Key points:

• Debenture sector in the spotlight following recent collapses e.g. Banksia
• ASIC proposals seek to improve the financial strength of issuers
• Better investor understanding about debenture investments is a priority. 

The move follows a number of high-profile collapses in the sector, including Banksia Securities Ltd, the subsequent ASIC debenture taskforce and the Government’s December 2012 announcement about law reform for this $4 billion sector.

ASIC will consult on:

• mandatory minimum capital and liquidity requirements for debenture issuers
• proposals to strengthen disclosure to investors about debenture issuers
• clarifying the powers and duties of debenture trustees, and the role of auditors.

‘At the time of the failure of Banksia ASIC made it clear we had pushed the existing conduct and disclosure regime to its limit, and debenture issuers who accept retail investments and then on-lend that money like a bank should be required to have a more sustainable financial position,’ ASIC Commissioner John Price said.

‘This is consistent with growing international interest in regulating ‘shadow banking’ more effectively. We also consider debenture trustees may need greater powers so they can perform their supervisory role more effectively right across the debenture industry.’

Mr Price said while the proposals would help ensure debenture issuers are more financially resilient, ‘they will not prevent failures’.

‘For this reason, it is important to understand debenture investments are higher risk than a deposit with a bank, building society or credit union that is prudentially supervised by APRA,’ Mr Price said.

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The taskforce will comprise business units from across ASIC and will be led out of Melbourne by Commissioner John Price.

The taskforce will make recommendations to Treasury.

‘The failure of Banksia, an unlisted debenture company that has operated a mortgage financing business across a large part of regional Victoria, will affect the lives of many everyday Australians. ASIC wants to take a closer look as it is another area of retail-funded shadow banking.’, ASIC Chairman Greg Medcraft said.

‘At the moment there are laws around disclosure and, to a limited extent, the conduct of debenture issuers. But we need to lift the regulatory intensity to make sure that investors are confident and informed.’

‘The taskforce will review the extensive work we’ve done to date around the regulation of the unlisted debenture sector. The taskforce’s work may involve making recommendations to Treasury about law reform given we have pushed the existing conduct and disclosure regime to its limit.’

‘We will also work closely with Banksia receivers and managers McGrath Nicol to try and get the best result for Banksia investors and retail clients who Banksia provided credit to. Importantly, we’ll also continue to remind debenture trustees of their obligations as gatekeepers to protect investors and monitor debenture investments – particularly bad loans and liquidity problems.’

ASIC’s recent activity in this sector more broadly has included undertaking general market reviews into the Australia unlisted debenture market and ASIC has conducted risk based surveillances on a small number of debenture issuers.

ASIC’s historical work in the debenture sector reflects the fact that a disclosure regime is in place for debentures, coupled with the requirement that a trustee is in place to monitor the issuer and seek to protect the interests of debenture holders.

People wishing to provide feedback on these issues can send submissions to the following email address: debenturesandnotes@asic.gov.au

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