ASIC Corporations (Financial Requirements for Responsible Entities, IDPS Operators and Corporate Directors of Retail CCIVs) Instrument 2023/647

This legislative instrument is made under paragraph 926A(2)(c) of the Corporations Act 2001. Its core effect is to modify the operation of Part 7.6 of the Corporations Act, other than Divisions 4 and 8, for a defined group of financial services licensees.

The modified regime is aimed at licensees that operate a registered scheme, an IDPS or a retail CCIV. If a covered licensee complies with the section inserted by the instrument, it is taken to comply with licence conditions that relate to a cash needs requirement, net tangible assets applying because it is a responsible entity or is authorised to operate an IDPS or retail CCIV, and the obligation to lodge an auditor opinion on financial requirements for the relevant period.

That means this instrument is not just background law. It is a practical compliance pathway for certain AFS licensees. It sets out how those businesses can satisfy key financial resource licence conditions through a tailored framework covering cash flow forecasting, director oversight, NTA, cash, liquidity, custody arrangements and audit reporting.

It is also a targeted regime rather than a universal one. If your business does not operate a registered scheme, IDPS or retail CCIV, another financial requirements framework may be more relevant to your licence.

The instrument applies to a financial services licensee that holds an AFS licence authorising it to operate one or more of the following: a registered scheme, an IDPS, or a retail CCIV.

It does not apply if the licensee is one of the excluded categories listed in the instrument. Those exclusions are a body regulated by APRA that is not required to comply with paragraph 912A(1)(d), a market participant, or a clearing participant.

There is also a special extension rule for a covered licensee that is a manager and also holds an AFS licence authorising it to provide wholesale equity financial services under the conditions described in the instrument. In that case, the assets, liabilities, cash inflows and cash outflows of any eligible trustee that is a related body corporate are treated as included in the manager's own position for the purposes of the section.

For many businesses, the first practical question is not how to calculate NTA. It is whether the licence authorisations actually bring the business into this regime. A business that only provides advice, dealing or other financial services without operating a registered scheme, IDPS or retail CCIV is less likely to be governed by this instrument.

The practical trigger is operating under an AFS licence that authorises one of the covered activities. Once in scope, the obligations are ongoing. The instrument requires the licensee to prepare a projection of its cash flows over at least the next 12 months based on the licensee's reasonable estimate of what is likely to happen over that period.

The projection must be approved at least once a quarter by the licensee's directors as satisfying that requirement. The licensee must also document the calculations and assumptions used in preparing the projection and describe in writing why the assumptions are appropriate.

The projection is not a static document. It must be updated if it ceases to cover at least the next 12 months, or if there is reason to suspect that an updated projection would differ materially from the current projection or would show that the licensee was not meeting the projection-based requirements about access to enough financial resources and holding the required amount of cash or cash equivalents.

The instrument also requires the licensee to document whether, based on the projection, it will have access when needed to enough financial resources to meet its liabilities over the projected term of at least the next 12 months, and whether it will hold at all times during the projected period cash or cash equivalents equal to or greater than the current amount it is required to hold under the cash requirement.

In practice, businesses should expect to revisit the projection whenever there is a material change in revenue, expenses, fund assets, redemptions, financing, group support, custody arrangements or business structure. The legal trigger is the wording in the instrument, but operationally the safest approach is to treat the forecast as a live compliance document rather than a quarterly formality.

The instrument sets a minimum NTA requirement and separate cash and liquidity requirements. These are ongoing requirements that must be met at all times, not just at reporting dates.

Under the lower threshold in subsection (4)(a), the licensee must hold at all times NTA of at least the greatest of three amounts: $150,000, an amount of up to $5 million being 0.5% of the average value of fund assets of the registered schemes, IDPSs and retail CCIVs operated by the licensee, and 10% of average revenue.

Under the higher threshold in subsection (4)(b), the licensee must hold at all times NTA of at least the greater of $10 million and 10% of average revenue. This higher threshold applies where subsection (5) does not apply and the licensee operates one or more registered schemes, IDPSs or retail CCIVs.

The cash requirement is separate. The licensee must hold at all times cash or cash equivalents in an amount at least equal to the greater of $150,000 and 50% of the amount of NTA it is required to hold. The liquidity requirement is also separate. The licensee must hold at all times liquid assets in an amount that is at least 100% of the required NTA.

The instrument expressly says that money in an account held by the licensee for the purposes of section 981B cannot be counted towards either the cash requirement or the liquid assets requirement. It also says that other cash or cash equivalents that are also liquid assets can be counted for both tests.

The definitions matter. NTA is not just a simple balance sheet number. The instrument defines adjusted assets, adjusted liabilities, excluded assets, average revenue, average value of fund assets, eligible undertaking, cash or cash equivalents and other key concepts. Those definitions can materially change the result. For example, the averaging rules for revenue and fund assets differ depending on whether the licensee is in its first, second, third or later financial years.

The custody rules are central because they determine whether subsection (5) applies, which in turn affects whether the lower NTA threshold can be used. Broadly, subsection (5) applies if at least one of the listed custody pathways is satisfied in relation to each registered scheme, IDPS and retail CCIV operated by the licensee.

One pathway is that all fund assets are held by a custodian appointed by the licensee that meets the requirements described in the instrument, a sub-custodian appointed by such a custodian, or an eligible custodian. The instrument also recognises a pathway for certain Tier $500,000 class assets of a registered scheme or retail CCIV, with additional NTA requirements depending on who holds the assets. Another pathway deals with special custody assets and specifies who may hold them.

The instrument gives a practical deeming rule for the required reasonable belief about a custodian. If the licensee or retail CCIV has obtained a written assurance within the preceding 13 months from a custodian that holds an AFS licence authorising custodial or depository services, stating that the custodian complies with the relevant requirements and is not an incidental provider, the licensee or retail CCIV is taken to have the required reasonable belief.

There is also a more detailed requirement in subsection (7). A custodian satisfies that subsection at a relevant time if the licensee or retail CCIV has obtained a written assurance within the preceding 13 months covering the matters listed in the instrument and, subject to the start-up concessions in subsections (7A) and (7B), has obtained a registered company auditor's report for the required period. The first report can in some cases cover less than 12 months, and paragraph (7)(b) does not apply immediately to a custodian that has not previously provided such a report, because the instrument gives a timing concession.

These custody rules are not just technical drafting. They can change the capital requirement for the operator. A business should not assume that appointing any external custodian is enough. The exact status of the custodian, the written assurance cycle, the auditor report timing and the type of assets being held all matter.

For each financial year, the licensee must lodge with ASIC an audit opinion by a registered company auditor addressed to both the licensee and ASIC. The opinion must state whether, in the auditor's opinion, the licensee complied with the quarterly director approval requirement, the NTA and liquidity requirements, and other financial requirements in conditions on its licence.

The audit opinion must also state whether the licensee had at all times a projection that purports to, and appears on its face to, comply with the projection requirement, and whether the projection was correctly calculated on the basis of the assumptions used for the projection.

In addition, the auditor must state whether the auditor has no reason to believe a number of matters apply, including that the licensee did not have adequate systems for managing the risk of having insufficient financial resources, failed to comply with the documentation requirement for calculations and assumptions, will not have access when needed to enough financial resources to meet liabilities over the projected term, will not hold the required amount of cash or cash equivalents during the projected period, or adopted unreasonable assumptions for the projection.

The audit opinion must be lodged with the balance sheet the licensee is required to lodge under section 989B. ASIC may also direct that an audit opinion be lodged for another period, and if it does, the opinion must be lodged by the date ASIC directs in writing.

From a practical records perspective, businesses should keep board approvals, forecast versions, assumption papers, NTA and liquidity calculations, evidence supporting adjusted asset and liability treatment, custodian assurances, auditor reports and internal escalation records showing when and why a projection was updated.

The instrument was made on 30 August 2023 and registered on 31 August 2023. It commenced on the day after registration, which means 1 September 2023.

It is in force. The repeal provision states that the instrument is repealed on 1 October 2028.

Because this instrument works by modifying the operation of Part 7.6 of the Corporations Act for covered licensees, businesses should read it together with their licence conditions and any related ASIC instruments it cross-refers to, especially where custody and defined terms are involved.

Before relying on this summary, confirm the exact authorisations on your AFS licence and whether you are operating a registered scheme, IDPS or retail CCIV. Then check whether any exclusion applies.

Next, test your custody arrangements carefully. The lower NTA threshold depends on subsection (5) applying. If your custody model does not fit one of the permitted pathways, the higher NTA threshold may apply instead.

You should also verify your NTA, cash and liquidity calculations using the instrument's definitions and exclusions rather than ordinary accounting labels alone. Pay particular attention to adjusted assets, adjusted liabilities, excluded assets, average revenue, average value of fund assets, and any eligible undertakings or commitments you intend to count.

If you are in your first, second or third financial year, check the special averaging rules. If you operate through a group structure, check whether the wholesale equity manager rule affects the calculation. Finally, make sure your quarterly board approval timetable, forecast update triggers, custodian assurance cycle and annual audit process are all operating in practice.

This page summarises the ASIC Corporations (Financial Requirements for Responsible Entities, IDPS Operators and Corporate Directors of Retail CCIVs) Instrument 2023/647 as published on the Federal Register of Legislation.