A Guide to the Law of Securitisation in Australia - Clayton Utz

7 The regulation of the participation by authoriseddeposit-taking institutions in securitisations7.1 Australian Prudential Regulation Authority guidelines7.1.1 IntroductionThe Australian Prudential Regulation Authority (APRA) isresponsible for regulating, amongst others, authorised deposittakinginstitutions (ADIs). The regulation of ADIs has the effectof bringing under APRA’s authority Australian building societiesand credit unions in addition to the Reserve Bank of Australia’s(RBA) previous mandate to regulate Australian-owned banks,foreign subsidiary banks and branches of foreign banks.APRA has powers under section 11AF of the Banking Act 1959to make prudential standards for ADIs and their holdingcompanies.APRA’s Prudential Standard APS 120 – Funds Management &Securitisation (APS 120) became effective on 1 October 2000.APS 120 applies to the participation by ADIs in all capacities,both within Australia and overseas, in the securitisation of assets(whether or not the ADI is the sponsor).Some of the principles in APS 120 are also intended to apply toforeign banks operating in Australia through branches. Whilstthe capital adequacy treatment of their involvement is notregulated by APS 120, foreign banks are required to comply withits disclosure and separation provisions (which are dealt withbelow).In APS 120, APRA warns that securitisation exposes an ADI tomoral or commercial pressure to support a securitisation vehiclebeyond its legal obligations. A fundamental principle underlyingAPS 120 is that ADIs must resist these pressures and onlyprovide support to a securitisation vehicle strictly in accordancewith their formal legal obligations.Where the totality of an ADI’s involvement in funds managementand securitisation suggests that the overall level and/orconcentration of risks has become excessive relative to itscapital, APRA may require that ADI to maintain a buffer abovethe minimum capital ratio.The approach of APS 120 is to concentrate on three aspects. Thefirst is to attempt to minimise the moral or commercial pressureson an ADI by ensuring that there is sufficient separation betweenthe ADI and a securitisation vehicle and for there to be adequatedisclosure to investors of an ADI’s limited role.The second is to outline the requirements that need to besatisfied if an ADI provides facilities to a securitisation vehicleand to specify the capital that needs to be held against these.The third is to set out the requirements that must be satisfied inorder for an ADI to be relieved of the need to hold capital againstassets transferred by it to a securitisation vehicle.7.1.2 Separation and disclosureAPS 120 requires that an ADI must ensure that a securitisationvehicle should stand “clearly separate” from any ADI involved inthe scheme. To achieve this, the vehicle should not include thewords “bank, building society, credit union, authorised deposittaking institution or ADI” in its name. An ADI cannot have anyownership or beneficial interest in the vehicle, or control it foraccounting purposes, and the ADI must limit the number of itsdirectors on the board of the vehicle. In addition, the ADI shouldnot itself act as manager or trustee of the vehicle (but can do thisthrough a subsidiary which is not itself an ADI).APS 120 also requires that any marketing materials (eg. aninformation memorandum) should not give the impression toinvestors that the vehicle is backed by the ADI beyond any legalobligations to which it has formally committed itself. Inparticular, investors should be unambiguously informed in writingthat the securities do not represent deposits or other liabilities ofthe ADI, that the securities are subject to investment risk andthat the ADI does not stand behind the capital value and/orperformance of the securities issued by the vehicle. Aninformation memorandum must display this prominently(generally as a stand-alone item on the inside front cover) andinvestors must sign an acknowledgement to this effect (except insome circumstances where the securities are electronicallytraded and it is impractical to obtain such an acknowledgement).Where an ADI fails to comply with the foregoing, it must holdcapital against the full value of the relevant securities. Inaddition, APRA warns that where investors are given theimpression that the securities are backed by the ADI, it may beprecluded entirely from engaging in securitisation activities.One of the requirements for “separation” of securitisationentities under APS 120 is that the ADI should not “control” theentity such that it would need to be consolidated with the ADIfor Australian accounting standards. This has caused muchcontroversy in recent years as Australian accountants hadhistorically taken a less demanding view of the relevantaccounting standards than their European counterparts (althoughthe wording of the standards in Australia and Europe was almostidentical). The accounting firms had periodically tried to bringthe Australian interpretation into line with that in Europe – onlyto back down each time in the face protest from their clients.44