Federal Register of Legislation - Australian Government

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This instrument provides responsible entities of registered managed investment schemes relief from certain provisions in Chapter 5C of the Corporations Act 2001 to facilitate withdrawals by members suffering hardship while the scheme is frozen.
Administered by: Treasury
Registered 27 Aug 2020
Tabling HistoryDate
Tabled HR31-Aug-2020
Tabled Senate31-Aug-2020
This Legislative Instrument has been subject to a Motion to Disallow:
Motion Date:
07-Dec-2020
Expiry Date:
15-Mar-2021
House:
Senate
Details:
Full
Resolution:
Withdrawn
Resolution Date:
25-Feb-2021
Resolution Time:
11:45
Provisions:

 

Australian Securities and Investments Commission

 

Explanatory Statement

 

ASIC Corporations (Hardship Withdrawals Relief) Instrument 2020/778

This is the Explanatory Statement for the ASIC Corporations (Hardship Withdrawals Relief) Instrument 2020/778 (the Instrument).

The Explanatory Statement is approved by the Australian Securities and Investments Commission (ASIC).

Summary

1.       ASIC has issued the Instrument in anticipation of an increased demand from investors in managed funds to realise their investments due to the impact of COVID-19. The Instrument addresses the impediments in Chapter 5C of the Corporations Act 2001 (the Act) to a responsible entity of a registered scheme making withdrawal payments to individual members on hardship grounds.

2.       The Instrument exempts a responsible entity from its equal treatment duty under paragraph 601FC(1)(d) of the Act in respect of hardship withdrawal payments. The Instrument modifies Part 5C.6 of the Act to enable a responsible entity to make hardship withdrawal payments to specific investors who meet specified hardship criteria, rather than the responsible entity having to comply with the usual requirements of making a withdrawal offer to all members of an illiquid scheme. Further, the Instrument adds a new provision to Part 5C.3 of the Act under which the constitution of a scheme does not have to set out adequate provisions for making and dealing with withdrawal requests to the extent that the constitution gives the responsible entity a discretion, which must be exercised reasonably, to decide whether to satisfy a hardship withdrawal request at all and if so, to decide whether to satisfy a hardship withdrawal request in whole or in part.

3.       The Instrument also increases the responsible entity’s capacity to change the scheme constitution unilaterally for the purpose of adding, if required, a specific hardship withdrawals provision. The responsible entity’s capacity to change a scheme constitution unilaterally is subject to members of the scheme not requiring a meeting to consider the proposed changes.

4.       The Instrument does not apply to time-sharing schemes, mortgage investment schemes, IDPS-like schemes and registered litigation funding schemes that involve representative proceedings.


Purpose of the instrument

5.       ASIC acknowledges that the impact of the COVID-19 pandemic may involve responsible entities for a significant number of registered managed investment schemes suspending withdrawals in the foreseeable future.

6.       ASIC considers that the COVID-19 impact may lead to increased investor demand to withdraw on hardship grounds. In this context, ASIC decided to issue the Instrument to provide a clear framework within which responsible entities may make hardship withdrawals available to members within reasonable parameters.

7.       In contrast, in response to the global financial crisis of 2008-09 (the GFC), ASIC granted relief to responsible entities on a case-by-case basis to allow hardship withdrawal payments. ASIC considered that providing relief by legislative instrument was a more timely and effective option than considering relief applications from responsible entities on an individual basis.

8.       The Instrument applies the fundamental policy principle that, in a general economic downturn, it is reasonable for a responsible entity to have special capacity to consider applications from members suffering genuine hardship due to the inability to access their money, and this special capacity should be balanced with the interests of the members who do not wish to withdraw, by ensuring adequate liquidity levels. ASIC applied these policy principles to hardship relief applications after the GFC and the principles remain applicable to the COVID-19 impact. ASIC’s policy approach is set out in Regulatory Guide 136 Funds management: Discretionary powers which has been updated in light of the COVID-19 pandemic.

9.       If a responsible entity wishes to make a hardship withdrawal payment outside the scope of the Instrument, such as where the withdrawal would exceed a hardship withdrawal limit (see below), the responsible entity may apply to ASIC for relief on an individual basis.

Consultation

10.     In April 2020, ASIC consulted with various financial services industry and consumer representative bodies about the proposal to grant hardship relief by legislative instrument. The consultation process resulted in its participants providing in-principle support to ASIC providing the hardship withdrawals relief by legislative instrument.

11.     In light of the urgency of enabling responsible entities to make hardship withdrawals available during the COVID-19 pandemic, ASIC carried out a targeted consultation process, rather than issuing a public consultation paper.

 

 

Schemes outside the scope of the Instrument

12.     The relief under the Instrument is available to the responsible entity of a registered scheme that is frozen[1], except for four types of schemes that are covered by the definition of ‘excluded scheme’ in section 4 of the Instrument.

13.     The first type of excluded scheme is a registered time-sharing scheme under ASIC Corporations (Time-sharing Schemes) Instrument 2017/272. A registered time-sharing scheme is a time-sharing scheme (defined later in this paragraph) that is registered under section 601ED of the Act and that has not at any time been promoted by its operator as a means of generating a financial return other than by way of a rental pool. A time-sharing scheme is defined in section 9 of the Act as a scheme, undertaking or enterprise that operates for a period of three years or more and in which participants are, or may become, entitled to use, occupy or possess the property for two or more periods.

14.     A time-sharing scheme has fundamental characteristics that distinguish it from many other types of schemes. An interest in a time-sharing scheme involves the right to use a property, typically a holiday property, subject to conditions, rather than a financial interest in a pool of scheme assets. In addition, unlike many non-time-sharing schemes, time-sharing schemes typically do not allow a member to withdraw and to receive a return of capital on withdrawal. In the limited cases where a member may withdraw from a time-sharing scheme, the withdrawing member will tend to receive only a nominal amount, rather than a proportionate share of the scheme’s property. The main benefit that a withdrawing member from a time-sharing scheme will usually obtain on withdrawal is that the member will no longer be exposed to future costs and liabilities in relation to the scheme, or that such exposure will be limited.

15.     The special features of a time-sharing scheme outlined in the previous paragraph indicate that it would not be appropriate for general hardship withdrawal relief under the Instrument to be available to the responsible entity of a time-sharing scheme. Separately, ASIC may develop its policy in relation to time-sharing schemes to accommodate a hardship withdrawal framework that is tailored to time-sharing schemes.

16.     The second type of registered scheme that is outside the scope of the Instrument is a mortgage investment scheme. ASIC has issued a legislative instrument, ASIC Corporations (Mortgage Investment Schemes) 2017/857, in relation to mortgage investment schemes and this legislative instrument provides relief from Part 5C.6 of the Act such that these provisions operate in relation to each mortgage loan, rather than to the mortgage investment scheme as a whole. A member of a mortgage investment scheme will generally be unable to withdraw before the termination of the underlying loan. As a result, it is not appropriate for the general hardship withdrawals relief under the Instrument to be available to members of a mortgage investment scheme.

17.     Thirdly, IDPS-like schemes under ASIC Class Order [CO 13/762] are outside the scope of the Instrument. This is because [CO 13/762] modifies Part 5C.6 of the Act for IDPS-like schemes to exclude Part 5C.6 of the Act and to allow withdrawals to be governed solely by the terms of a scheme’s constitution. As Part 5C.6 of the Act does not apply to IDPS-like schemes under [CO 13/762], it is not necessary for the Instrument to apply to IDPS-like schemes. However, the Instrument will apply in relation to interests in a registered scheme that is frozen where interests in that scheme are held through an IDPS-like scheme.

18.     Fourthly, registered litigation funding schemes under ASIC Corporations (Litigation Funding Schemes) Instrument 2020/787 that involve representative proceedings are outside the scope of this Instrument. This is because the ASIC Corporations (Litigation Funding Schemes) Instrument 2020/787 sets out a specific regime for withdrawals from such registered litigation funding schemes.

Operation of the Instrument

Effect

19.     The Instrument commences on the day after it is registered on the Federal Register of Legislation.

Definitions

20.     Section 4 of the Instrument contains various definitions that are used for the purposes of the instrument, including a definition of an excluded scheme, a definition of frozen scheme and a definition of operator. An excluded scheme is a registered scheme that falls within any one of four categories of schemes, as set out in paragraphs 13 to 18 of this Explanatory Statement. A frozen scheme is defined as a registered scheme for which the responsible entity has suspended withdrawals (other than hardship withdrawals) and has ceased to allow the issue of new interests in the scheme. An operator is defined as a person who is any of the following:

(a)          a member of the scheme in its capacity as responsible entity or custodian of another registered scheme;

(b)          a life company within the meaning of the Life Insurance Act 1995;

(c)          a trustee of a trust;

(d)          a trustee or custodian of a superannuation entity within the meaning of the Superannuation Industry (Supervision) Act 1993 (the SIS Act);

(e)          a trustee of a self-managed superannuation fund within the meaning of the SIS Act; or

(f)           a provider or acquirer in relation to a custodial arrangement as defined in section 10l2IA of the Act.

 

Equal treatment duty exemption

21.     Section 5 of the Instrument exempts the responsible entity of a frozen scheme from its duty under paragraph 601FC(1)(d) of the Act to treat members who hold interests of the same class equally. The exemption operates where the responsible entity allows a member to withdraw from the scheme on hardship grounds under notional section 601KEB of the Act, which is inserted by section 7 of the Instrument.

Changing scheme constitutions

22.     Section 6 of the Instrument makes two sets of modifications to Part 5C.3 of the Act. Firstly, section 6 inserts notional section 601GAH of the Act. Under subsection 601GAH(1), despite the effect of subsection 601GA(4), the constitution of a scheme does not have to set out adequate procedures for making and dealing with withdrawal requests to the extent that, in relation to a hardship withdrawal request under section 601KEB that otherwise satisfies the requirements in the constitution, the constitution gives the responsible entity either or both of two discretions. The two discretions are:

(a)          the discretion to decide whether to allow or refuse the hardship withdrawal request at all; and

(b)          if so, the discretion to decide whether to satisfy the hardship withdrawal request in whole or in part.

23.     Under subsection 601GAH(2), the responsible entity must act reasonably in exercising a discretion under subsection 601GAH(1). The responsible entity continues to be subject to its general duties under section 601FC of the Act, including its duty under paragraph 601FC(1)(c) to act in the best interests of the members of the scheme.

24.     The second set of modifications under section 6 of the Instrument consists of variations to Part 5C.3 of the Act to allow a responsible entity to unilaterally change the scheme’s constitution, if required, to include a specific hardship withdrawals provision. In the absence of this relief, the responsible entity may have to implement the change by special resolution under paragraph 601GC(1)(a). The capacity of a responsible entity to unilaterally change a scheme’s constitution to include a hardship withdrawals provision is subject to the members having a mechanism to require the responsible entity to convene a members’ meeting at which the members will consider and vote on a special resolution to change the constitution.

25.     Notional section 601GCC of the Act, as inserted by section 6 of the Instrument, requires the responsible entity to give the members at least 14 days’ notice of the proposed change to the constitution. This notice must be given on the responsible entity’s website and directly to all members, either by e-mail or by post.  

26.     If members that hold at least 5% of the votes that may be cast on a special resolution to change the scheme’s constitution request a members’ meeting, then the responsible entity will be unable to change the constitution unilaterally and must convene a members’ meeting to consider a special resolution to change the constitution. In this scenario, the responsible entity must give at least 21 days’ notice of the meeting to consider the special resolution under section 252F of the Act, or any longer period stipulated in the scheme’s constitution, and the responsible entity must comply with the provisions in the Act and the scheme constitution for convening and holding a members’ meeting.

27.     If members do not request a members’ meeting as described in the previous paragraph, the responsible entity will be allowed to unilaterally change the scheme’s constitution to include a specific hardship withdrawals provision that complies with the Instrument.

28.     Until 6 November 2020, the responsible entity will be able to rely on the Corporations (Coronavirus Economic Response) Determination (No. 1) 2020 to provide notices of meeting to members by e-mail, to achieve a quorum from members attending the meeting on-line, and to hold the meeting on-line.

29.     When unilaterally changing a scheme’s constitution under the Instrument, a responsible entity must comply with its duty under paragraph 601FC(1)(c) to act in the best interests of the members of the scheme.

Changes to Part 5C.6 of the Act to allow hardship withdrawals

30.     Section 7 of the Instrument inserts notional sections 601KEA, 601KEB and 601KEC into Part 5C.6 of the Act. Part 5C.6 requires that withdrawals be made in accordance with the Act and the scheme’s constitution and the responsible entity of an illiquid scheme may only allow members to withdraw by making a withdrawal offer to all members: see subsections 601KA(3) and 601KB(1) of the Act. Section 7 of the Instrument modifies Part 5C.6 so that the responsible entity of a frozen scheme may allow members to withdraw on hardship grounds on a case-by-case basis.

31.     Section 601KEA contains definitions of terms for the purposes of the hardship withdrawals relief (subsections 601KEA(1) and 601KEA(2)) and sets out the hardship categories and criteria (subsection 601KEA(3)). The defined terms in subsection 601KEA(1) include cash, frozen scheme and quarter. Cash is defined as scheme property that consists of money in an account or on deposit with a bank. The definition of frozen scheme in subsection 601KEA(1) is the same as the definition in section 4 of the Instrument. A quarter is defined as a period of three months ending on 31 March, 30 June, 30 September or 31 December.

32.     Under subsection 601KEA(3), a member in relation to whom a hardship withdrawal request has been made falls within a hardship category set out in column 2 of the table in subsection 601KEA(3) if the hardship criteria specified in column 3 of the table are satisfied in relation to the member. Where a beneficiary of the estate of a deceased member makes a hardship withdrawal request, the beneficiary falls within a hardship category in column 2 of the table where the beneficiary satisfies the hardship criteria in column 3 of the table. Where the member is an operator, the person who has asked the operator to make a hardship withdrawal request will meet a hardship category in column 2 of the table where that person satisfies the hardship criteria in column 3 of the table.

33.     The hardship categories and hardship criteria in subsection 601KEA(3) are similar to the hardship grounds set out in standard relief instruments ASIC issued after the GFC.

34.     Section 601KEB enables the responsible entity of a frozen scheme to allow a member to withdraw on hardship grounds. Under subsection 601KEB(1), the capacity of the responsible entity to allow hardship withdrawals is subject to the scheme’s constitution including a provision that provides that the responsible entity may allow a member to withdraw if the member has made a hardship withdrawal request and the responsible entity is satisfied that:

          (a)          the member falls within a hardship category; or

(b)          where the member is deceased – a beneficiary of the estate of the deceased member falls within a hardship category; or

(c)          where the member is an operator - a person (instructor) who has asked the operator to exercise a right to withdraw falls within a hardship category. Please refer to paragraph 20 for the definition of an ‘operator’.

35.     In order to rely on the relief under the Instrument, a responsible entity must satisfy the notification pre-conditions under subsection 601KEB(2). The first pre-condition is that the responsible entity must give ASIC written notice under paragraph 601KEB(2)(a) that the responsible entity proposes to allow hardship withdrawals. This reliance notice must include a statement signed by a director or secretary of the responsible entity that the board of the responsible entity has resolved that that:

(a)          the scheme is a frozen scheme; and

(b)          the board has considered expected hardship withdrawals and believes on reasonable grounds that the scheme property over the following 6 months will include adequate cash to meet hardship withdrawals from members and continue the day-to-day operations of the scheme.

36.     The second pre-condition is that, before allowing the first hardship withdrawal for each period for which the fund becomes a frozen scheme, the responsible entity must give each member written notice, by post or by e-mail, explaining the effect of allowing hardship withdrawals: paragraph 601KEB(2)(b). The responsible entity may use a single notice to satisfy this notice requirement and the requirement under paragraph 601GCB(2)(a) in relation to a proposal to change the scheme’s constitution to allow hardship withdrawals under the Instrument.

37.     The third pre-condition is that the responsible entity must publish on its website a statement that explains the effect of allowing hardship withdrawals: paragraph 601KEB(2)(c). The responsible entity must publish this statement in a way that it is likely to come to the attention of a person looking for information about the scheme on the website.

38.     If a responsible entity has previously given notice to ASIC under paragraph 601KEB(2)(a) that it proposes to allow hardship withdrawals but the scheme has ceased to be a frozen scheme, subsection 601KEB(3) requires the responsible entity to give written notice to ASIC that the scheme has ceased to be a frozen scheme. The responsible entity must give this notice to ASIC as soon as practicable after the scheme ceases to be frozen. As the relief under the Instrument is restricted to frozen schemes, a responsible entity must not allow a hardship withdrawal if, since the most recent date of the notice of reliance that the responsible entity provided ASIC, the registered scheme has ceased to be frozen.

39.     A responsible entity may rely on the relief under the Instrument more than once. The responsible entity must notify ASIC each time a scheme ceases to be frozen and, if the scheme becomes frozen again, the responsible entity must provide a separate notice of reliance to ASIC, which must include a resolution of the board of the responsible entity that the scheme is a frozen scheme, in order for the responsible entity to be able to rely in the relief under the Instrument.

40.     The constraints on hardship withdrawals are set out in subsection 601KEB(4). The first constraint is that the responsible entity must not allow a hardship withdrawal unless there are reasonable grounds to consider that, following the withdrawal, the scheme property over the following 6 months would include adequate cash for likely future hardship withdrawals and for the day-to-day operation of the scheme: paragraph 601KEB(4)(a). The second constraint is that the responsible entity must not allow a hardship withdrawal if it would exceed either or both of the following limits (paragraph 601KEB(4)(b)):

          (a)          four hardship withdrawals per member for the calendar year; or

          (b)          $100,000 of hardship withdrawals for a member in the calendar year.

41.     Under subsection 601KEB(5), if a scheme’s constitution includes a provision that allows the responsible entity to exercise a discretion in relation to a hardship withdrawal, the responsible entity must act reasonably in exercising the discretion. Such a discretion may include the responsible entity’s discretion to accept or reject a hardship withdrawal request. In exercising a discretion under the scheme’s constitution, the responsible entity remains subject to its general duties under section 601FC, including the duty to act in the best interests of members of the scheme.

42.     Section 601KEC sets out a responsible entity’s record-keeping and reporting requirements. In relation to record-keeping, a responsible entity must ensure that the records which it keeps under section 988A of the Act document how and why a decision to allow or refuse a hardship withdrawal request was made: subsection 601KEC(2). The records that a responsible entity must keep under subsection 601KEC(2) include a document in relation to any discretion:

          (a)          to allow or refuse the hardship withdrawal request at all; or

          (b)          to allow the hardship withdrawal request in whole or in part.

43.     In relation to data reporting requirements, for the period in which a responsible entity relies on the relief under the Instrument, the responsible entity must comply with the quarterly data reporting requirements under subsection 601KEC(3). These data reporting requirements take effect from the date the responsible entity provides ASIC with written notice of reliance on the Instrument. From this date, the responsible entity must provide ASIC with the required information (detailed below) for each quarter, or part of a quarter, until the date the scheme ceases to be frozen. The responsible entity must provide ASIC with the required information within 14 days of the end of each quarter.

44.     The responsible entity must provide the required information to ASIC in an electronic spreadsheet: subsection 601KEC(3). ASIC has provided a template spreadsheet (available on the ASICwebsite), for this purpose.

45.     For each quarter, the responsible entity must provide the following information to ASIC for each frozen scheme for which the responsible entity relies on the Instrument:

(a)          the total value of scheme property as at the end of the quarter;

(b)          the number of members of the scheme as at the end of the quarter;

(c)          the number and total value of hardship withdrawal requests received for the scheme in that quarter;

(d)          for each hardship category - the number and the total value of hardship withdrawal requests accepted in full, accepted in part and rejected in full in that quarter. Where a responsible entity accepts or rejects a hardship withdrawals request under two or more hardship categories, the responsible entity should identify the primary hardship category for reporting purposes;

(e)          the total number and the total value of hardship withdrawals accepted in full, accepted in part and rejected in full for the scheme in that quarter; and

(f)           the number of complaints in relation to hardship withdrawals that were received in that quarter. Complaints in relation to hardship withdrawals include complaints about changes to the scheme’s constitution to facilitate hardship withdrawals and the time taken to pay accepted hardship claims.

46.     The quarterly data reporting requirements are designed to enable ASIC to form a clear picture of hardship withdrawals under the Instrument and to supervise responsible entity conduct in respect of hardship withdrawals.

Sunset date

47.     Section 8 of the Instrument provides that the exemption in section 5 and the modifications in sections 6 and 7 will cease five years after the date the Instrument commences.

Incorporation by reference

48.     The Instrument does not incorporate any matter by reference.

Retrospective application

49.     The Instrument does not have retrospective application.

Legislative instrument and primary legislation  

50.     The subject matter and policy implemented by this Instrument is more appropriate for a legislative instrument rather than primary legislation because the matters contained in the Instrument are a specific amendment designed to ensure the application of the Act remains flexible to adapt to market developments and applies in a way consistent with the intended policy and the enabling provisions in the Act. As a result, it is more suitable for the changes to the legal position to be implemented by legislative instrument than by primary legislation. As more information comes to light about the impact of COVID-19 on the managed funds sector and the efficacy of the hardship relief framework under the Instrument, ASIC may consider, in consultation with relevant stakeholders, whether the terms of the Instrument should be adjusted.

Legislative authority

51.     The Instrument is made under section 601QA of the Act.

52.     The Instrument is a disallowable legislative instrument.

Regulatory Impact Statement

53.     Over the course of May and June 2020, ASIC consulted with the Office of Best Practice Regulation (OBPR) as to whether ASIC would be required to provide a Regulatory Impact Statement (RIS) in relation to the Instrument.  On 11 June 2020, OBPR confirmed that ASIC would not be required to provide a RIS in relation to the Instrument, as the instrument would be unlikely to have more than a minor regulatory impact (OBPR reference: 42557).

Statement of Compatibility with Human Rights 

54.     The Explanatory Statement for a disallowable legislative instrument must contain a Statement of Compatibility with Human Rights under subsection 9(1) of the Human Rights (Parliamentary Scrutiny) Act 2011. A Statement of Compatibility with Human Rights is in the Attachment.


Attachment

Statement of Compatibility with Human Rights

 

This Statement of Compatibility with Human Rights is prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.   

ASIC Corporations (Hardship Withdrawals Relief) Instrument 2020/778 (the Instrument)

Overview

1.       The Instrument enables the responsible entity of a registered scheme to allow members to withdraw their investments, subject to limits, on hardship grounds. In relation to hardship withdrawal payments, the Instrument provides relief to a responsible entity from the duty under paragraph 601FC(1)(d) of the Corporations Act 2001 (the Act) to treat all members who hold interests in a class equally. In addition, the Instrument modifies the withdrawal provisions in Part 5C.6 of the Act to allow a responsible entity to make hardship withdrawals to individual members. The Instrument provides relief to the responsible entity such that the responsible entity may exercise specific discretions in relation to hardship withdrawal requests. The Instrument also provides the responsible entity with relief to enable it to change the scheme constitution to add a hardship withdrawals provision, if required, unilaterally. This element of the relief is subject to members of the scheme having a mechanism to require a members’ meeting to be held to consider and vote on a special resolution to change the constitution. The Instrument does not apply to time-sharing schemes, mortgage investment schemes, investor directed portfolio services-like schemes and registered litigation funding schemes that involve representative proceedings.

Assessment of human rights implications

2.       This Instrument does not engage any of the applicable rights or freedoms as it assists some investors in registered schemes to access their investment funds on hardship grounds.

Conclusion

3.       This Instrument is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

 



[1] The concept of a frozen scheme is explained in paragraph 20.