Let’s talk about the minimum liquidity amount
I will use this post to discuss concerns some aged care providers have been raising in our public consultation on the proposed Financial and Prudential Standards. One of those concerns is that the proposed Liquidity Standard will have a negative effect on financial viability. But that’s the opposite of what the Liquidity Standard is supposed to do. More on these concerns later in this post.
Our public consultation – links and FAQs
If you’re just tuning in to the topic now, we launched a public consultation on the draft Financial and Prudential Standards on 18 February. Here are the links to the webinar recording and consultation pack. As part of the consultation process, we are regularly updating the New Financial and Prudential Standards webpage. Please bookmark it so you can keep up to date on the latest responses to feedback. A list of frequently asked questions will be added later this week and updated over time in the lead up to the new Aged Care Act.
In the meantime, please keep your keep your feedback coming.
- Read the Financial and Prudential Standards guidance for providers
- Provide your feedback by:
- completing the survey and/or
- sending a written submission to New_FP_Standards@agedcarequality.gov.au.
This consultation closes on 7 March 2025.
We want to make sure we answer all your questions and concerns before we finalise the standards, including reaching a final position on the minimum liquidity amount.
The new Liquidity Standard
I thought it might be useful to make a couple of matters clear in this post. Before I do, here’s a quick recap on what the new Liquidity Standard aims to achieve.
The Royal Commission into Aged Care Quality and Safety recommended strengthening the prudential standards. One of the recommendations was introducing enforceable liquidity requirements. That’s because the Liquidity Standard that existed at the time of the Royal Commission, and is still in place today, doesn’t set a minimum liquidity amount.
The minimum liquidity amount set out in the proposed new Liquidity Standard:
- is a whole dollar calculation specific to your organisation’s financial circumstances
- must be re-calculated quarterly as part of your Quarterly Financial Report
- encourages regular tracking of liquidity needs.
Why do we need a minimum liquidity amount?
Without a minimum amount, liquidity can vary a lot across the sector. This means that some providers are very vulnerable to short-term changes in their cashflow. For example, due to decreased occupancy, increased expenditure or higher than usual levels of refundable accommodation deposit repayments. At these times they may not have enough access to cash or cash equivalents, which are what are known as liquid assets. That’s a problem, because it could cause those providers to decide to reduce costs in ways that could affect the services they deliver. It could also risk their ability to refund any refundable deposits they hold.
It’s for these reasons we have developed the proposed minimum liquidity amount to include in the Financial and Prudential standards that accompany the new Act.
How did we set the minimum liquidity amount?
In setting the minimum liquidity amount, we have worked very closely with an actuarial firm. They analysed annual and quarterly financial reports across multiple years and modelled the impact of different financial stress scenarios to decide on the proposed minimum amount. They also analysed the volume of refundable deposits paid out and the average timeframes for new refundable deposits being received across multiple years in the sector.
Key considerations in setting the minimum liquidity amount include:
- making sure it creates enough of a buffer to help most providers manage financial stress scenarios caused by short-term cashflow issues
- making sure providers can continue capital investment in the sector – critical for improving services and increasing bed capacity – without locking up more capital than necessary.
Will the minimum liquidity amount be enough?
We consider the minimum liquidity amount to be an important starting point for making sure that we have a financially resilient and sustainable aged care sector.
Due to the diverse nature of the aged care sector, we understand that the minimum liquidity amount will not be enough to fully manage the liquidity risk for a small number of providers. We have intentionally set the minimum liquidity amount at that point, as our analysis shows it will enable most providers to manage liquidity risk while avoiding them having to hold a liquidity amount that impacts their ability to invest in capital works. The Commission considers this to be an important compromise to support capital investment in the sector, as increasing the minimum liquidity amount to cover these providers would disproportionately increase the number of providers that would hold a higher level of liquidity than they would need. We will work directly with the small number of providers where compliance with the minimum liquidity amount won't create a sufficient liquidity buffer.
Quarterly financial reporting and the rest of the story
Through our analysis of quarterly financial report data we know that there are some providers that will seem to fall below the proposed minimum liquidity amount when they haven’t. That’s because these providers have arrangements to access the cash or cash equivalents that they need to meet the minimum liquidity amount, but those arrangements don't form part of their quarterly financial reporting.
Where that’s the case, if they can show us those other arrangements are in place, they will be deemed compliant. However, because we won’t be able to monitor their ongoing compliance through quarterly financial reporting, we may put a condition on their registration. This will require them to report any changes in those arrangements that might cause them not to comply.
When providers can’t meet the minimum liquidity amount, we’re here to help
If a provider can’t show us they have access to enough cash or cash equivalents to meet the minimum liquidity amount, that will be a concern to us given the risk the Standard aims to reduce. Namely, to make sure providers can continue to provide quality care and stay financially viable through a short period of reduced cash-flow.
Where a provider is in that situation, our aim is not to take compliance action, but to make sure they have a suitable plan to meet the minimum liquidity amount. We accept that for some providers it might take time for them to meet the minimum liquidity amount. Our provider financial viability monitoring team will work with those providers and give them the guidance and support they need. We will only resort to use of regulatory powers where a provider demonstrates a lack of commitment to managing their liquidity risk.
Our goal is not to catch providers out. We want to help them develop strategies that protect them from risk of sudden financial collapse, which can harm older people and put refundable deposits at risk.
Until next time…
Peter Edwards
a/g Deputy Commissioner, Regulatory Operations
