Govt's ADI proposal could cost billions

(AAP) Managed funds could pay billions to satisfy capital adequacy provisions and revamp their business models, if they take up Prime Minister Kevin Rudd's proposal that they become banks.

Treasurer Wayne Swan told the Macquarie Radio Network that some funds and wealth
managers wanted apply to the Australian Prudential Regulation Authority (APRA) to
become banks.
"Some of those funds have indicated to us that they want to proceed in that
direction but there are other courses of action that we are working on in
conjunction with the industry," he said.
Most wealth managers contacted by AAP were still digesting the invitation by Mr Rudd
that investment funds wanting access to the federal government's bank deposit
guarantee should apply to APRA.
A successful application would make a managed fund an authorised deposit-taking
institutions (ADIs), which carried the same status as a retail bank.
The move towards granting managed funds bank status, is aimed at fixing an
unintended consequence of the government's guarantee scheme that has left some $12
billion of investment funds frozen by eight big funds managers.
The funds are market-linked investments and are not covered by the guarantee.
Perpetual Ltd said becoming an ADI could cost it billions of dollars if funds
managers faced the same regulatory provisions as banks.
"On capital adequacy alone, we have $30 billion of funds under management in all of
our funds. So to set aside that sort of capital if we had to oblige by capital
adequacy provisions, that is significant - we're talking hundreds of millions of
dollars at a minimum," Perpetual spokesman Tim Scott told AAP.
"We're trying to understand the detail (of the proposal). It's quite a fundamental
difference for us if we were to move to an ADI basis.
"That fundamentally changes our business model."
APRA's minimum capital adequacy requirements require an ADI to hold a prudential
capital equivalent to eight per cent of its total risk-weighted assets, half of
which must be held as tier one capital.
The transition to an ADI takes several months, and entities must also meet APRA's
governance, risk management and supervisory standards.
Perpetual last week suspended all applications an redemptions relating to its
Monthly Income Fund and 42-year old Mortgage Fund, both of which account for $2
billion in funds under management.
"Just on those two funds, (the capital adequacy requirement would be) a couple of
hundred million dollars," Mr Scott said.
Challenger Financial Services said the government needed to clarify which entities
would fall under Mr Rudd's proposal.
"If the intent of the proposal is that the funds themselves become an ADI then there
will be a need for capital adequacy requirements.
" All of it would need to get unitholder approval, which is a complex process," a
Challenger spokeswoman said.
Challenger is processing redemptions on its $2.8 billion Howard Mortgage Trust and
$1 billion High Yield Fund on a quarterly basis instead of daily.
An AXA Asia Pacific Holdings spokeswoman said the fund manager did not "see
becoming an ADI as a solution to this issue for our customers".
Industry body Investment and Financial Services Association (IFSA) joined calls for
more detail on the proposal.
"Unfortunately, the great majority of mortgage trusts are not currently transacting
redemptions," IFSA chief executive Richard Gilbert said in a statement.
Mr Gilbert said IFSA would continue working with the Australian Securities and
Investments Commission to assist hardship cases.
A spokesman for City Pacific Ltd managing director Philip Sullivan said the
government's banking licence proposal was not going to assist anybody with immediate
liquidity problems.
ING Australia Ltd and the nation's largest funds manager, Colonial First State -
wholly owned by Commonwealth Bank of Australia - said it was awaiting further
details of the proposal before commenting.