This is the second part of a blog series titled 'Sleepers Wake' about the regulation of religious charitable development funds. Read the first blog here.

In its discussion paper, APRA stated that there were 59 Religious Charitable Development Funds (RCDFs) in Australia holding over $7 billion in funds. Of those funds, $1.1 billion was raised from individuals. APRA initially proposed that RCDFs that raise retail deposits be required to register as an RFC, obtain authorisation as an ADI or become a managed investment scheme. In response to submissions received on this proposal, APRA substantially amended its position and now proposes amendments that preserve the existing exemptions for existing participants but with greater limitations on the products RCDFs can offer.

RCDFs are financial services providers because they deal in, and give financial advice about, investment products. As such, they would ordinarily require an Australian Financial Services Licence (AFSL). However, ASIC exempts RCDFs from most of the AFSL regime on the rationale that investors participate in these products predominantly out of a desire to support the relevant charity rather than generate financial returns for themselves. ASIC's consultation paper raised two options: removal of the existing class order exemption; and retention of the existing exemptions with additional conditions of relief. The paper proposed an implementation timeline from early 2014 but ASIC has not published anything further since the initial paper. It will be disappointing if APRA proceed without ASIC's involvement as their roles are intertwined and complementary.

In APRA's response to submissions2, it accepted that the administrative costs of its initial proposal were higher than it had presumed and it therefore proposes preserving the existing exemption arrangements with additional conditions that prevent an RCDF from offering any "at call" product. APRA believes "at call" products can be readily misunderstood by investors due to the high profile of transactional "at call" accounts offered by banks.

Under these new requirements:

  • A retail account offered by an RCDF must have a minimum maturity date of 31 days. Accounts without a specified maturity must impose a 31 day notice period prior to any withdrawal (subject to provision for early release in the case of hardship);
  • RCDFs may no longer offer bill payment services such as BPAY to customers; and
  • Use of the terms "deposit" and "at call" would be prohibited, being too closely associated with bank products.

Further, no new exemptions will be granted. In future, religious or charitable entities that wish to accept funds from retail investors, but do not wish to seek authorisation as an ADI, will need to register as a managed investment scheme (MIS) or RFC. This two-speed approach raises interesting questions for how the sector, small as it is, will develop in coming years. Will existing exempt entities leverage their services under outsourcing arrangements to new players? How will customers seeking to invest in their chosen charity perceive a regulated entity in comparison to a less regulated one? How will the products offered by these entities evolve in light of changing and two-tier regulation?

Footnote

2: Response to Submissions, Religious Charitable Development Funds August 2013, Australian Prudential Regulation Authority August 2013.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.