Regulation and access to capital
This final chapter discusses the regulation of the sector, and whether
it provides competitive neutrality, and issues raised by the sector around
access to capital.
The Australian Uniform Co-operative Laws Agreement (AUCLA) committed
jurisdictions to uniformity of regulation. While most states and territories
have adopted the legislation, or committed to introducing consistent
legislation, full uniformity has not yet come to fruition.
The sector is governed by a plethora of regulations and bodies,
depending on what type of co-operative or mutual it is. Dual regulation and
registration across federal and state jurisdictions also remains in some cases.
Ernst and Young described the current regulatory environment:
Cooperative organisations have been registered and regulated
by State and Territory governments, with the exception of financial
cooperatives. Credit unions, mutual building societies and friendly societies
are not covered by the Cooperatives National Law [CNL]. These organisations are
Authorised Deposit-taking Institutions and are federally regulated as
Australian banks. [Co-operative and Mutual Enterprises] CMEs which are
non-distributing including those that are Public Benefit Institutions (PBIs)
are regulated by the Australian Charities and Not-for-Profit Commission (ACNC). 
Many submitters expressed concern that the current regulatory burden was
not flexible enough to cater for all sizes and types of CME. While one of the
goals of the CNL is to reduce reporting requirements for small cooperatives,
this is apparently not being felt by organisations at that level. The Voluntary
Parents Association suggested that the regulatory environment is
over-burdensome for small co-operatives, and should be flexible enough to allow
all sizes of CMEs to operate:
To be clear, we do not challenge the need for an authority
like the ACNC, or the objectives of NSW Fair Trading, but we do ask that there
be some recognition that small not-for-profit self-help groups do not have the
resources to fulfil obligations that seem small to others, and that some leeway
be granted or streamlining created. It is surely not impossible for standard
information on co-operatives, such as names, registration details, ABN’s, to be
shared and allowed to populate the forms that each government department
Ms Robyn Donnelly expressed concern about the lack of consistency across
different jurisdictions, which resulted in duplicity across many regulatory
requirements. According to Ms Donnelly, this is not only an issue in the
application of the CNL, but also in the policies in relation to registration
across state lines and interstate fundraising:
There is no uniform administrative policy across those
jurisdictions that have commenced the law. There has been no progress in
removing dual regulatory requirements for cooperatives that are imposed as a
result of the operation of the Corporations Act on interstate transactions by
cooperatives. Those are in the areas of issuing securities across state and
territory borders and also the requirement for registration under part 5B.2 of
the Corporations Act.
ASIC confirmed that if a registrable Australian body wishes to carry on
business in one or more states or territories other than its home jurisdiction,
it must be registered under Part 5B.2 of the Corporations Act. An association
which is registered under a state law not recognised in other states will
generally be a registrable Australian body. A foreign company wishing to carry
on business in Australia must be registered under Part 5B.2 of the Corporations
Many co-operatives are registered under both state laws, and under Part
5B.2 of the Corporations Act which prohibits the carrying on of business by a
state registered body (a co-operative) outside its state of origin unless it
registers under Part 5B.2. The Business Council of Co-operatives and Mutuals
(BCCM) propose that
co-operatives should be exempt from this dual-regulatory requirement.
The Australian Securities and Investments Commission (ASIC) further
explained that dual registration may be a requirement of both the Corporations
Act 2001 and the CNL. While there are aspects of the Corporations Act that
exclude participating co-operatives under the CNL, the decision not to exclude
them from registration requirements under both Acts seems to be a deliberate
Under section 12(1) of the Appendix to the Co-operatives
(Adoption of National Law) Act 2012, a co-operative and a participating
co-operative are each declared to be an excluded matter for the purposes of
section 5F of the Corporations Act 2001 (Cth) in relation to the whole of the
Corporations legislation. However section 12(2), subsection 12(2)(1)(c) does
not exclude the application of the Corporations legislations to co-operatives
or participating co-operatives to the extent that the provisions relate to the
registration of a co-operative as a company under Chapter 5B of the
Corporations Act. In other words it appears there was a deliberate policy
decision made to apply both regimes.
Dual fundraising regulation
Under s708 (20) and s66A of the Corporations Act, a security – share or
debt security – issued by a co-operative is an exempt security if it is offered
or issued within its state of origin. As an exempt security, these offers are
not subject to the disclosure requirements. However they are subject to the
disclosure requirements of the state legislation (CNL or Co-operatives Acts).
The disclosure requirements for debt securities issued by a co-operative match
the disclosure requirements for similar securities under the Corporations Act.
However, if a co-operative offers any security to persons in another
state or territory, then it must comply with the disclosure requirements under
the Corporations Act. This will require the lodgement of a disclosure document
or an application for exemption from ASIC. This exposes a co-operative to
double lodgement fees and potentially double preparation costs. BCCM outlined
the lack of a coherent system between jurisdictions, as well as between
There are instances of dual and inappropriate regulatory
compliance obligations for co-operatives. As a result of the division of
regulatory authority for corporations and financial markets, co-operatives that
wish to issue shares or other securities where a potential subscriber resides
in another state or territory must comply with disclosure requirements under
both state co-operatives legislation and disclosure regulations developed for
investor-owned companies under the Corporations Act.
Ms Robyn Donnelly discussed the potential risk of dual regulation in
terms of the disclosure requirements for co-operative shares:
The CNL provides for disclosure in respect of the issue of
shares in a co-operative based on the nature of these securities. The
disclosure requirements for shares in a company are different and are not appropriate
for the issue of shares in a cooperative. However, a co-operative wishing to
issue shares as part of a membership offer across a state border is subject to
the disclosure requirements for the issue of shares by a company under the
The disclosure requirements for company shares are both
unsuitable for cooperative shares and constitute dual and potentially costly
While ordinarily a non-distributive co-operative is not required to
lodge a disclosure statement, the Registrar does have discretion to require one
be prepared. There appears to be no policy or guidance about whether such a
document will be required, and as such, proposed co-operators do not know
whether to prepare for this as they may be required to prepare such a document at
a later date. This adds to the time it takes to form a co-operative and the
The Voluntary Parents Association were concerned that the disclosure
requirements were out of sync with the overall registration process, and were
too onerous for small co-operatives more generally:
For us in forming the co-operative we felt it was strange
that we had to write a disclosure statement that identified who the directors
were before we had an election for the board and to declare who the General Manager
was before we had raised funds to look for someone to fill the position.
We ask that regulatory bodies scale the level of regulation
to the size of the co-operative. Whilst there would be argument that this would
increase the cost for the regulator, what we are doing currently is to pass on
that cost to the co-operative, which is not in an easy situation to cover such
ASIC responded to a number of questions on notice generally about the
regulatory burden on co-operatives. With regard to the claims of duplication
around the disclosure requirements for interstate offerings of securities under
Chapter 6D of the Corporations Act, ASIC stated that if the shares being
offered were member shares, and were not to raise capital, then they wouldn't be
subject to these requirements:
If the shares being offered are to members, and it is not an
issue to raise capital, to raise money, then chapter 6D would not apply.
Chapter 6D of the Corporations Act applies when someone is issuing shares to
receive money in as capital formation, whether it is shares, other securities,
debt instruments or otherwise.
There is duplication in both registration and disclosure regulation
across state and regulatory lines. The regulatory framework that governs
fundraising, disclosure, registration and compliance for CMEs can be
burdensome, particularly for small and medium sized CMEs. These CMEs operate
very differently from companies and the committee is keen to ensure that they
are appropriately regulated relative to their size and operation.
The committee also heard calls for the burden of regulatory policy
proposals on co-operatives and mutuals to be specifically considered. While
this is a complex area, the committee is supportive of calls by the sector to
be treated in the same way as other types of business.
The committee recommends that the co-operative and mutual sector
be considered when the government is preparing a Regulatory Impact Statement
that accompanies new regulatory policies.
The committee recommends that the Commonwealth Government liaise
with its state and territory counterparts to ensure that the regulatory burden
for small and medium sized co-operative and mutual enterprise aligns with the
needs of these organisations and ensures they are not disadvantaged relative to
companies of a similar size.
With respect to the issue of disclosure of interstate offerings of
securities, the committee is of the view that if an organisation is behaving
ostensibly in the same way as a company then they should be similarly
On the issue of dual registration of CMEs who are operating interstate
and as such are required to register under both the CNL and the Corporations
Act, this appears to be a deliberate decision taken and agreed by all the
states and territories that have so far enacted the legislation. While all
aspects of the Act should be reviewed periodically to ensure they are achieving
their respective outcomes, the committee is of the view that it is appropriate
to wait until all jurisdictions have legislation in place before this review
Accounting standards - measuring
the true value of a co-operative
The committee heard that one of the barriers for a co-operative or a
mutual to access capital is how their balance sheets are represented. A member
of a co-operative has voluntarily contributed their shares in the enterprise,
and is entitled to a full refund of their contribution should they leave.
Current accounting standards therefore treat their shares on the balance sheet
as a liability rather than equity. BCCM highlighted the unintended consequences
of this accounting treatment:
Australian Accounting Standards have incorporated
International Financial Reporting Standards developed to provide consistent
information for investor-owned firms. These financial reporting standards were
applied in 2005 to all reporting entities regardless of whether they are
investor-owned or member-owned. The result of the application of these
standards to CMEs was dramatic. The different nature of a share in a
co-operative or a mutual meant that it was classed as a liability whereas in a
company it was classed as equity. Virtually overnight, many CMEs with a share
capital were rendered undercapitalised.
Furthermore, BCCM suggested the financial standards and practice are not
adequate to measure the true economic benefit to the economy, with the community
impact of the work of co-operatives being ignored, and not adequately measured
by current accounting methods:
International developments for Integrated Reporting to
include greater emphasis on intangible assets of an enterprise such as human,
social and natural capital dictates the need to focus on broader value
measurements. Standard financial and accounting metrics are inadequate to
capture their full value. Research by Ernst & Young in 2014 shows that for
every $1 spent in a co-operative enterprise 76% of value was added to its
This is a view shared by Ms Ann Apps, a law academic from Newcastle Law
School, who says the problem is compounded by the Co-operatives National Law
itself because does not present the true value of CMEs because the accountancy
treatment they receive is based on the reporting requirements of the
Corporations Act which are not appropriate for the co-operative model:
The CNL adopts financial auditing and reporting requirements
that are largely based on the reporting requirements found in the Corporations
Act.15 It has been acknowledged that ‘fair value’ accounting fails to provide
an accurate or holistic representation of how organisational value is created
over time...The inability of financial metrics to capture the social value of
CMEs and the operation of Financial Reporting Standards results in inadequate
recognition of the value and importance of the CME sector.
In response to questions on notice about whether there is any way that
accounting standards could be amended to avoid co-operatives recording their
shares as liabilities, Chartered Accountants Australia and New Zealand informed
the committee that possible solutions to the problem were being mooted by the
International Accounting Standards Board (IASB):
The International Accounting Standards Board
(IASB) is currently undertaking a project on Financial instruments with the
characteristics of equity. The final outcomes of this project may include
possible solutions to bring co-operative shares within the definition of
capital under AASB 132.
The IASB’s current investigations include
potential improvements to (1) the classification of liabilities and equity in
IAS 32 Financial Instruments: Presentation, including investigating
potential amendments to the definitions of liabilities and equities in the Conceptual
Framework; and to (2) the presentation and disclosure requirements for
financial instruments with characteristics of equity, irrespective of whether
they are classified as liabilities or equity.
The ability for a co-operative to compete on an equitable basis with
other business structures, and meet its established objectives, is contingent
on the appropriate application of financial instruments such as Accounting
Standard IAS 32. The committee therefore welcomes the developments at the IASB
which may provide solutions to the consequences of the application of current
The committee recommends that the Commonwealth Government closely
monitor the progress of the International Accounting Standards Board in
developing solutions to bring co-operative shares under the definition of
capital under AASB 132, and, where possible, facilitate equivalent amendments
as expeditiously as possible.
Access to capital
Access to capital was cited as a significant problem for CMEs. The issue
is that all mutuals are established for a purpose and are owned by their
members, and no one can take away their share of the assets unless the entity
is demutualised. Mutuals therefore have no shares they can sell or trade and
have no access to the equity markets.
Organisations from the agricultural sector argued that their sector in
particular has problems investing in essential infrastructure:
A major issue that Norco faces is the availability of capital
for infrastructure projects. Other than traditional bank debt, there is little
opportunity to seek large amounts of capital to upgrade infrastructure from our
members given the economic conditions they face as primary producers. Even
though Norco can shield our members from the supply and demand issues they
would face if trying to market their produce individually, there is still very
little margin left due to ever-increasing production costs and so any
compulsory contribution schemes approved under the Co-operative National Law
are for modest amounts at the most.
Professor Cotter from Southern Queensland University informed the
committee of research currently being undertaken to examine how agribusiness
co-operatives can access further amounts of capital:
To address the issue of access to capital for expansion of
the sector, we have commenced research into capital raising for agribusiness
including available and emerging co-investment models, including investors are
looking for and governance considerations. There is a lack of knowledge amongst
agribusiness enterprises about access to equity capital. Further, lack of
sufficient scale and compelling business cases limits the number of investable farming
and agribusiness enterprises. Investors include managed funds, private equity,
high net worth individuals and family offices.
Ms Ann Apps proposed the legal recognition of an alternative, or
'hybrid' CME that could have greater access to capital. According to Ms Apps, a
‘pure’ co-operative that allocates control rights to active members under the
principle of one member, one vote, was sacrificing the ability to access
external capital for democracy.
Ms Apps suggested that this model could be supported by changes
throughout the regulatory framework to enable the diversity of business models
beyond the traditional definitions that exist in state and federal legislation:
There is a general lack of
understanding of the key legal features of the
co-operative model and the importance of protecting the legal
distinction between the co- operative and the company models. However there is
a case for diversity of business models including the separate legal
recognition of a ‘hybrid’ co-operative company under the Corporations Act 2001 (Cth).
The Australasian Mutuals Institute submitted that the implementation of
more stringent regulation following the Global Financial Crisis (GFC) has
benefited larger banks, but inhibited access to capital for smaller banks and
customer owned banks:
In summary there has been a continual flow of outcomes post
the GFC that has advantaged the major banks and disadvantaged regional banks
and customer owned banking institutions competitive position in the market
thereby reducing important choice for the Australian consumer. This has been
further exacerbated for the customer owned banking institutions by the
prudential regulator’s approach to Basel III implementation which has served to
severely limit their access to capital instruments that align to mutuality.
Ernst and Young provided the committee with specific suggestions for
ways in which CME's could improve their access to capital, primarily within the
There needs to be greater awareness of the alternative methods
for CMEs to access capital amongst CMEs themselves, financial institutions and
Templates need to be developed based on the Cooperative National
Law and successful capital raising mechanisms to reduce the costs of capital
raising and speed-up the process.
Mature CMEs have the potential to explore opportunities for
research and development and the investment in other CMEs.
Establish a Cooperative and Mutual Development Investment Fund
controlled by CMEs may increase the access to capital for new and growing CMEs.
Submitters cited other jurisdictions like the UK, Canada and the
Netherlands as having recognised the value for the economy of diverse corporate
structures. The Mutuals Deferred Shares Act in the UK was highlighted as a
possible model to allow investment for growth by mutual organisations.
Australian Unity recommended that Australian law and regulation be amended to
allow similar opportunities:
In jurisdictions such as these, corporate regulation exists
which defines and permits (and importantly, does not preclude) the issue of
financial securities by mutuals, for example by the Mutuals Deferred Shares Act
in the UK.
Australian Unity submits that Australian law and regulation
be amended to enable the issue of such securities by mutual organisations.
Consideration should also be given to the opportunity to permit franking for
the returns on such instruments in the Australian context. This would allow
tax-paying mutuals to utilise currently unusable franking credits and would also
remove yet another competitive disadvantage for these types of mutual companies
versus typical shareholding companies.
The National Health Co-operative also cited the UK's legislative changes
as a model that Australia could look at further:
There is a precedent in the United Kingdom which you may be
aware of. They passed a new act of parliament—about a year ago, I
understand—that enables cooperatives to issue capital-raising rounds. It is
treated in much the same way as any other capital-raising round would be
treated. The dividend paid to those investors is considered equivalent to
interest paid on a loan—it does not change the risk profile, if it is managed
appropriately. It is something that this government could look at.
Australian Unity further submitted examples of novel capital instruments
in the Australian context, and argued that these are examples of mutuals
raising long term capital with a fixed return, and all that has been missing in
Australia is 'a clearly legislated invitation to mutuals to follow that path':
Currently in Australia, APRA regulations (APS 111) envisage
the conversion of Additional Tier 1 (AT1) and Tier 2 (T2) debt capital
instruments held by Authorised Deposit-Taking Institutions (ADIs) into Mutual
Equity Interests (MEIs) upon a loss absorption or non-viability event. The MEIs
are not envisaged to be shares under the Corporations Act, although that has
not yet been tested in court, and they would be able to be redeemed on a
winding up but at no more than the face value of the original instrument. While
this kind of capital cannot be deliberately created—it only arises on a
negative trigger event—it is a contemporary Australian example of a regulator
considering a new capital instrument that did not previously exist for mutual organisations.
In response to specific questions on notice about the status of Mutual
Equity Interests (MEIs) under the Corporations Act, ASIC responded:
Mutual ADI's do not issue MEIs directly as a form of capital,
but may end up with MEIs in their capital structure if they are required to
convert their hybrid instruments. MEIs may result from a hybrid regulatory
capital instrument issued by a mutual ADI that is required to convert – with
MEIs issued on conversion rather than ordinary shares.
The aim of MEIs is to provide the Mutual ADIs with access to
convertible regulatory capital in the same way that other ADI's have used
convertible hybrids. MEIs were contemplated by APRA in Attachment K to
Prudential Standard APS 111. It is anticipated the specific terms of the
particular MEIs are to be included in the constitution of the mutual proposing
to issue them.
It is not possible to answer specifically how MEIs would be
treated under the Corporations Act as no instruments that have the possibility
of converting to MEIs have been issued to date. Like hybrids there are no
standard terms for the instruments that may give rise to MEIs or for the MEI's
themselves. The determination will depend on the specific structure and form of
the instrument (pre conversion) and the form of the MEI post conversion.
If the pre-conversion instrument and/or the MEIs into which
they may convert are considered preference shares, then member approval
requirements of Part 2H.1 of the Corps Act would apply. If both the
pre-conversion instrument and subsequent MEI are legal form debt – then the
instrument may not require member approval. Given that mutuals are likely to
want to take advantage under APRAs prudential requirements of the post
conversion equity like features of the MEI, then it is likely these instruments
would need to meet the same requirements under the Corporations Act as a
preference share. (i.e. Part 2H.1 of the Corporations Act.)
In another example of innovative options for raising capital evolving in
the sector, Professor Cotter from Southern Queensland University provided the
example of Murray Goulburn issuing units last year:
In terms of capital raising, I think the issue last year of
units by Murray Goulburn showed that we do have sufficient flexibility in our
legislation for different types of innovative capital raising. However, that is
extremely costly, and only the very large co-ops, like Murray Goulburn, could
access that. So I think more work needs to be done to make that less costly.
From the co-operative perspective the Voluntary Parents Services
Co-operative expressed their wish for some kind of instrument that would
attract capital into co-operatives on the basis of their social-type benefit
rather than a financial return:
The situation at the moment is that capital usually comes
from a risk basis and people put money into capital on the basis that they
might be able to sell that company for a lot more money than they put into it.
The cooperative situation does not have that same benefit because we are not
going to sell the company for a whole lot of money. We need to have something
like a social bond to provide the facility where it is not based on benefit
from risk but benefit for social purpose and that risk matrix is something we
have really struggled to find a way to solve to raise capital for social type
There are currently limited options for co-operatives and mutuals to
raise capital that avoid the debt to equity ratio problem. Ernst and Young
explained some of the options available, including the new Cooperative Capital
Units developed by CMEs:
CMEs have developed a range of mechanisms to raise capital
including Cooperative Capital Units (CCUs) which are flexible instruments
determined by members that can include attributes of both debt and equity to
attract capital from outside the membership. CCUs can be structured ranging
from ordinary debentures to redeemable preference shares. Methods such as
proportional voting may be used to raise additional capital from members, but
this creates a problem whereby a minority of members may gain control of the
cooperative via disproportionate voting rights (28). Alternatively CMEs may
look to innovative forms of funding such as crowd sourcing and
multi-stakeholder partnerships such as London Ventures.
Central to the committee's concerns is the availability of finance to
smaller co-operatives, who cannot raise capital through extensive retained
earnings or debt financing. There are a number of innovative practical and
policies developing both within the sector and overseas that could assist in
providing a suite of options for these organisations. The committee
particularly welcomes innovations such as social impact bonds, crowd sourcing
and Cooperative Capital Units.
The committee recommends that Commonwealth and State Governments
support the formalisation of some of innovative market-based approaches to
raising capital for small and medium sized co-operative and mutual enterprises,
in the form of advice and information, as they become available.
In terms of improving access to capital for larger mutuals, the
committee is aware of the discussions the sector has been having with APRA in
respect of changes to legislation and regulations to facilitate easier access
to capital. These discussions should properly include an analysis of the
applicability of international developments to Australia, as well as the
recognition of possible 'hybrid' entities.
The committee was concerned to hear that no target date is set for those
discussions to culminate, and that no end date is in sight.
The committee recommends 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.
Despite the committee's concern around the delays and administrative
delays of the discussions in this area, the committee is cognisant of
statements by APRA that 'from an industry perspective, mutuals...are well
capitalised'...and 'can grow today if they want to.'
The committee is of the view that government should not be placing
regulatory barriers that impede the development of one sector or another.
Furthermore, it is not the role of the government to provide special
consideration to one industry or sector. There does seem to be innovation
throughout the mutuals sector, as supported by Dr Crane from the BCCM, who said
that these innovations 'shows you the way that co-ops and mutuals are trying to
work their way through the current either impediments or structures we have
around us to find ways to do this'.
The committee supports this innovation and commends the sector in the
efforts they are undertaking to ensure that they are treated equitably. The
committee is of the view the government should consider ways to remove any
barriers that impede the sector expanding. The evidence the committee received
of developments overseas are initiatives that should be examined for
applicability in Australia.
The committee recommends that the Commonwealth Government examine
proposals to amend the Corporations Act 2001 to provide co-operative and mutual
enterprises with a mechanism to enable access to a broader range of capital raising
and investment opportunities.
Senator Chris Ketter
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