(9) sets out the requirements for the content of an opinion of a registered company auditor covering the period during which the responsible entity was authorised to operate a registered managed investment scheme. The auditor is required to provide an audit opinion on the matters specified in paragraph 912AA(9)(a) and negative assurance based on a review on the matters specified in paragraph 912AA(9)(b).

In relation to the NTA requirement and calculation, there is no requirement for the auditor to express an audit opinion or conduct a review of the forecasts but merely to audit whether a forecast as required to calculate average RE revenue exists and whether the responsible entity has the NTA that would be required based on what appears in the forecast and the other matters relevant to ascertaining the NTA required.

e) Compliance with AFS licence conditions

To avoid duplication, subsection 912AA(2) clarifies that where a licensee has complied with the above requirements, it is taken to satisfy any conditions of its AFS licence that relate to the cash needs requirement, the net tangible assets requirement for responsible entities and the audit opinion lodgement requirement (in so far as the opinion covers a period for which the responsible entity was authorised to operate a registered scheme).

f) Definitions

The definitions that are relevant to the above requirements are set out in subsection 912AA(11) of the Class Order. The definitions generally reflect existing requirements applying in accordance with RG 166. Material amendments are as follows.

Adjusted liabilities

To ensure that the NTA requirement appropriately reflects the risk associated with any personal guarantees, a responsible entity would be required to assess the value of, and exclude from the NTA calculation (by adding to adjusted liabilities), the maximum potential liability of any guarantee provided by the licensee other than:

  • a guarantee limited to an amount recoverable out of any scheme property of a registered scheme operated by the responsible entity; or
  • a guarantee of the obligations of another member of a stapled group of which the responsible entity is a member.


Eligible provider

The definition of eligible provider under this class order excludes those providers who were eligible providers on the basis they were listed parent entities with a certain level of net assets. This is because the benefits of such undertakings are less likely to be available in the event that the responsible entity experiences financial difficulties.

4. Consultation

ASIC issued Consultation Paper 140: Responsible entities: Financial requirements in September 2010. ASIC received submissions from a range of industry associations and private industry bodies. Following a review of the submissions, ASIC held meetings with several of the parties who had made submissions. Following these meetings, ASIC received further submissions from certain submitting parties.

ASIC has prepared a Regulatory Impact Statement for this Class Order, which has been approved by OBPR (see attachment).