Government releases managed investment schemes and life insurance products proposals paper

The Federal Government has released a proposal paper on product rationalisation of managed investment schemes and life insurance products (Proposals Paper) which outlines the Government’s proposed framework for product rationalisation in those industries.


Product rationalisation is the process of converting or consolidating products of a similar nature into a single product with equivalent features and benefits, which removes outdated products from the market. The Federal Government released an Issues Paper about product rationalisation in 2007. The feedback it received suggested a ‘one-size-fits-all’ approach would not be appropriate given the differences between the various products (ie managed investment schemes are collective investment vehicles whereas life products tend to be governed by individual contracts between the issuer and policyholder), so the new mechanism has some common requirements for managed investment and life products, as well as each having its individual requirements.

The closing date for submissions on the Proposals Paper is 26 February 2010. The key features of the Proposals Paper are outlined below.

General requirements

The proposed mechanism for rationalisation of managed investment and life products has three elements common to both these products: the legacy product test, the taxation relief test and the no disadvantage test

Legacy product test

The legacy product test is a threshold test designed to ensure that only genuine legacy products are allowed to benefit from the proposed relief. It requires that the product has been closed to new investors or policyholders for a period of two years and satisfies at least one of the following:

  • the product has become uneconomic for policy holders or members
  • the product has become out of date because of changes in the regulatory regime
  • the costs of operating the product have become excessive for the product provider because of an outdated technology platform or for other reasons or
  • the product rationalisation will result in the decommissioning of an underlying administration system or interrelated system.

The last two elements would be most useful for providers as they relate to costs of the business, rather than direct costs to members.

Taxation relief test

It is proposed that a legacy product can only receive taxation relief if the product has been closed to new members or policyholders for a period of five years. The product must also not be an interest in a managed investment scheme that was closed to new members after it had raised an amount that was disclosed in a prospectus or product disclosure statement. This will prevent special purpose managed investment products that closed after raising the necessary capital from claiming the relief that is intended only for genuine legacy products. If obtaining tax relief is not a particular consideration (and it is not yet clear how the proposed mechanism will interact with other forms of tax relief already available), providers will not have to meet this test but could instead make the application after the product had been closed for two years (provided the other elements of the legacy product and no disadvantage tests were satisfied).

No disadvantage test

The no disadvantage test is designed to ensure that no member or policyholder will be worse off as a result of a product rationalisation transfer. In applying the no disadvantage test, the factors that product providers must consider include:

  • compensating or similar rights and entitlements, monetary redress and replication of rights and entitlements
  • features, rights and benefits of the old product, including fees, charges, premiums, taxes, industry sector characteristics, withdrawal rights and insurance benefits as well as the transaction costs involved in moving policyholders and members from the old to the new product and
  • the impact on future rights and entitlements.

If it is not possible to determine the impact of the loss of a right, the only way for the product provider to satisfy the no disadvantage test will be to replicate that right in the new product. This means that representations made in relation to the legacy product around issues such as risk profile may have to be built into the new product in order to transfer the members.

Managed Investment Schemes

For managed investment schemes to satisfy the legacy product test, they will also need to incorporate the following elements:

  • the responsible entity will need to develop the product rationalisation proposal, including outlining how the no disadvantage, legacy product and (if required) taxation relief tests will be satisfied, which may involve seeking tax rulings from the Commissioner and
  • the responsible entity will need to commission an independent expert to report that the no disadvantage, legacy product and (if required) taxation relief tests have been satisfied. The independent expert would either have to meet set criteria or be selected from a list of ASIC approved experts.

The responsible entity can then proceed with the proposal if any of the following are satisfied:

  • Option A: Notification: no more than 5% of members in any class notify the responsible entity within 30 days that they do not agree to the proposal being implemented withoutapproval of a Court or meeting of members.
  • Option B: Meeting of Members: a majority by value of members in each class who voted on the proposal approve it, and at least 10% by value vote in each class.
  • Option C: Court Order: the court approves the proposal.

Life insurance products

The Proposals Paper suggests a court based process for the rationalisation of life insurance products that satisfy the legacy product test, with broad discretion for APRA to approve certain rationalisation proposals (essentially those where the application of the no disadvantage test is relatively simple). The mechanism is modelled on the transfer of business provisions in Part 9 of the Life Insurance Act 1995.

As with managed investment schemes, life companies will need to develop the rationalisation proposal and commission an independent expert’s report. However, the proposal must then be lodged with APRA with sufficient time for APRA to consider it prior to being sent to policy owners, and to seek further information if necessary (including more expert material).

Each policy owner would also be entitled to a copy of the full rationalisation scheme on request. The communication to policy owners will need to include which option the product provider proposes to proceed with and invite comments on any concerns about the proposals, with all responses to be provided to APRA or the Court.

The proposal to involve the courts with rationalisation of life products appears to be similar to its role in schemes of arrangement for company takeovers and mergers.

Superannuation products

Interestingly, the Proposals Paper excludes superannuation products from the product rationalisation mechanism because the Government considers that the successor fund transfer (SFT) process is generally adequate for merging legacy products into new products. Many superannuation trustees with legacy products would have hoped those products could be included in the rationalisation mechanism so as to avoid the onerous (and ill-defined) successor fund transfer requirements in the Superannuation Industry (Supervision) Regulations 1994, although the proposed mechanisms (especially for life products) may prove to be more onerous and costly than the SFT provisions as they take the decision out of the provider’s hands.

Concluding comments

The Proposals Paper is a good start in developing an overarching framework for dealing with legacy products in industries where there are few formal mechanisms for unilaterally transferring members out of old funds and into new ones.  It is disappointing that superannuation products could not be accommodated in the proposed framework, but it may turn out that the SFT provisions are easier to work with, and require less interaction with third parties, than does the proposed mechanism for life companies.


Adrian Verdnik

Adrian’s financial services law practice covers superannuation, managed funds, insurance, and financial advice.

Harry New

Harry leads our financial services team and focuses extensively on financial services law and corporate advisory.

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