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Office of Aged Care Quality and Compliance (OACQC)

Issues Paper – Proposed Legislative Amendments

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Enhanced Prudential Regulation of Accommodation Bonds

Proposed Legislative Amendments

This paper has been prepared by the Department of Health and Ageing (the department) for consultation with consumers of residential aged care services, the aged care industry and the general public regarding legislative changes being considered as part of continuous improvement to the enhanced prudential regulation of accommodation bonds (bonds).

Increased protections for aged care residents’ savings, including the enhanced prudential regulation of bonds, were announced on 12 April 2010 as part of the More Support for Older Australians in the National Health and Hospitals Network. From 1 October 2011 the Aged Care Act 1997 (the Act) and User Rights Principles 1997 (the Principles) were amended to:

• clarify the permitted uses of bonds
• introduce a two year transition period for approved providers to adjust and fully comply with the permitted uses
• introduce a Governance Standard for approved providers holding bonds
• improve reporting and disclosure for greater transparency and consumer confidence
• introduce additional information gathering powers for monitoring compliance
• remove restrictions on the use of income from bonds, retention amounts and accommodation charges
• introduce criminal penalties for the misuse of bonds.

This paper aims to guide consultation and discussion by providing an overview of the issues identified to date in respect of enhanced prudential regulation of bonds. These issues include the restrictions which the 2011 regulatory amendments placed on:

• permitted uses of loans made using bonds
• investments in Religious Charitable Development Funds (RCDFs).

These consultations will inform the development of advice to the Minister for Ageing, the Hon Mark Butler MP, regarding options for enhancing the regulatory framework for bonds.

These measures are separate to the Living Longer, Living Better aged care reform package announced on 20 April 2012.

The options outlined in this consultation paper have not been endorsed by the department, the Minister for Ageing, or the Australian Government.
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Making a Submission

Submissions may address some or all of the issues discussed in this paper and may also raise other issues that are considered relevant, but which have not been canvassed in this discussion document.

Submissions will be considered by the department and used, along with research evidence, to inform advice to the Minister for Ageing regarding options for enhancing the regulatory framework for bonds.

Submissions can be lodged by post or email to:

The Director
Standards, Financial and Risk Assessment Section
Prudential and Approved Provider Regulation Branch
Department of Health and Ageing
MDP 454
GPO Box 9848
Canberra ACT 2601

Email: Prudential

Phone: (02) 6289 7294

Closing Date for Submissions

Submissions must be received by the department no later than 5pm, 31 January 2013.

Publication of Submissions

Submissions received become the property of the department and the department may choose to make the submissions public.

If you do not want your submission, or parts of your submission, made available to individuals or agencies outside of the department, you should clearly indicate this, along with your reasons, when you make your submission.

Permitted Use of Loans Made Using Bonds

Purpose of Consultation

To identify and discuss issues associated with the permitted use of loans made using accommodation bonds (bonds).
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Background

From 1 October 2011 the Aged Care Act 1997 (the Act) and User Rights Principles 1997 (the Principles) were amended to specify particular permitted uses of bonds. The permitted uses reinforce the policy intent of bonds in financing capital investment in residential aged care and allow investment of bonds where they are not immediately required for capital expenditure.

Section 57-17A of the Act and Division 8A of the Principles provide that use of a bond charged by an approved provider after 1 October 2011 is permitted if the bond is:

1. used for capital expenditure (defined by ss 57-17A(2) of the Act)
2. invested in a financial product (defined by ss 57-17A(3) of the Act and ss 23.64(C) of the Principles)
3. used to make a loan in relation to which the following conditions are satisfied:
1. the loan is not made to an individual;
2. the loan is made on a commercial basis;
3. there is a written agreement in relation to the loan;
4. it is a condition of the agreement that the money loaned will only be used as mentioned in items 1 and 2, above; and
5. the agreement includes any other conditions specified in the Principles
4. used to refund bond balances or entry contribution balances
5. used to repay debt accrued for the purposes of capital expenditure or refunding bond balances
6. used to repay debt that is accrued before the commencement of this section, if the debt is accrued for the purposes of providing aged care to care recipients
7. used to meet reasonable business losses that are incurred in the period:
1. beginning when the approved provider begins receiving:
1. residential care subsidy in relation to a residential care service; or
2. flexible care subsidy in relation to a flexible care service
2. ending 12 months after the approved provider begins to receive the subsidy in relation to that service.

A two year transition period is in place to assist approved providers to adjust to the permitted use arrangements.

The Consultation Paper on the 2011 legislative amendments (released by the department in February 2011) proposed that loans using bonds could be made for a permitted use. The majority of stakeholders (including approved providers, peak bodies and financial services sector) supported the proposed conditions around loans.

Issue

Approved providers can make loans of monies they have received from bonds in two permitted ways: capital expenditure and investments in permitted financial products. This restriction prevents providers from lending bonds to other parties for uses that would otherwise be permitted (items four to seven in the above list of permitted uses) such as refunding bonds and repayment of debt incurred for aged care capital expenditure.

Restricting the loaning of bonds to these two permitted uses does not support the policy intent for bonds to be used as a source of capital funding for residential care infrastructure, for prudent investment to generate income and to refund bond balances.
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Discussion

The department has received information from approved providers discussing the limits of not being able to lend bonds to a property company for the property company to repay debt incurred for aged care capital expenditure.

The legislation also prevents bonds from being lent to refund bond balances. This may create difficulties for approved provider groups, particularly those within which bonds are legitimately transferred to meet capital expenditure and refund needs.

It is currently possible for approved providers to use the transition period for expenditure in relation to residential and flexible aged care. However, the transition period expires on 30 September 2013. Further, the transition period is in place to assist providers in making necessary adjustments to their business in order to comply with the permitted uses and not as a means of avoiding the permitted use rules.

It is also possible to transfer funds between corporate entities by the approved provider purchasing securities issued by the borrower. However, this creates a significant and unintended change to business financing structures and additional costs.

Allowing the lending of bonds for the repayment of debt accrued for the purposes of providing care to care recipients is not being considered as using bonds for operational expenses is contrary to the policy intent for bonds.

Expanding the range of uses for which bonds may be lent would marginally increase the risk that the lending provider may not hold sufficient funds to refund bonds as they become due. However, the benefits to financing and repayment of capital infrastructure and the ability to move funds between providers to enable capital investment in aged care infrastructure and timely refunds supports the policy intent for bonds.

Proposed Action

The department is considering recommending that the Minister amend the legislation to allow loans made using bonds to include the refunding of accommodation bond balances or entry contribution balances and the repayment of debt accrued for the purposes of capital expenditure or refunding accommodation bond balances.

Religious Charitable Development Funds

Purpose of Consultation

To discuss issues associated with the deposit by some religious and charitable approved providers of accommodation bonds (bonds) into Religious Charitable Development Funds (RCDFs) and to identify options for addressing those issues.

Background

RCDFs are funds established by religious organisations for the purpose of seeking investment from the public to help further the funds' religious and charitable goals and objectives. This fundraising activity meets the definition of banking business under the Banking Act 1959. The Australian Prudential Regulation Authority (APRA) determines which bodies to recognise as RCDFs as noted in Schedule 1 of the Banking Exemption No. 1 of 2011 (the Exemption) dated 21 December 2011. RCDFs are not prudentially regulated and do not have the same status as an APRA regulated ‘authorised deposit-taking institutions’ (ADI).

Consultation with approved providers and their RCDF representatives has identified that RCDFs receive funds from a range of sources including their operational arms such as schools, aged care services and community service providers; and deposits and donations from individuals/parishioners who wish to assist the religious body financially. RCDFs lend funds to their operational arms and may charge interest on those funds.

In aged care, RCDFs fall into two broad categories, those that are a separate legal entity from the approved provider and those that are a fund operated within the approved provider entity.

The number of providers using RCDFs and the amount of bonds deposited in them is unknown. The Exemption lists 59 RCDFs however an RCDF may have many approved providers making deposits. At 30 June 2011 there were 239 approved providers classified in the department’s National Approved Provider System as ‘religious’ or ‘charitable’ organisations and in total they held approximately $5.3 billion in bonds.
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Issues with existing rules

At a meeting with key approved provider and RCDF representatives on 16 March 2012, it was identified that:

1. where the fund is within or part of the approved provider entity, the permitted use and reporting rules for accommodation bonds in practice require, in their view, separate tracking of bonds from other monies. The RCDF representatives indicated that this would be a significant administrative change; and
2. where the fund is a separate legal entity from the approved provider the existing rules only enable a deposit into a fund if it is done either as a formally documented loan (where it is a condition that that the money can only be used for particular permitted uses) or by the fund issuing a security. The funds claim that these processes are significant impediments to the usual mode of operation.

Discussion

The first issue, whether bond funds must be tracked separate to other money held by the provider, is faced by all providers and is not specific to investment in RCDFs. The prudential rules do not require banking or physical separation of bonds from other monies and the reporting requirements through the Annual Prudential Compliance Statement focus on expenditure on permitted uses from all sources rather than being about the use of bonds. For example, a private sector provider operating retirement villages, independent living units or other more diverse businesses would face similar issues to a religious and charitable provider depositing into an RCDF in ensuring that it can adequately account for bond use.

The second issue, the restricted ability for some providers to deposit funds with RCDFs, appears to create a significant change in operation of the providers. To continue making deposits with an RCDF the affected provider and their RCDF must enter into new legal arrangements, either by way of loan arrangements or the issuance of securities (which would also require documentation of an Investment Management Strategy [IMS]), thereby increasing costs to the two organisations. These additional compliance requirements are likely more onerous for the provider than a permitted investment such as purchasing securities on the Australian Stock Exchange.

Analysis by the department shows that religious and charitable providers, on average, represent significantly lower financial risk than private sector bodies. The department does not hold information to directly assess the risk represented by RCDFs. However, the RCDFs are an integral part of many religious and charitable providers’ financial arrangements.

The Exemption expires on 27 June 2013 and APRA has publicly announced its review. Renewal of the Exemption in its current terms would give rise to ongoing pressure to address the issues identified later in this paper. If the Exemption were removed it is likely that RCDFs would need to comply with ADI requirements or be wound-up or, both of which would likely require significant timeframes to achieve for some funds. It would also be possible for APRA to change the terms of the Exemption, for example to limit the sources of funds that may be deposited into an RCDF.

Options

Three options have been identified:

1. no change, maintain the permitted use rules as introduced on 1 October 2011
2. enable approved providers to deposit bonds into RCDFs without restriction (as per current arrangements for deposits into a deposit-taking facility made available by an ADI in the course of its banking business)
3. enable deposits of bonds into RCDFs to be classified as a permitted financial product which must be covered by an IMS (as per other permitted financial products).

Proposed Action

The department is considering recommending that the Minister amend the legislation to create an additional permitted use of deposits of bonds into RCDFs.
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