Commonwealth of Australia Explanatory Memoranda Commonwealth of Australia Explanatory Memoranda[Index] [Search] [Download] [Bill] [Help]
2004-2005
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
HOUSE OF REPRESENTATIVES
EXPLANATORY MEMORANDUM
(Circulated by authority of the Minister for Ageing, the Honourable Julie
Bishop MP)
AGED CARE (BOND SECURITY) BILL 2005
OUTLINE
The Aged Care (Bond Security) Bill 2005 establishes a scheme to guarantee
the repayment of aged care residents' bond balances in the event that an
approved provider of a residential aged care service or a flexible care
service becomes insolvent (a default event) and is unable to meet his/her
financial obligation to repay residents' bond balances.
This Bill forms part of a suite of Bills, including the Aged Care Amendment
(2005 Measures No. 1) Bill 2005 and the Aged Care (Bond Security) Levy Bill
2005, which together strengthen protection of residents' accommodation
bonds, as announced by the Government in September 2005, by enhancing
prudential regulatory requirements and by guaranteeing the repayment of
bond balances to residents in the event that an approved provider becomes
insolvent and is unable to repay bonds.
This Bill enables the Commonwealth to pay to a person an amount that is
equal to a bond balance, and interest, owed to the person by an approved
provider. In exchange for the payment, the Bill provides that any rights
that a person paid such an amount by the Commonwealth had to recover the
amount from an approved provider are transferred to the Commonwealth.
Provisions in the accompanying Aged Care (Bond Security) Levy Bill 2005
allow the Commonwealth to recoup costs it incurs from other approved
providers (to the extent that costs are unable to be recovered from the
defaulting approved provider).
FINANCIAL IMPACT STATEMENT
There will be no cost to approved providers of residential aged care unless
a provider becomes bankrupt or insolvent and the Commonwealth has to pay
outstanding bond balances owed to residents. The magnitude of costs that
flow to approved providers of residential aged care will be determined by
the monetary value of the outstanding bond balances (including interest)
repaid by the Commonwealth on behalf of the defaulting approved provider,
whether any part of this cost can be recovered from the defaulting approved
provider and the costs incurred by the Commonwealth in administering the
default event (including the repayment of the bond balances). In the event
that an approved provider becomes bankrupt or insolvent and defaults on
their financial obligation to repay residents' bond balances, the
Commonwealth will assess the impact of recovering costs from all approved
providers holding accommodation bonds. The Commonwealth will have the
legislative capacity to recover costs from approved providers holding bonds
in a series of instalments over a number of years. This will minimise the
potential impact on approved providers.
REGULATION IMPACT STATEMENT: STRENGTHENED PROTECTION OF RESIDENTS'
ACCOMMODATION BONDS
A: Background
Accommodation bonds
Under the Aged Care Act 1997 ('the Act'), an accommodation bond (bond) is
an initial payment that an approved provider (provider) may charge a
resident of aged care services (resident) for entry to low level
residential aged care, or to high level residential aged care in an 'extra
service' facility. Some aged care residents in Multipurpose Services (MPS)
may also be charged accommodation bonds. The balance of a bond that is
paid to a provider when a resident enters a facility (minus certain
deductions and any investment returns retained by the provider) is refunded
to the resident upon their exit from the facility.
For lump sum bonds, providers can draw down a certain amount from the
capital sum each month for five years from the date of entry. This is the
retention amount. The retention amount is calculated monthly and fixed on
entry to a service (that is, it never changes during the life of the bond).
The Government regulates the maximum retention amount and this is
currently $265.50 per month or $3,186 per annum for residents who pay a
bond of more than $31,860. Maximum retention amounts set by the Government
vary depending on the size of the bond and are indexed annually. After
five years, no further retention amounts can be deducted from the bond.
Prior to commencement of the Aged Care Act 1997, some residents of aged
care services were charged entry contributions. These entry contributions
are akin to bonds.
Industry use of bonds and industry structure and trends
Around 74 per cent of aged care services levy bonds on residents. Based on
2004 data, around $3.7 billion in bonds is held across the industry. The
average total bond holding of providers in 2003-04 was $3.96 million with
about 10 per cent of bond holders holding $10 million worth of bonds or
more. Total holdings have increased from $500 million in 1996. The average
new bond has also increased from $26,000 in 1996-97 to $127,600 in 2004-05.
In 2004 a Review of Pricing Arrangements in Residential Aged Care ('the
Review' or 'the Hogan Review') was undertaken. One of the recommendations
of the Review was that appropriate prudential arrangements be established,
to ensure the protection of residents' bonds, noting that bonds do not
qualify as preferential debts under the Corporations Act 2001.
In the 2004-05 Budget, the Australian Government ('the Government')
committed $0.8 million (through the Investing in Australia's Aged Care:
More Places, Better Care initiative) to develop proposals, in consultation
with the community and providers, for strengthening the level of security
for bonds, both currently held by providers and any taken in the future.
Current prudential arrangements
Under the Act, providers must not use an accommodation bond for a purpose
that is not related to providing aged care to care recipients. Providers
must also comply with a limited set of prudential requirements set out in
the Act.
Under the current limited prudential arrangements, providers holding bonds
are required to:
. submit an annual prudential statement to the Department of Health and
Ageing (the Department) confirming whether the provider can repay, in
accordance with the Act, liabilities for accommodation bond balances that
can be expected to fall due in the following financial year and whether
the provider has had enough insurance, throughout the year, to cover
losses arising from fraud, loss of earnings, fire, flood, or other
reasonably insurable events that may affect the ability of the provider
to refund bond balances;
. give a copy of the statement described above to any resident who has a
bond held by the provider; and
. give the resident, or a prospective resident, the most recent statement
of the service's audited accounts, or if the service is operated as part
of a broader organisation - the most recent statement of the audited
accounts of the organisation's aged care component.
Sanctions for non-compliance include, for example, prohibiting the charging
of accommodation bonds, restricting the provider's approval and revoking or
suspending the allocation of places. However, such sanctions are
infrequently exercised in relation to prudential matters as the current
focus of the aged care legislation is on ensuring quality of care rather
than ensuring the financial viability of providers.
In addition, providers wishing to remain eligible for the Conditional
Adjustment Payment (CAP) are now required to prepare General Purpose
Financial Reports (GPFRs) in accordance with accounting standards, subject
to limited exemptions and transitional arrangements. The GPFRs must be
audited and must be provided, on request, to residents, prospective
residents, or any other person or agency authorised by the Department.
B: Problem
In the event that a provider becomes bankrupt or insolvent, the resident is
not guaranteed return of their bond because the resident ranks as an
unsecured creditor under corporations law. Further, there is no capacity
in the aged care legislation to give priority to bond balances. While to
date there have been no cases where a resident's bond balance has not been
repaid, the risk of this is increasing because of the increased reliance of
providers on bonds and the increasing value of bonds [as discussed in the
Background to this Regulation Impact Statement (RIS)].
The main problems to be addressed are:
. the current prudential arrangements in place to protect bonds, while they
have worked well to date, cannot guarantee the full refund of residents
bond balances;
. bonds are uncapped fees in a market in which supply is constrained and
can represent a significant proportion of residents' life savings;
. a range of risks arise that may prevent residents from receiving a refund
of the bond moneys due to them on leaving a residential aged care
facility. A provider may fall into financial difficulty and be unable to
repay residents' bonds, either because of short term liquidity problems
or net financial default. Currently, if a provider becomes bankrupt or
insolvent, residents who are owed bonds rank with other unsecured
creditors. Bonds are currently unsecured debts owed to older people; and
. the large sums of money held in bonds and the lack of a comprehensive
arrangement for the monitoring and supervision of the management of these
funds are of concern to the Government and the community.
Justification for action by the Government to address the problem
The need for stronger prudential regulation and for a guarantee arrangement
is becoming more pressing as the industry's collective holdings of bonds
increase and as the average size of bonds - that is, the level of loss to
which a resident would be exposed if their provider defaulted - also
increases. The industry is unable to respond to this problem independently
of the Government at this time because providers rely on bonds for capital-
raising. Bonds could be protected if they were placed in trust funds by
providers. However, this option is not viable at this time because most
providers are dependant on bonds as a source of capital funding, and there
would be a significant adverse impact on industry if the bonds had to be
realised and placed in trust funds. Also, in the event of a default,
corporations law operates such that residents will always be unsecured
creditors.
C: Objectives
In recognising the level of risk to which residents' bond moneys are
currently exposed, and the inherent risk to the Government, the key
objectives are to:
. improve the efficiency and sustainability of the industry and strengthen
the management of bond moneys to reduce the likelihood of providers
becoming insolvent or bankrupt and defaulting on repayment of bonds;
. strike a balance between the added security for residents that is
provided by this strengthening and the financial impact of the new
arrangements on the industry's viability and its standing with the
capital markets, including its ability to construct and maintain aged
care homes, and pressures that might flow on to subsidies, user charges,
and the quality and continuity of care; and
. ensure that residents receive their full entitlement to the balance of
aged care bonds that they have paid, in the event that a provider becomes
insolvent or bankrupt.
D: Options for prudential regulation of providers holding bonds and
options for securing residents' bonds
This RIS proposes a number of options for: (a) increasing prudential
regulation of providers holding accommodation bonds; and (b) guaranteeing
the security of residents' bonds. These two sets of options are inter-
related because, as prudential regulation is increased it is expected that
the need for the Government to guarantee the security of residents' bonds
will decrease. Similarly, if residents' bonds are guaranteed from the
outset, this enables a staged approach to prudential regulation to be
introduced over time (cognisant of the impact of prudential regulation on
the sector). In the short term, in the absence of strong prudential
regulation there is a need to couple prudential requirements with a
guarantee arrangement for securing residents' bonds.
Options for prudential regulation
Option A1: Retain the status quo
As detailed in the Background to this RIS, the status quo is that providers
are required to submit an annual prudential statement confirming whether
they have sufficient insurance and capacity to repay bonds likely to be
owing in the following year.
Option A2: Staged introduction of prudential standards as part of a
prudential regulatory framework
Under this option, a prudential regulatory framework would be established.
The framework would require providers holding bonds to comply with an
initial set of prudential standards, based largely on existing requirements
under the Act. New standards would be developed over time following
consultation with stakeholders and appropriate research and analysis.
Initially the prudential regulatory framework would establish three
mandatory prudential standards for providers:
a) a liquidity standard would require each provider holding bonds to
confirm that the provider has sufficient liquidity to be able to repay
liabilities for bonds and a liquidity management strategy to minimise the
risk of not being able to refund accommodation bond balances because of
losses arising from, for example, loss of confidence in the service, an
epidemic, fraud, flood, fire and other events;
b) a records standard would require providers holding bonds to maintain an
up-to-date register of their bonds, and related information, in a
prescribed form and to have it audited annually; and
c) a disclosure standard would require a provider holding bonds to give:
. the Department information about the provider's compliance with the
liquidity standard, records standard and disclosure standard
including information from the bonds register. The information
provided to the Department must be audited.
. a resident (or the resident's representative) a copy of the bond
agreement, an annual extract of the transactions in the bond register
for the resident and information on the provider's compliance with
prudential requirements; and, on request, a copy of the financial
report and any audit report on it, a copy of the entry on the
register that relates to the resident and a copy of the audit report
on the register; and
. a prospective resident of the provider's service (or the prospective
resident's representative), on request, information on the provider's
compliance with prudential requirements and a copy of the financial
report and any audit report on it, and a copy of the most recent
audit report on the register.
The Department would monitor compliance with the prudential standards and
impose sanctions as appropriate.
The Department would be responsible for developing any necessary additional
prudential standards in consultation with all stakeholders to reduce risks
to residents and the Government.
It is proposed that the prudential regulatory framework would be
administered by the Department by a relatively small team with 10 staff or
less.
Option A3: Introduce comprehensive prudential regulation as soon as
possible
Under this option, providers holding bonds would be required to comply with
comprehensive prudential requirements, modelled on those administered by
the Australian Prudential Regulatory Authority (APRA) in respect of
financial services. Such standards would include those detailed against
Option A2 but would also include prudential standards relating to, for
example, governance, risk management and capital requirements.
As for Option A2 the prudential regulatory framework would be administered
by the Department. Given the expanded role under Option A3 it is
anticipated that the staff required would be in excess of 15.
Groups likely to be affected
Residents
In 2003-04 there were 189,929 residents. The Department does not currently
hold data on the total number of residents paying bonds. However, in 2003-
04, there were 48,222 new entrants to permanent care and of these
approximately 37.6 per cent paid (or agreed to pay) an accommodation bond.
Providers
In 2004, there were 2,493 services and 1,309 providers. Providers include
private incorporated bodies, community based organisations, religious
organisations, State/Territory Government organisations, charitable
organisations, local government bodies, private non-incorporated entities
and publicly listed companies.
Of the 1,309 providers, approximately 57 per cent received bond moneys,
indicating relatively wide use of bonds within the industry.
The Government
The Government currently funds providers through a range of subsidies paid
under the Act. The legislation also enables providers to require residents
to deposit bonds with them.
Impact analysis
Option A1: To retain the status quo
Impact on residents
There would be no positive impact on residents if current arrangements were
retained.
While some prudential protections exist in the Act currently, the absence
of strong prudential regulation increases the risks to residents that may
arise as the result of poor financial management by providers.
Impact on aged care providers
There would be no positive impact on providers if current arrangements were
retained. However, there would be no increased cost to providers under
this option.
Under current arrangements, there is limited encouragement for providers to
take responsibility for their own financial risk and to develop a more
prudent approach to the management of bonds held. It could be argued that
over time, the industry will be able to develop a more prudent approach
without the intervention of the Government. However, the Hogan Review did
not support this notion.
Impact on the Government
As the Act enables providers to raise bonds, the Government may be exposed
to moral hazard under the current arrangements. It could be considered
that the Government is obliged to ensure that risk of loss of these funds
is minimised. The deficiencies in the current prudential regulatory
framework mean that, in the event of a provider being unable to repay
residents' bonds the Government would face considerable criticism for
failing to put measures in place designed to mature industry and decrease
the likelihood of such an event occurring. There is a risk that the
Government would be accused of inadequate monitoring of the financial
management and operations of providers holding residents' bonds.
Option A2: Staged introduction of prudential standards as part of a
prudential regulatory framework
Impact on residents
Option A2 would have a positive impact on residents and prospective
residents and their representatives, with deficiencies in the current
arrangements being addressed.
An increase in prudential regulation is likely to increase the financial
security of providers. In turn, this is likely to decrease risks to
residents' bonds over time. To the extent that there are increased
compliance costs for providers, these increased costs may be passed on to
residents. However, the advantage of a staged approach to the introduction
of prudential standards is that the Department would assess the costs and
benefits (the regulatory impact) of each standard as it was developed
(including the cumulative cost and benefit of the standards in total).
An additional benefit of this option is that the disclosure standard would
ensure that all residents and prospective residents and their
representatives would have access to detailed information about the
financial status of any provider holding accommodation bonds.
Option A2 would result in residents being better informed about the
financial health of their provider and allow them to judge the safety of
their bonds. This may be a less significant consideration where there is a
shortage of residential care places or limited choice.
Impact on providers
This option would have a positive impact on providers with some of the
deficiencies in the current arrangements being addressed.
The current prudential arrangements already include a liquidity
requirement. However, the requirement in the liquidity standard to a
produce a liquidity management strategy is new.
In addition, the records standard is a new standard that would require that
providers document details of each bond held in a database in a prescribed
form determined by the Department, ie. in the bonds register. There would
be some additional cost to providers including in terms of reporting to the
Department in a standardised format. However, the new requirements should
not be a significant impact as providers are currently responsible for the
appropriate management of bonds, and should already be keeping appropriate
records.
The Department already conducts a voluntary annual survey of aged care
homes which includes gathering information on accommodation bonds, and
although the response rate is not 100 per cent, it is substantial.
Response rates of more than 80 per cent were obtained for the surveys
conducted between 2001 and 2004 inclusive. In responding to the survey,
most providers already provide the type of data that would be required
under the new standards.
The Government bear the cost of administering the new prudential
arrangements for the first three years of operation. A further submission
to the Government, on cost recovery of these functions, would be considered
at a later date.
Impact on the Government
Option A2 would have a positive impact for the Government, with some of the
concerns with the current arrangements, in light of the increasing value of
accommodation bonds, being addressed.
This option would enable a strong information base to be developed
(including through the information provided by industry, and the associated
analysis and research) which would inform the future development of the
prudential regulatory regime over time, but in a way that would not
inadvertently or adversely affect the viability of services in the short
term.
This option would ensure that future policy development would be based on a
sound understanding of industry viability and financial health. The moral
hazard to the Government should be reduced as the Government will have
taken steps to protect bonds from exposure to risk of loss. This option
imposes additional costs on the Government until such time as the
regulatory scheme is cost recovered from industry.
The estimated cost of administration of prudential arrangements is not
expected to exceed $3 million per year in any of the first three years.
This cost will be met by the Government. This arrangement would be
reviewed with the intention to introduce cost recovery from industry from
the fourth year of operation of the new prudential regulatory framework.
Option A3: Introduce comprehensive prudential regulation as soon as
possible
Impact on residents
Option A3 would have a positive impact on residents, prospective residents
and their representatives with deficiencies in the current arrangements
being addressed.
However this option would also introduce new risks to residents,
prospective residents and their representatives. If parts of industry are
unable to meet the stringent prudential requirements in the short term, the
availability, quality and continuity of care may be adversely affected,
with providers exiting from the industry. This would be of particular
concern in areas where supply of services is limited (eg. some rural and
remote areas). Strong prudential regulation is likely to minimise the risk
to residents' bonds in the longer term.
Impact on providers
As with Option A2, this option would have a positive impact on providers
with deficiencies in the current arrangements being addressed.
This option would generate significant additional costs to industry and the
impact of this cost on the industry's viability (including its ability to
construct and maintain aged care homes, and pressures that might flow on to
subsidies, user charges, and the quality and continuity of care) is not
known. However, the impact is likely to be far more significant for
smaller and rural and remote services.
As with Option A2, the Government would bear the cost of administering the
new prudential arrangements for the first three years of operation.
Impact on the Government
As with Option A2, Option A3 would have a positive impact for the
Government, with deficiencies in the current arrangements being addressed.
However, the option introduces new risks to the Government in terms of the
possible flow on effect that it would have on the viability of services and
hence, the availability of services (including small services or those
operating in remote/rural locations).
The Government considered the risks and benefits of this option when
formulating its response to the Review. The Government concluded that the
high degree of regulation recommended by the Review cannot be justified,
including because of the high cost of additional regulation and
administrative burden to providers. This conclusion formed part of the
Government's response to the Review in 2004.
Administrative costs to government are likely to be higher under Option A3.
Options for guaranteeing security of residents' bonds
Option B1: Retain the status quo
Currently, in the event of a provider becoming insolvent or bankrupt and
defaulting on the repayment of bonds to residents, aged care residents rank
as unsecured creditors of the defaulting provider.
Option B2: Guarantee scheme based on post-payment model
Under this option, the Australian Government would pay bond balances owed
to residents by a defaulting provider (including interest). Residents
would, in return, sign over their rights as creditors to the Government
following receipt of their bond entitlements from the Government. The
Government could then pursue the defaulting provider and if there was any
shortfall, could recover the funds paid out by imposing a levy on the
industry (all other providers charging accommodation bonds).
Option B3: Guarantee scheme based on pre-payment model
Under this option, providers who hold bonds would be required to deposit an
up-front percentage of the bond balances they hold, into a guarantee fund
that would be managed by the Department and drawn upon to pay amounts owed
to residents in the event of a default. Residents would, in return, sign
over their rights as creditors to the Australian Government following
receipt of their bond entitlements from the Government. The Government
would then pursue the defaulting provider and if there was any shortfall,
would top up the guarantee fund by imposing a levy on the industry (all
other providers charging accommodation bonds).
Groups likely to be affected
The groups likely to be affected are the same as the groups detailed in
relation to Options A1, A2 and A3.
Impact analysis
Option B1: Retain the status quo
Impact on residents
There would be no positive impact on residents if current arrangements were
retained, and deficiencies in the current arrangements would remain in
place.
In the event that a provider becomes bankrupt or insolvent and is unable to
repay a bond, the resident ranks as an unsecured creditor of the defaulting
provider. This means that in these circumstances the resident may not ever
receive their full bond entitlement. This can have a significant negative
impact, given that bonds are increasing (the average new bond agreement in
2004-05 was $127,600) and given that they can represent the life savings of
older people.
Impact on providers
There would be no positive impact on providers if current arrangements were
retained, and deficiencies in the current arrangements would remain in
place. However, there would be no increase in costs to providers.
Impact on the Government
There would be no positive impact for the Government if current
arrangements were retained, and deficiencies in the current arrangements
would remain in place. In the event that a provider becomes bankrupt or
insolvent and fails to repay bonds, the Government may come under pressure
to repay the bonds.
Option B2: Guarantee scheme based on post-payment model
Impact on residents
This option would ensure that aged care residents would recover 100 per
cent of bond moneys owed to them in the event that a provider became
bankrupt or insolvent. In return for receipt of the bond money, residents
would be expected to sign over their rights as creditors to the Australian
Government.
Impact on providers
This option imposes minimal cost on the sector, as there are no up-front
payments. The scheme only comes into operation in the event of a default.
The levy on the sector to recoup the amounts paid to residents may never
have to be imposed.
However, this option would not allay provider concerns that good providers
would be liable for poor financial and risk management of defaulting
providers.
Impact on the Government
This option is administratively simple. The Government would initially
bear the costs of repaying bonds. The extent of the exposure would depend
on the size of the bond holdings held by the defaulting provider. In 2004,
seven providers that held more than $37 million in bonds. The three
largest bond holdings are $220.3 million, $81.4 million and $78.4 million.
Under this option, the defaulting provider would not have contributed
anything to the guarantee scheme.
Option B3: Guarantee scheme based on pre-payment model
Impact on residents
This option would ensure that aged care residents would recover 100 per
cent of bond moneys owed to them in the event that a provider became
bankrupt or insolvent. In return for receipt of the bond money, residents
would be expected to sign over their rights as creditors to the Government.
Impact on providers
This option would ensure that the defaulting provider would make some
contribution to the repayment of bonds, through their initial contribution
to the guarantee fund. This option reflects the real cost to providers of
securing bonds compared with the cost of using conventional capital-raising
mechanisms. The payment of a deposit by all providers holding bonds would
reinforce to providers the individual and collective responsibility
attached to holding bonds.
Under this option, providers would not have access to the amount
contributed to the guarantee fund. Any interest earned on the money
deposited would be used to offset the cost of the scheme and any excess
would be used to top up the fund to increase the amount available to cover
payouts in the event of a default.
As for Option B2, Option B3 would not allay provider concerns that good
providers would be liable for poor financial and risk management of
defaulting providers.
Impact on the Government
Because the scheme would be pre-funded, the Government would already have
"the money in the bank" from providers to enable payments to be made to
residents. This option would minimise the financial risk to the
Government. However, there would be an additional administrative cost
associated with managing a multimillion dollar fund.
E: Consultation
Initial consultation with the industry and consumers
As part of the Hogan Review, extensive consultation was undertaken with
consumers and providers about issues within the Review's Terms of Reference
(including prudential regulation and the security of bonds).
Professor Hogan, the reviewer, undertook consultation in all States and
Territories from May to October 2003. Further consultation was undertaken
through the Industry and Consumer Reference Group, which was established
during the Review.
Supplementary discussions were held with peak bodies, Government agencies
and other stakeholders as part of the Review, and a number of aged care
services were visited.
External stakeholder consultation following the Hogan Review
Consultation regarding options for establishing a guarantee scheme for
repayment of residents' bonds was undertaken through the Minister's
Implementation Taskforce (MIT) between September 2004 and April 2005. The
Conditional Adjustment Payment and Prudential Reference Group (the
Reference Group) was also established and consulted following the Review.
Members of MIT and the Reference Group were also consulted on the content
and approach proposed for the legislative framework for the guarantee
scheme and the prudential regulatory arrangements.
Consultation with Government agencies
There has been extensive consultation with relevant Government agencies
including the Departments of the Prime Minister and Cabinet, Finance and
Administration and the Treasury.
Views of those consulted
There has been lengthy discussion of prudential regulation generally in the
context of the Review. The Review recommended comprehensive prudential
regulation overseen by a Guarantee Fund Authority with powers to examine
the financial affairs of providers, review the assets of providers, apply
to court for the winding up of insolvent providers and require a provider
to dispose of assets to meet bond claims.
In relation to the options for guaranteeing the repayment of bonds to
residents, industry has expressed support for both Options B2 and B3 (with
a preference for B2). In relation to the prudential regulatory
arrangements, members of MIT and the Reference Group provided positive
feedback.
F: Conclusion and recommended options
Prudential regulation of providers holding bonds
Option A2 (staged implementation of prudential regulation) is preferable to
Options A1 (retention of the status quo) and A3 (implementation of
comprehensive prudential regulation).
Option A2:
. would allow all residents and prospective residents to be better
informed about the financial health of providers, and allow them to
judge the security of their bonds;
. would create a strong information base to enable the development of
further standards over time;
. would minimise the risk to residents of a loss of their bond and may
also improve overall management of aged care homes (a benefit that would
also apply to Option A3).
However, Option A2 is preferable, as the sudden increase in prudential
regulation proposed under Option A3 may adversely impact providers; and
. is appropriate given the current information base available to the
Government to inform the development of prudential standards at this
time.
Guaranteeing repayment of residents' bonds
In relation to the options for repayment of residents' bonds in the event
of a provider default:
. Option B1 (retention of the status quo) is not supported as it does not
ensure the repayment of bonds;
. Option B2 (guarantee scheme based on a post-payment model) is preferred
because of its lower administrative costs. The combination of
establishing the guarantee scheme at the same time as prudential
regulation is strengthened further reduces the risk of default.
. Option B3 (guarantee scheme based on a pre-payment model), meets the
objective of protecting residents' bond balances. However, this option
has higher administrative costs and a greater regulatory impost that was
not considered necessary given the lower risk of a provider default in
the light of increased prudential regulation.
G: Implementation and review
Implementation
The preferred options for prudential regulation of the industry (Option A2)
and operation of the guarantee scheme (Option B2) would be implemented
through legislation. Stakeholders were consulted during the development of
the legislation via MIT and the Reference Group.
Review
The prudential regulatory framework and the guarantee scheme would be
subject to review. The Department will evaluate the impact of a prudential
regulatory framework and a guarantee scheme on industry and consumers.
H: Cost recovery issues
Prudential regulatory framework
It is proposed that the prudential regulatory framework would ultimately be
fully cost recovered from providers holding bonds. However, the Government
will meet the costs of the framework for the first three years. There
would, therefore, be no cost recovery impacts for providers or residents in
the first three years.
During the first three years of operation of the framework, a full cost
analysis regarding the detail of the cost recovery regime would be
undertaken, and the cost recovery mechanism developed in accordance with
the cost recovery policy of the Department of Finance and Administration.
A full Cost Recovery Impact Statement (CRIS) would then be prepared in
accordance with the Cost Recovery Guidelines.
The CRIS would examine key issues such as the link between charges and the
costs of undertaking the proposed scheme; the detail of how the fees and
charges would be structured and calculated; legal requirements for the
imposition of fees and charges; the consultation process and the views of
those consulted about the cost recovery mechanisms; and the monitoring and
review of cost recovery arrangements. Particular attention would be given
to the arrangements for handling under- or over-recovery of costs. It is
expected that this would be a particularly complex issue. In developing
the CRIS, it would also be important to balance the need for review of fees
and charges against the industry's need for some level of certainty about
the fees and charges they would be liable to pay.
The CRIS would be considered by the Australian Government prior to
implementation of cost recovery.
Guarantee scheme
There will be no cost to industry associated with the guarantee scheme
unless a provider becomes bankrupt or insolvent and the Australian
Government has to pay outstanding bond balances. Costs will only be
realised in the event of a default. It should be noted that, while aged
care residents in Australia have paid bonds for many years, there has, to
date, never been a circumstance where a resident's bond balance has not
been refunded.
AGED CARE (BOND SECURITY) BILL 2005
NOTES ON CLAUSES
PART 1 - PRELIMINARY
Clause 1 - Short title
This clause provides that the Act may be cited as the Aged Care
(Bond Security) Act 2005.
Clause 2 - Commencement
This clause provides that sections 1 and 2 of the Bill will commence on the
day on which the Bill receives Royal Assent and sections 3 to 22 of the
Bill will commence at the same time as Schedule 5 to the Aged Care
Amendment (2005 Measures No. 1) Bill 2005. Schedule 5 to the Aged Care
Amendment (2005 Measures No. 1) Bill 2005 will commence on a day to be
fixed by Proclamation or, at the latest, 6 months after Royal Assent.
The commencement of sections 3 to 22 of the Bill is timed to coincide with
the commencement of Schedule 5 of the Aged Care Amendment (2005 Measures
No. 1) Bill 2005 which gives the Secretary the power to require people to
give information about bonds. This information informs determinations and
declarations that the Secretary will make under the guarantee scheme.
Clause 3 - Simplified outline
This clause briefly explains the operation of the Aged Care (Bond Security)
Bill 2005. It provides that in certain circumstances the Commonwealth will
pay a person an amount that is equal to their bond balance (and interest).
These circumstances are described in the Bill and in summary, are
circumstances where an approved provider becomes insolvent and has not
repaid outstanding bond balances to aged care recipients. Once the
Commonwealth commits to repay the outstanding bond balance (with interest)
to a person, the rights of the person to recover their bond balance (and
interest) from the approved provider transfer to the Commonwealth. This
enables the Commonwealth to attempt to recoup that money from the
defaulting approved provider (standing in the shoes of the care recipient
as a creditor of the approved provider). The Commonwealth may also make
determinations which (through the imposition of a levy by way of
regulations made under the Aged Care (Bond Security) Levy Bill 2005) will
enable it to recover the following from other approved providers:
. refund amounts (which the Commonwealth has not recovered from the
defaulting approved provider); and
. associated administrative costs.
Clause 4 - Application of this Act
This clause provides that the Bill applies in all States and Territories
but does not apply in any external Territory (for example, Norfolk Island,
the Australian Antarctic Territory, Heard Island, the McDonald Islands and
the Coral Sea Islands). This is consistent with the Aged Care Act 1997.
Clause 5 - Binding the Crown
This clause provides that the Bill binds the Crown in each of its
capacities and that the Bill does not make the Crown liable to be
prosecuted for an offence.
Clause 6 - Definitions
This clause sets out a number of definitions for words and phrases used in
the Bill. These definitions determine the meaning that is to be attributed
to certain words or phrases whenever they are used in the Bill. Key
definitions, which are essential to defining the scope of the legislation
and describing how it will be administered, include the following:
"approved provider" - This term has the same meaning that it has in
Schedule 1 of the Aged Care Act 1997. That is, an approved provider means
a person or body in respect of which an approval under Part 2.1 of the Aged
Care Act 1997 is in force, and, to the extent provided for in section 8-6,
includes any State or Territory, authority of a State or Territory or local
government authority.
"bond" - This definition ensures that both "accommodation bonds" as defined
in the Aged Care Act 1997 and entry contributions made to aged care
operators prior to 1 October 1997 are both covered by the guarantee scheme.
The term "entry contribution" is further defined in the Bill and is
consistent with its definition in the Aged Care Amendment (2005 Measures
No. 1) Bill 2005.
"bond balance" - A bond balance is defined as:
(a) in relation to an accommodation bond - an "accommodation bond balance"
within the meaning of the Aged Care Act 1997 (that is, a bond less
amounts that have been legally retained by an approved provider); or
(b) in relation to an entry contribution - an "entry contribution balance"
within the meaning of the Aged Care Amendment (2005 Measures No. 1)
Bill 2005 (that is, the amount of the entry contribution less any
amounts permitted to be deducted under a formal agreement entered into
between the aged care recipient and the operator prior to 1 October
1997).
"outstanding bond balance" - The effect of this definition is to identify
when a bond balance becomes outstanding and may therefore be refundable by
the Australian Government in the event of approved provider insolvency. In
essence, a bond balance is an outstanding bond balance if the time within
which it should have been refunded by the approved provider has passed, or
part of it hasn't been refunded. In the case of accommodation bonds (as
defined in the Aged Care Act 1997), this is the time detailed in
Subdivision 57G of the Aged Care Act 1997 or the User Rights Principles and
in the case of entry contributions this is the time detailed in the formal
agreement entered into between the aged care recipient and the operator
prior to 1 October 1997.
"insolvency event" - This definition describes the events that signal that
an approved provider has become insolvent (and therefore the circumstances
in which the guarantee scheme will potentially be activated). There are a
number of different ways that an approved provider may become insolvent.
For example, a corporation may be wound up under the Corporations Act 2001
(either by court order or the passing of a special resolution) or an
incorporated association may be wound up under a State or Territory law
dealing with incorporation of associations.
"administrative costs" - This definition sets out administrative costs that
may be associated with the operation of the guarantee scheme and therefore
costs that the Commonwealth may recover from approved providers.
Part 2 - Insolvency event declaration
Clause 7 - Making of insolvency event declaration
Sub-clause 7(1) provides for the circumstances in which the Minister may
make an insolvency event declaration. An insolvency event declaration may
be made if an approved provider has at least one outstanding bond balance
and either:
a) the approved provider is an externally administered body corporate
(within the meaning of the Corporations Act 2001); or
b) a personal insolvency agreement under Part X of the Bankruptcy Act
1966 is in effect in relation to the approved provider or the approved
provider's property.
This power is necessary because there may be circumstances where an
approved provider is not insolvent (as provided for in paragraphs (a) to
(f) in the definition of insolvency event) but is nonetheless unable to
repay bond balances and unlikely to be about to trade out of difficulty.
For example, both the Corporations Act 2001 and the Bankruptcy Act 1966
enable a person or corporation to enter into arrangements with creditors in
an attempt to resolve financial difficulties and avoid being declared
bankrupt or wound up. This provision enables the Minister to use his or
her discretion to determine whether the guarantee scheme should be
activated in these circumstances. Sub-clause 7(1) would only be used where
there is no likelihood that the bond balances will be returned to the care
recipients.
Sub-clause 7(2) provides that an insolvency event declaration must be in
writing.
Sub-clause 7(3) is included to assist readers, as the insolvency event
declaration is not a legislative instrument within the meaning of section 5
of the Legislative Instruments Act 2003. Accordingly, it is not subject to
the requirements that apply to legislative instruments under that Act.
Clause 8 - Notice of insolvency event declaration
Sub-clause 8(1) provides that once an insolvency event declaration has been
made by the Minister under clause 7, then the Secretary must provide
written notice of the declaration to the approved provider to which the
insolvency event declaration relates. Section 28A of the Acts
Interpretation Act 1901 specifies how documents must be "given". For
example, in relation to a body corporate-by leaving it at, or sending it by
pre-paid post to, the head office, a registered office or a principal
office of the body corporate.
Sub-clause 8(2) ensures that if the Secretary fails to provide such a
notice to the defaulting approved provider, then this does not affect the
validity of the insolvency event declaration. This means that the
guarantee scheme can operate regardless of administrative delays.
PART 3 - REQUIREMENT TO NOTIFY SECRETARY OF CERTAIN INSOLVENCY EVENTS
Clause 9 - Notice of certain insolvency events
This clause provides that should an approved provider be in a situation
where an insolvency event has occurred, other than one that is declared
under section 7, (as defined in the Bill) then the approved provider must
notify the Secretary in writing by the end of the first business day after
the day on which the insolvency event occurs.
This is a similar requirement to that under section 470(1) of the
Corporations Act 2001 and will alert the Secretary to the fact that an
insolvency event has occurred (at the earliest possible time). Following
on from this, the Secretary can then determine whether a default event has
occurred such that the Commonwealth will need to refund outstanding bond
balances to care recipients of the approved provider. This clause does not
preclude the Secretary from becoming aware of an insolvency event through
other means including, for example, through notification by an insolvency
practitioner, a resident or a resident's representative.
Sub-clause 9(2) provides that failure by an approved provider to comply
with this requirement to provide notice attracts a maximum penalty of 30
penalty units. This is consistent with other penalties for like offences
in the Aged Care Act 1997.
PART 4 - DEFAULT EVENT DECLARATION
Clause 10 - Making of default event declaration
Sub-clause 10(1) provides that as soon as practicable after the Secretary
first becomes aware that an insolvency event has occurred and that there is
at least one outstanding bond balance, the Secretary must make a default
event declaration. In effect, the making of a default event declaration by
the Secretary triggers the chain of events that lead to payments being made
by the Commonwealth to care recipients under the guarantee scheme.
Sub-clause 10(2) establishes what a default event declaration must contain.
It provides that the default event declaration must be in writing, must
state that an insolvency event has occurred in relation to the approved
provider and must state that the Secretary considers that there is at least
one outstanding bond balance.
Sub-clause 10(3) is included to assist readers, as the default event
declaration is not a legislative instrument within the meaning of section 5
of the Legislative Instruments Act 2003. Accordingly, it is not subject to
the requirements that apply to legislative instruments under that Act.
Clause 11 - Notice of default event declaration
Sub-clause 11(1) provides that the Secretary must give a copy of the
default event declaration to the approved provider in relation to which an
insolvency event has occurred and to each person that the Secretary
considers may be entitled to receive a refund of an outstanding bond
balance by the approved provider (for example, a care recipient).
The intention of providing notification is to inform the approved provider
and care recipients (or their representatives) that a default event
declaration has been made, and any information that was contained in it.
This is to ensure that approved providers and care recipients (or their
representatives) are made aware that actions are being taken by the
Department to ensure outstanding bond balances will be refunded.
Subclause 11(2) provides that the default event declaration will also be
published in a national newspaper. This will alert residents (and/or their
representatives) of the defaulting approved provider that a default event
has occurred and they may be entitled to a refund. It will also inform
other approved providers holding accommodation bonds that a default event
has occurred and that the guarantee scheme has been activated.
Sub-clause 11(3) makes it clear that if the Secretary fails to comply with
all of the notification requirements this does not affect the validity of
the default event declaration. For example, if the Secretary is not able to
identify and notify all potential care recipients who may be entitled to a
refund of their bond balance at this time, they will not be precluded from
being refunded their outstanding bond balance.
PART 5 - REFUND DECLARATION
Clause 12 - Secretary to determine certain matters
Sub-clause 12(1) provides that once the Secretary has made a default event
declaration the Secretary must identify each outstanding bond balance and
each bond balance that later becomes outstanding.
Once a default event declaration has been made, there may be instances
where more bond balances become outstanding. This provision ensures that
the guarantee scheme can cover not only those bond balances that are
outstanding at the time a default event declaration is made, but also those
bond balances that subsequently become outstanding.
Sub-clause 12(2) the Secretary must also determine, in relation to each
bond balance, the date that the bond balance was due to be repaid, an
amount equal to the amount of the bond balance at that date, an amount
equal to any interest that has accrued on the bond balance, the person the
refund should be made to, and the most appropriate means for refunding the
bond balance.
Gathering information in order to determine refunds to be made
For the purposes of sub-clause 12(2), there is a considerable amount of
information that must be gathered by the Secretary. The Secretary may use a
range of means for gathering such information including working with any
insolvency practitioner who may be involved and working with the defaulting
approved provider. In order to ensure that the Secretary has access to
necessary information, the Aged Care Amendment (2005 Measures No. 1) Bill
2005 inserts a new provision (section 9-3A) in the Aged Care Act 1997
requiring an approved provider to give the Secretary information about
bonds, if requested, within 28 days after the request was made, or within a
shorter period as is specified in the request. The provision is
accompanied by a criminal penalty for non-compliance that can be imposed on
corporations. Approved providers have a responsibility under Part 4.3 of
the Aged Care Act 1997 to comply with this obligation. Failure to comply
with a responsibility can result in a sanction being imposed under Part 4.4
of that Act.
Date for determining bond balance
The date on which the accommodation bond balance becomes an outstanding
bond balance will vary between care recipients as it will be depend on when
they have left the service. For example, a care recipient may have left
the service before the default event and the accommodation bond may still
be outstanding. In other cases, at the time that the default event
declaration is made, some recipients may still be in the service of the
approved provider and may not leave until some time after the default event
declaration is made. In this case the bond balance would not become
outstanding until a certain time after the care recipient leaves the
service. The legislation ensures that regardless of when the bond balance
became outstanding, the guarantee scheme is able to repay the bond balance.
Clause 13 - Making of refund declaration
Sub-clause 13(1) provides that as soon as practicable after the Secretary
has determined all of the matters in sub-clause 12(2) relating to an
outstanding bond balance, the Secretary must make a refund declaration in
relation to the outstanding bond balance.
Sub-clause 13(2) provides that the refund declaration must be in writing,
specify the defaulting approved provider and detail the amount that the
Commonwealth is to pay to the person named in the determination (that is,
the person to whom an outstanding bond balance and interest is owed).
The Secretary may make multiple refund declarations. For example, if only
four care recipients' bonds are outstanding at a point in time, the
Secretary may make a declaration in relation to these four bonds only. If
at a later time, more bonds become outstanding (as care recipients leave
the service or as bonds become payable upon probate or the granting of
letters of administration) the Secretary may make further refund
declarations. The Secretary can continue to make refund declarations until
all outstanding accommodation bonds have been acknowledged.
Sub-clause 13(3) is included to assist readers, as the refund declaration
is not a legislative instrument within the meaning of Section 5 of the
Legislative Instruments Act 2003. Accordingly, it is not subject to the
requirements that apply to legislative instruments under that Act.
Clause 14 - Notice of refund declaration
This clause provides that the Secretary must give the defaulting approved
provider and the refund recipient a copy of the refund declaration.
If the Secretary does not provide either the defaulting approved provider
or the refund recipient with a copy of the refund declaration, this does
not affect the validity of the refund declaration. This means that the
guarantee scheme can operate regardless of administrative delays.
PART 6-TRANSFER OF RIGHTS AND PAYMENTS OF REFUND AMOUNTS
Clause 15 - Transfer of recovery rights to Commonwealth
This clause provides that once the Secretary has made a refund declaration
(which guarantees repayment of the outstanding bond balance to the care
recipient by the Commonwealth), the rights (including the right to prove
the bond balance amount as a debt in liquidation or bankruptcy) of the care
recipient to attempt to recover the refund amount from the defaulting
approved provider are transferred to the Commonwealth. The only rights
that are transferred to the Commonwealth are the rights to recover any
money equivalent to the amount paid out by the Commonwealth. Rights for any
additional amounts, for example any interest that is not included in the
refund amount, are not transferred from the refund recipient to the
Commonwealth.
By transferring the rights to recover from the defaulting approved
provider, this means that the Commonwealth can take action against the
defaulting approved provider in an attempt to recover all or part of the
money paid to care recipients by the Commonwealth. In any action against
the defaulting approved provider, the Commonwealth will be in the same
position (relative to other creditors) as the care recipient would have
been.
Clause 16 - Payments by the Commonwealth
This clause provides that the Commonwealth must pay the refund recipient
the amount specified in the refund declaration within 14 days of the refund
declaration being made.
This timeframe will ensure refunds are made promptly and will allow for
administrative processes to be carried out in order to make the refunds.
Clause 17 - Appropriation
This clause provides that any refund amounts are to be paid from the
Consolidated Revenue Fund (which is appropriated accordingly).
PART 7 - COSTS RECOUPMENT DETERMINATIONS
Clause 18 - Making of refund costs recoupment determination
Sub-clause 18(1) provides that the Minister may make a refund costs
recoupment determination detailing the amount that the Commonwealth will
recoup (through the Aged Care (Bond Security) Levy Bill 2005) from other
approved providers holding bonds. The cost recoupment determination may
only relate to amounts that the Commonwealth has not already recovered
including, for example, from the defaulting approved provider.
Before making a refund costs recoupment determination the Minister must
inform the Treasurer and the Finance Minister that he or she intends making
a cost recoupment determination.
Sub-clause 18(2) provides that each refund costs recoupment determination
must, in writing, state which refund declarations the determination is in
relation to, the amount that the refund costs recoupment determination is
for and the default event determination to which it relates.
Sub-clause 18(3) provides that the Minister cannot make more than one
refund costs recoupment determination relating to the same amount. A
refund costs recoupment determination may relate to more than one refund
declaration. The Minister may make more than one refund costs recoupment
determination in relation to a single default event declaration. This may
be the case, for example, where there are still bond balance amounts held
by an approved provider that are not yet outstanding (for example, where a
care recipient has died and there is a delay in obtaining a grant of
probate or letters of administration). Therefore, the Minister may make a
refund costs recoupment determination and then at later points in time make
further refund costs recoupment determinations, as other bond balances
become outstanding.
Sub-clause 18(4) is interlinked with sub-clause 18(2). The purpose of this
sub-clause is to ensure that the refund declaration and the default event
declaration under sub-clause 18(2) must be related.
Sub-clause 18(5) is included to assist readers, as the refund costs
recoupment determination is not a legislative instrument within the meaning
of Section 5 of the Legislative Instruments Act 2003. Accordingly, it is
not subject to the requirements that apply to legislative instruments under
that Act.
Clause 19 - Making of administrative costs recoupment determination
Sub-clause 19(1) provides that the Minister may determine amounts to be
recouped (through the Aged Care (Bond Security) Levy Bill 2005) from other
approved providers holding accommodation bonds to reimburse the
Commonwealth for administrative costs associated with a refund declaration.
Prior to making an administrative costs recoupment determination the
Minister must inform the Finance Minister and the Treasurer.
Sub-clause 19(2) provides that the administrative costs recoupment
determination must state, in writing, the default event that the
administrative costs recoupment determination relates to and the
administrative costs recoupment amount.
Sub-clause 19(3) provides that the administrative costs recoupment amount
should be no more than the amount of the administrative costs and the
amount that is likely to cover the costs of recovering the levy from
approved providers holding accommodation bonds.
Sub-clause 19(4) provides that, as for refund costs determinations,
administrative costs recoupment determinations is not a legislative
instrument for the purposes of the Legislative Instruments Act 2003.
Accordingly, it is not subject to the requirements that apply to
legislative instruments under that Act.
PART 8 - MISCELLANEOUS
Clause 20 - Delegations by Minister
This clause provides that the Minister may delegate to the Secretary all or
any of the Minister's powers or functions under the Bill. The delegation
must be in writing and the Secretary must comply with any directions of the
Minister in relation to the delegation.
Clause 21 - Delegations by Secretary
This clause provides that the Secretary may delegate to an SES employee or
acting SES employee (as defined in the Public Service Act 1999) within the
Department, all or any of the Secretary's powers or functions under the
Bill. The delegation must be in writing and the delegate must comply with
any directions of the Secretary in relation to the delegation.
The Secretary cannot delegate any powers that have themselves been
delegated to the Secretary from the Minister.
Clause 22 - Regulations
This clause empowers the Governor-General to make regulations prescribing
matters required or permitted to be prescribed by the Act, or necessary or
convenient to be prescribed, for carrying out or giving effect to the Act.
In particular, regulations may be made prescribing matters necessary or
convenient to be prescribed for the purpose of enabling or facilitating the
collection of levy imposed by regulations under section 6 of the Aged Care
(Bond Security) Levy Bill 2005.
Regulations may prescribe, among other things, persons who are liable to
pay the levy, the time when the levy is due and payable and the methods by
which the levy may be paid (including by instalments over a period of
time). Regulations prescribing these matters would not be made until after
an insolvency event declaration has been made.
The regulations may also prescribe penalties for offences against the
regulations.
-----------------------
AGED CARE (BOND SECURITY) BILL 2005