Reforms for mutuals’ access to capital

The Government has released the Independent Facilitator Review Report on Reforms for Cooperatives, Mutuals and Member-owned Firms on whether there should be regulatory or legislative changes to improve Commonwealth-registered cooperative and mutual enterprises’ access to capital and whether ‘mutual enterprise’ should be explicitly defined in the Corporations Act 2001.

At the same time the Treasurer has announced the Government has accepted all the recommendations of the Review Report as well as releasing the Government’s response to the Senate Economics References Committee’s Report on the role, importance and overall performance of cooperative, mutual and member‑owned firms. Background.

This response has been of great interest to mutual banks, credit unions and building societies who wish to access equity capital to allow growth without affecting their mutual status. I have worked on previous capital issues by credit unions; an important element of a successful mutual capital instrument will be its tax treatment.

The Government’s response to the Senate Economics References Committee includes:

  • accepting the committee’s recommendation that a mutual enterprise is explicitly defined in the Corporations Act 2001, and its associated regulations.
  • noting the committee’s recommendation that the role of directors in mutual enterprises is defined in the Corporations Regulations to align with the proposed definition of a mutual enterprise in the Corporations Act. On this point the Government supports ASIC giving consideration to whether regulatory guidance on the duties of directors of mutuals should be issued.
  • noting the committee’s recommendation that APRA set a target date for the outcome of discussions with the co-operative and mutuals sector on issues of capital raising and bring those discussions to a timely conclusion. The Government says that APRA anticipates it will release the final revised prudential standard proposing direct issuance by mutually-owned ADIs of equity-like capital instruments for prudential capital purposes in late 2017 for commencement as soon as practicable thereafter. The Government has also asked APRA to amend its prudential standards to permit the ability of mutual friendly societies and mutual private health insurers to directly issue CET1 instruments.
  • accepting the committee’s recommendation that the Commonwealth Government examine proposals to amend the Corporations Act 2001 to provide co-operative and mutual enterprises with a mechanism to enable them access to a broader range of capital raising and investment opportunities. The Government will amend the Corporations Act to expressly permit mutuals registered under the Act to issue capital instruments without risking their mutual structure or status. The Government has asked ASIC to facilitate the issue of capital instruments by unlisted transferring financial institutions by developing minimum service standards (including an agreed process, framework and timetable) for the timely consideration of applications for exemption from the demutualisation provisions in the Corporations Act (and under the demutualisation guidelines under the Banking Act), and accountability mechanisms for the service standards.

Tax treatment of mutual capital

The Government’s response to the Review Report includes agreement that tax regulations be promptly amended to treat Tier 2 Capital instruments convertible into Mutual Equity Interests in the same manner as Tier 2 Capital instruments convertible into ordinary shares.

But there is no mention of whether mutual capital instruments will possess the relevant features to qualify for the release of franking credits and whether holders of mutual capital instruments will be able to access franking credits accrued prior to the implementation of the amendments.

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