Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon. Josh Frydenberg MP)Chapter 20 Structured Finance Support (Coronavirus Economic Response Package) Bill 2020
Outline of chapter
20.1 The Structured Finance Support Bill establishes the Structured Finance Support (Coronavirus Economic Response) Fund, initially consisting of $15 billion. The Fund will enable the Government to ensure continued access to funding markets impacted by the economic effects of the Coronavirus, and to mitigate impacts on competition in consumer and business lending markets resulting from the Coronavirus. In particular, this will ensure smaller lenders can maintain access to funding, by the Government making targeted investments in structured finance markets.
20.2 The Structured Finance Support Bill:
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- establishes the Structured Finance Support (Coronavirus Economic Response) Fund and the Structured Finance Support (Coronavirus Economic Response) Fund Special Account; and
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- credits the Account with $15 billion on the commencement of the Structured Finance Support Bill (on the day after the Structured Finance Support Bill receives Royal Assent).
20.3 Further amounts can be credited to the Account under the Structured Finance Support Bill, if required.
20.4 The Structured Finance Support Bill provides a framework for investing funds of the Fund in authorised debt securities and other investments prescribed by rules made under the Structured Finance Support Bill.
Context of amendments
20.5 Uncertainty in the economic outlook due to the Coronavirus has disrupted funding markets. The Structured Finance Support (Coronavirus Economic Response) Fund is being established to ensure continued access to these funding markets.
20.6 The focus of the Fund's activities will be investing in securitised loans, including residential mortgages, written by smaller lenders, through either warehouses or the term market. This will support the ability of smaller lenders to:
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- continue to issue new loans in the current economic conditions resulting from the impact of the Coronavirus; and
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- obtain funding from markets at a competitive price.
20.7 Securitisation is a method of funding whereby the cash flows from assets, such as loans, are packaged into tradeable debt securities that are generally (but do not need to be) tranched.
20.8 Each tranche has different risk characteristics. The cash flows from the underlying loans are used to make interest and principal payments to investors in the securities. These securities often only have recourse to the underlying assets, with generally no recourse to the originator of the assets.
20.9 Securitisation may be undertaken on a warehouse or term basis. Warehouses are securitisation facilities that allow a lender to fund loans until they have built up a large enough pool and track record to refinance them into the term securitisation markets.
20.10 The securitisation market has been an important source of funding for smaller lenders and has been an important driver of competition for residential mortgages and other types of loans. Ensuring continued access to this market for smaller lenders will allow these lenders to have greater liquidity in their portfolios and continue to compete effectively. This will ensure the greatest availability of lending in the market during the economic conditions resulting from the impact of the Coronavirus.
Summary of new law
20.11 Part 1 to the Structured Finance Support Bill sets out the objects of the Bill, arrangements for commencement, application to the Crown, key definitions, its extension to external territories and extra-territorial application.
20.12 Part 2 to the Structured Finance Support Bill:
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- establishes the Structured Finance Support (Coronavirus Economic Response) Fund and the Structured Finance Support (Coronavirus Economic Response) Fund Special Account;
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- provides for the types of investments that can be made using the Fund; and
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- credits $15 billion into the Account on the day after the Structured Finance Support Bill receives Royal Assent, and enables further amounts to be credited to the Account.
20.13 Part 3 to the Structured Finance Support Bill sets out the constitutional limits of investments made under the Fund, provides for the Minister's powers to be delegated, and provides for regular reporting in relation to the Fund.
Detailed explanation of new law
Part 1 - Preliminary
Short title
20.14 The Structured Finance Support Bill, when enacted, may be cited as the Structured Finance Support (Coronavirus Economic Response Package) Act 2020. [Section 1 of the Structured Finance Support Bill]
Commencement, objects and simplified outline
20.15 The Structured Finance Support Bill commences and applies on the day after Royal Assent. [Section 2 of the Structured Finance Support Bill]
20.16 The objects of the Structured Finance Support Bill are to:
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- ensure continued access to funding markets impacted by the economic effects of the Coronavirus; and
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- mitigate impacts on competition in consumer and business lending markets resulting from the Coronavirus;
- by the Commonwealth making investments in accordance with the Structured Finance Support Bill.
[Section 3 of the Structured Finance Support Bill]
20.17 The Structured Finance Support Bill contains simplified outlines that summarise its operation. The simplified outlines are only intended to assist readers to understand the legislative framework, but are not otherwise operational. For a detailed understanding, readers of the Structured Finance Support Bill will need to refer to the substantive provisions and explanation in this Explanatory Memorandum. [Sections 4, 9 and 16 of the Structured Finance Support Bill]
Definitions, crown to be bound, extension to external territories and extra-territorial application
20.18 The Structured Finance Support Bill defines the terms and expressions used in it. [Section 5 of the Structured Finance Support Bill]
20.19 The Crown will be bound in each of its capacities, but is not liable to prosecution for an offence. [Section 6 of the Structured Finance Support Bill]
20.20 This Structured Finance Support Bill, once enacted, will extend to every external Territory. [Section 7 of the Structured Finance Support Bill]
20.21 This Structured Finance Support Bill, once enacted, will extend to acts, omissions, matters and things outside Australia. [Section 8 of the Structured Finance Support Bill]
Part 2 - The Structured Finance Support (Coronavirus Economic Response) Fund and the Structured Finance Support (Coronavirus Economic Response) Fund Special Account
Establishment of the Structured Finance Support (Coronavirus Economic Response) Fund and Structured Finance Support (Coronavirus Economic Response) Fund Special Account
20.22 The Structured Finance Support Bill establishes the Structured Finance Support (Coronavirus Economic Response) Fund and the Structured Finance Support (Coronavirus Economic Response) Fund Special Account. The Fund consists of the Account and the investments of the Fund. The Account is a special account for the purposes of section 80 of the PGPA Act. [Sections 10 and 11 of the Structured Finance Support Bill]
20.23 The purpose of the Account is to provide the Commonwealth with an appropriation to make payments under investments it has made under subsection 12(1) of the Structured Finance Support Bill.
Investments of the Fund
20.24 The Minister is given the power, on behalf of the Commonwealth and to further an object of this Act, to invest amounts in the Account in authorised debt securities that meet the requirements of subsection 12(4), or in other investments (each other investment being of a kind prescribed by the rules and that comply with the requirements or restrictions (if any) prescribed in the rules). These investments are the investments of the Fund. [Subsections 12(1) and (2) of the Structured Finance Support Bill]
20.25 An authorised debt security is a debt security that:
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- is issued by a trustee of a trust, or by a body corporate that is a special purpose vehicle;
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- is expressed in Australian dollars;
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- relates to one or more amounts of credit; and
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- complies with the requirements or restrictions (if any) prescribed in the rules relating to authorised debt securities.
[Subsection 12(4) of the Structured Finance Support Bill]
20.26 This reflects the Fund's objectives of supporting access to finance for smaller lenders, principally via the securitisation market.
20.27 This approach is designed to support competition in consumer and business lending markets and to ensure finance continues to flow to both consumers and businesses. For example, this approach will involve investing in mezzanine tranches and warehouse facilities.
20.28 The Structured Finance Support Bill sets the outer limits on the types of investments the Minister can make. The rules have the flexibility to prescribe other limitations as required depending on how the market develops. It is appropriate for the rules to have the flexibility to further constrain the types of investments the Minister can make.
20.29 As the Structured Finance Support Bill provides for the investment of amounts in the Fund, it is not necessary for the standard provisions relating to investments by the Commonwealth provided for in section 58 of the PGPA Act to apply. While the Structured Finance Support Bill mirrors the majority of these standard provisions, the investment framework provided in the Structured Finance Support Bill provides the Fund with flexibility and agility to meet the objectives of the Structured Finance Support Bill. [Subsection 12(5) of the Structured Finance Support Bill]
20.30 The Minister is able to authorise re-investment. This ensures that once an investment reaches its legal final maturity date, it can be reinvested in investments with the same entity (meeting the criteria in subsection 12(1)) without the proceeds having to first be credited back into the Account. [Subsection 12(3) of the Structured Finance Support Bill]
20.31 The power for the Minister to reinvest the amounts of the Fund in these securities has been provided for convenience. It does not mean that the Minister must reinvest the funds, and it does not limit the ability for the principal and returns on investments to be credited back to the Fund to be invested elsewhere.
Credits to and withdrawals from the Account
20.32 The Account will be credited with $15 billion on the day the Structured Finance Support Bill commences (on the day after it receives the Royal Assent). [Paragraph 13(1)(a) of the Structured Finance Support Bill]
20.33 The Account will also be credited with income derived from the Fund's investments, capital returns or other financial distributions relating to the Fund's investments, and the proceeds of realising the Fund's investments. This will allow the Fund to reinvest its capital and earnings. [Paragraphs 13(1)(b) to (d) of the Structured Finance Support Bill]
20.34 Additional amounts can be credited to the Account as determined by the Minister in a notifiable instrument, following agreement with the Finance Minister. These amounts are to be credited to the Account on the date provided for in the determination, but that date must be on or after the date on which the instrument is made. The determination must also be expressed to be for a specified budget year. [Subsections 13(2) to (5) of the Structured Finance Support Bill]
20.35 The purposes of the Account are to:
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- pay the costs of, including the costs incidental to, making an investment under section 12;
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- pay or discharge any other costs, expenses and other obligations incurred by the Commonwealth exclusively in connection with the Fund; and
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- reduce the balance of the Account.
[Section 14 of the Structured Finance Support Bill]
20.36 The Minister may make a written direction to debit specified amounts from the Account on a specified day. The purpose of this is to reduce the balance of the Account to reduce the available appropriation for the Account without making a real or notional payment. The date of withdrawal must be on or after the date on which a direction is made. A copy of the direction must be given to the Finance Minister. The direction is declared not to be a legislative instrument. [Section 15 of the Structured Finance Support Bill]
Part 3 - Miscellaneous
Constitutional limits
20.37 The Structured Finance Support Bill primarily relies on the power of the Parliament to make laws:
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- with respect to nationhood; and
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- otherwise with respect to the executive power of the Commonwealth; and
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- in relation to trade or commerce:
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- between Australia and places outside Australia; and
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- among the States; and
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- within a Territory, between a State and a Territory or between two Territories; and
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- with respect to banking (other than State banking not extending beyond the limits of the States concerned).
[Section 17 of the Structured Finance Support Bill]
Delegation
20.38 The Minister has the power to delegate in writing the powers or functions provided for in the Structured Finance Support Bill except for the power to:
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- credit additional amounts into the Account under section 13; and
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- make rules under section 20.
[Subsection 18(1) of the Structured Finance Support Bill]
20.39 The Minister can only delegate powers to an eligible delegate. An eligible delegate is an official of the Department of the Treasury or a listed entity that is prescribed by the rules, who:
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- is an SES employee; or
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- is an APS employee who holds or performs the duties of an Executive Level 2, or equivalent position; or
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- occupies an office or position that is the equivalent level to that of an SES employee or an Executive Level 2 position.
[Subsection 18(2) of the Structured Finance Support Bill]
20.40 Where the Minister is delegating a power or function to a particular office or position, the Minister must take into account whether the person(s) holding the office or position are sufficiently senior to exercise the power or perform the function or duty. [Paragraph 18(3)(a) of the Structured Finance Support Bill]
20.41 Where the Minister is delegating a power or function to a particular person, the Minister must consider if the person has the appropriate qualifications or expertise to exercise the power or perform the function. [Paragraph 18(3)(b) of the Structured Finance Support Bill]
20.42 Eligible delegates are required to comply with any written directions given by the Minister. [Subsection 18(4) of the Structured Finance Support Bill]
20.43 Eligible delegates may be given a written direction by the Minister about any of the following:
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- strategies and policies to be followed for making investments;
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- decision making criteria for making investments;
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- limits on making investments;
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- risk and return relating to investments;
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- governance arrangements relating to investments; and
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- any other matters that the Minister thinks appropriate.
[Subsection 18(5) of the Structured Finance Support Bill]
20.44 However, the written direction must not:
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- have the purpose, or be likely to have the effect, of directly or indirectly requiring the Minister to make, or not to make, a particular investment; or
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- be inconsistent with the Structured Finance Support Bill (including the objects of the Bill) or a legislative instrument made under this Bill.
[Subsection 18(6) of the Structured Finance Support Bill]
20.45 It is intended that powers and functions delegated under section 18 will be delegated to officials of the AOFM.
20.46 The AOFM is a relatively small agency with approximately 40 staff in the 2018-19 financial year. The CEO of the AOFM is the only position that is equivalent to an SES. The remaining eight senior positions are at a level equivalent to an Executive Level 2. These positions are specialist positions, and position holders have often been recruited for their specialist knowledge and expertise in securities and debt management.
20.47 The requirement for the Minister to consider if the person has the appropriate qualifications or expertise to exercise the power or perform the function before making a delegation ensures there is not a wide delegation under this Structured Finance Support Bill.
Annual reporting
20.48 There will be a yearly update on the operation of the Fund in an annual report prepared by the CEO of the AOFM and given to the Minister under section 46 of the PGPA Act. [Section 19 of the Structured Finance Support Bill]
Rules
20.49 The Minister has the power to make rules as required or permitted, or that are necessary or convenient to give effect to provisions in the Structured Finance Support Bill. The rule making power will allow the Minister to prescribe additional restrictions on the types of investments that can be acquired. [Subsection 20(1) of the Structured Finance Support Bill]
20.50 To avoid doubt, the rule making power cannot:
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- allow the creation of an offence or civil penalty;
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- provide powers of arrest, detention, entry, search or seizure;
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- impose a tax;
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- set an amount to be appropriated from the Consolidated Revenue Fund under an appropriation in the Structured Finance Support Bill; or
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- directly amend the text of the Structured Finance Support Bill.
[Subsection 20(2) of the Structured Finance Support Bill]
Application and transitional provisions
20.51 The Assistance for Structured Finance Support Bill commences on the day after the Bill receives Royal Assent.