PFA makes submission to ASIC consultation paper looking to increase NTA requirements

Property Funds Association of Australia recently provided a submission to ASIC Consultation Paper 388: Net tangible assets requirements for responsible entities, which explores options to increase the net tangible assets (NTA) requirements for responsible entities and other AFSL holders.

PFA appreciates ASIC’s focus on regulatory system strength following the Shield and First Guardian collapses. Significant regulatory changes have been considered by ASIC and Treasury since these collapses. But PFA believes any response needs to be proportionate and targeted, without adversely impacting the industry. 

In its submission, PFA states: “The PFA notes, as it did in its submission to Treasury’s consultation on Enhancing Oversight and Governance of Managed Investment Schemes, that where scheme failures have occurred, they reflect breaches of existing obligations and governance failures, not structural deficiencies in the legislative or regulatory framework.”

“A lack of financial resources has not been shown to be a cause of the recent MIS failures, and there has been no evidence provided that more specific financial resource requirements would have assisted in those instances.”

“The appropriate response is targeted enforcement and enhanced supervisory capability for ASIC, not a blanket increase in capital requirements that would apply uniformly across the entire, highly diverse MIS sector.”

Three options for change presented

ASIC presented three options for changing the NTA requirements in its consultation paper: 

Option 1 – increase in line with CPI

Option 2 – increase the $150,000 minimum under the concessional NTA requirement

Option 3 – increase the $5 million cap under the concessional NTA requirement

ASIC sought feedback on the appropriateness of the liquidity component, a potential transition period, and alternative approaches. It also wanted feedback on the appropriateness of the concessional NTA requirement. 

The following summarises PFA’s key positions:

• There is no evidence to justify any changes to the NTA requirements for all responsible entities.
• If any changes are to be made to the NTA requirements, which the PFA believes is unnecessary, the only option the PFA could support is Option 1, a CPI-linked increase to the NTA thresholds, as this represents a measured and proportionate recalibration that restores the real value of the financial thresholds without disrupting market structures.
• The PFA does not support Options 2 or 3 in their current form, as these would impose material capital requirements that could create barriers to entry, necessitate consolidation of smaller fund managers, and increase compliance costs that are likely to be passed through to investors without demonstrated regulatory benefit.
• The concessional NTA requirement for responsible entities that meet custody and fund asset type requirements remains appropriate and should be retained.
• Any changes to the NTA requirement should be accompanied by a transition period of at least 18 months.
• Greater regulatory benefit is likely to be achieved through targeted supervisory, surveillance and enforcement action in relation to governance, compliance and oversight failures, rather than through across‑the‑board increases to capital requirements that apply to compliant responsible entities.
• ASIC should coordinate its review with Treasury’s separate consultation to avoid duplication and inconsistency.  Any regulatory changes should be considered from a wholistic perspective to ensure they are targeted, appropriate, proportionate and not overly burdensome and its impact on competition and barriers to entry for SME fund managers should be deeply considered.

The PFA requested that ASIC conduct a regulatory impact assessment before finalising any proposals under CP 388, including the impact of each proposal on competition, barriers to entry and the risk of market consolidation.

PFA also requested that ASIC consider the cumulative impact of NTA proposals together with Treasury’s separate consultation on enhancing oversight and governance of managed investment schemes. 

PFA urged ASIC to engage with industry to obtain qualitative data on actual NTA holdings across the sector to assess the scale of any required capital adjustments, and to consider the diversity of the MIS sector including the major differences in risk profile between different schemes and responsible entities. 

A copy of PFA’s submission is available to PFA members here.

If you have any questions for the PFA Issues & Regulatory Committee, please contact PFA on: pfa@propertyfunds.org.au 

PFA members benefit from access to networking and educational opportunities, industry research, advocacy, and greater connection with the unlisted property funds industry – click here to find out more.