Prudential targeted review: Related party arrangements

Insights Report

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Introduction
Background
Our findings
Our approach
Things to consider
Commission actions
Further information
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Introduction

We do targeted reviews to help providers understand their financial and prudential responsibilities. These reviews help us to identify risks and improve provider compliance.

This targeted review focused on how refundable deposits are used in related party arrangements. Our aim was to educate and support providers to meet their responsibilities.

A provider that is owned by or owns other entities or organisations may be operating as part of a corporate group. Related party arrangements are transactions, like providing a loan or paying for a service, between the companies within a corporate group. For example, between a parent company and its entities.

Background

Providers of residential and flexible aged care that hold refundable deposits must meet the prudential responsibilities in the:

Aged Care Act 1997 (Aged Care Act)
Fees and Payments Principles 2014 (No 2).

Providers can only use refundable deposits for certain things. The main use must be to provide residential and flexible aged care.

For this targeted review, we checked if providers complied with their responsibilities when using refundable deposits in related party arrangements. For example, when:

making loans to related parties
paying for goods or services provided by related parties
making rent and lease payments to related parties.

Providers need to meet conditions if they want to use refundable deposits to make a loan to another entity, including related parties. These conditions include that the loan is:

not made to an individual
made for a commercial purpose
recorded in a written loan agreement.

From October to December 2024, we reviewed 30 providers across the country. We checked if they understood and complied with their prudential responsibilities when using refundable deposits in related party arrangements.

Our findings

We found that many providers didn’t meet their prudential responsibilities when using refundable deposits in related party arrangements. Providers often:

made loans for non-commercial purposes
didn’t have formal loan agreements
didn’t have enough detail in their loan documents and agreements. For example, they didn’t have information about the:
- purpose of the loan
- term of the loan
- actual loan amount
- interest rate
- total expenses associated with getting the loan
- assets the related party used as collateral or security for the loan (a related party may promise assets, property or other valuable things to be used if they can’t repay the loan)
- repayment terms, amount and frequency
didn’t recognise and document a transaction as a loan when they moved funds between related parties.

To respond to our findings, providers agreed to fix these issues by:

documenting loans when lending refundable deposits to a related party
adding missing information to existing loan documents
documenting the reasons for each financial decision
sending us accurate financial reports on time, in compliance with the disclosure standards
regularly reviewing their risk management processes to:
- identify, assess and manage all possible compliance risks
- make sure they can effectively prevent future problems.

Our approach

Providers choose different corporate structures for their businesses for many reasons. We understand that all providers are different.

When doing this review, we educated and guided providers. Our aim was to help them understand their responsibilities. We explained that:

each individual provider must meet their financial and prudential responsibilities under the Aged Care Act
they need to meet their responsibilities whatever their corporate structure or related party arrangements are.

By the end of the review, providers:

understood their prudential responsibilities
had taken steps to meet them.

Things to consider

Do you have a strong governance system that:
- explains people’s roles and what they are responsible for?
- gives formal financial responsibilities to specifically trained staff?
- makes sure you’re open and honest about meeting your prudential responsibilities?
Does your governance system make sure refundable deposit transactions are approved by trained staff who are specifically delegated this responsibility?
Does your governance system:
- clearly show who to report problems to, and how to escalate them?
- help you proactively find and fix compliance problems?
Do you review your related party loan documentation and transactions often to make sure you’re meeting your prudential responsibilities?
Do you review and update your procedures and processes often to make sure they fit with your related party arrangements responsibilities? For example, your responsibilities when making loans.
Have you combined your policies with your risk management framework to make sure you meet your responsibilities?
Do you provide ongoing staff training? Does it align with:
- the Aged Care Act and Fees and Payments Principles 2014 (No 2)?
- Commission policy
- peak body resources
As legislation changes, do you educate your staff and update your procedures and processes?
Have you set up your system to remind you to provide training when there are key staff changes? For example, when they change roles and responsibilities.
Do you get auditors to do compliance reviews where needed? (Note that we prefer you to use external auditors.)
Are you preparing for the upcoming legislative changes by updating your policies and procedures? We recommend that you do as soon as possible.

Commission actions

We will guide and educate you on the Financial and Prudential Standards.
We may do more targeted reviews on using refundable deposits in related party arrangements.
We will use the information we collect from these reviews to improve our systems that identify risk. This will help us to find and fix possible problems.