ASIC Corporations (Mortgage Investment Schemes) Instrument 2017/857

The central concept is the mortgage investment scheme. The instrument defines it as a managed investment scheme that has, or is likely to have, at least 50% of non-cash assets invested in mortgage loans, and 100% of assets invested in mortgage loans or in an account with an Australian authorised deposit-taking institution (ADI). A mortgage loan is a loan secured by a mortgage over real property. This definition is narrower than a general mortgage fund; it requires a dominant position for mortgage loans and a prohibition on any non‑cash assets that are not mortgage loans.

The scheme structure is based on pooling investors’ funds to make a portfolio of mortgage loans. The risks are concentrated in real estate credit: default, illiquidity, valuation declines, and interest rate mismatches. The instrument recognises two structural types: small schemes (≤20 members) and larger schemes that are already registered. The small scheme exemption in s 5 allows the operator to avoid the full licensing, disclosure, registration, and hawking regime, but only if the operator is not in the business of promoting managed investment schemes and does not also run a registered mortgage investment scheme. This prevents regulators from treating such a scheme as a de facto public offer fund.

Withdrawal rights are a second critical concept. Normally, under Chapter 5C, a member’s right to withdraw from a registered managed investment scheme is subject to the scheme being liquid. When a scheme invests in multiple mortgage loans, one loan’s maturity event may make the scheme liquid overall, but another loan’s default may make it illiquid. The s 8 declaration overrides the default rule by making liquidity and withdrawal rights loan‑specific. This means a member can withdraw only from a particular loan in which they hold an interest, not from the entire pool. The modification essentially creates a fractional, loan‑by‑loan withdrawal regime for registered schemes relying on s 6.

The instrument also uses the concept of associate (in s 5(7)(a) and (b)). The 20‑member cap is aggregated across schemes operated by the operator and any associate. Without that aggregation, an operator could avoid the cap by setting up multiple small schemes through related entities.

Conditional exemptions are another key feature. The exemptions in ss 5(1), (2), (4), (5) apply only when the operator satisfies all three conditions in s 5(7). The operator bears the burden of ensuring the conditions hold. If the operator becomes aware that a condition is no longer satisfied, the exemptions cease to apply. The instrument imposes no transitional period for non‑compliance after a condition fails, which creates risk for operators who expand or change structure.

The instrument primarily affects operators of mortgage investment schemes and persons who provide financial services in relation to interests in those schemes.

For operators of small schemes (≤20 members) that meet the s 5(7) conditions, the instrument provides substantial relief from the standard regulatory burden. They do not need to register the scheme, hold an AFSL covering interests in it, comply with hawking prohibitions, or issue a product disclosure statement (PDS) under Part 7.9. This makes it cheaper and faster to launch and run such a scheme. The affected operators are typically small property developers, family offices, or syndicate managers who raise money from a limited number of sophisticated or wholesale investors.

For operators of registered mortgage investment schemes that invest across multiple mortgage loans (larger schemes), the main effect is the s 6 relief from having to register each loan as a separate scheme. This reduces compliance cost and administrative complexity: instead of managing dozens of registered schemes, the operator can hold all loans within one registered scheme. However, such operators then must deal with the s 8 declaration, which changes withdrawal mechanics. The operator (and its responsible entity) must ensure that internal systems can track each member’s interest in each particular mortgage loan, and that withdrawal offers are made loan‑by‑loan rather than scheme‑wide.

Investors are also affected. In a small exempt scheme, they receive less disclosure (no PDS), and the operator is not licensed. They rely on the operator’s honesty and the scheme’s small size for informal oversight. In a registered scheme using s 8, investors have withdrawal rights that are narrower than usual: they can only withdraw from a particular loan, not from the pool as a whole. This may reduce liquidity compared to a typical unit trust. Investors must understand that they are buying a fractional interest in a specific mortgage, not in a diversified portfolio.

Financial advisers and intermediaries who recommend or arrange interests in small exempt schemes receive relief from licensing and disclosure obligations under ss 5(3) and 5(6), but only where the scheme appears to meet the conditions. They need to have a reasonable basis for that belief. If they are aware or ought to be aware that a condition is not satisfied, they lose the relief and must hold an appropriate AFSL and comply with Part 7.9.

The instrument does not affect lenders, borrowers, or other parties to the mortgage loans themselves.

Duties of operators. The primary duty is to ensure that the conditions for any claimed exemption are met. For the s 5 exemptions (small schemes), the operator must ensure: the total membership across its mortgage investment schemes and those of any associate is 20 or fewer; it does not operate a registered mortgage investment scheme; and it is not in the business of promoting managed investment schemes (other than the small schemes). If these conditions fail, the operator must comply with the full Corporations Act regime - registration, licensing, disclosure, and hawking restrictions - immediately, or cease operation. There is no grace period.

For the s 6 exemption (registered schemes), the operator must already hold a valid registration under s 601EB. It does not need to register each loan, but it must operate the scheme in accordance with its constitution and compliance plan as modified by the s 8 declaration. The operator must also ensure that the scheme remains a mortgage investment scheme as defined (≥50% non‑cash assets in mortgage loans; 100% in mortgage loans or ADI accounts). If it deviates, the exemption may no longer apply.

Rights of operators. Operators of small schemes have a right to avoid licensing, registration, hawking, and disclosure obligations. This reduces upfront and ongoing costs. Operators of registered schemes have a right to pool multiple loans without separate registration for each.

Rights of investors. In small exempt schemes, investors have no statutory right to a PDS or other product disclosure. They have only the contractual rights set out in the scheme document and the general law of managed investment schemes (the scheme is unregistered, so Chapter 5C does not apply to it - except to the limited extent preserved by s 601ED(5)? The instrument exempts from s 601ED(5), but does not exempt from other provisions of Chapter 5C? Note: s 601ED(5) is the registration obligation; the exemption means the scheme is not required to register, but if it is unregistered, it is not a regulated managed investment scheme for most of Chapter 5C. Section 601ED(1) makes it an offence to operate an unregistered scheme that must be registered; the instrument removes that requirement. So the scheme is not subject to the governance, reporting, and compliance obligations of Chapter 5C. Investors must rely on contract and general law.

In registered schemes that rely on s 6, investors have withdrawal rights, but those rights are modified by s 8. Instead of a scheme‑wide withdrawal right, each investor can only withdraw from a particular mortgage loan in which they have an interest. The scheme may offer withdrawal from that loan only if that loan is liquid. An investor cannot withdraw from the scheme as a whole if other loans are illiquid. This reduces liquidity and may trap investors in a partially frozen scheme.

Rights of third parties. A person who provides financial services in relation to interests in a small exempt scheme (e.g., an accountant or solicitor arranging investments) is relieved from licensing and disclosure obligations if they reasonably believe the scheme meets the conditions. They have a duty to check the scheme’s status, but are not required to verify every detail.

The instrument itself does not create penalties. It provides exemptions from penalties and offences that would otherwise apply under the Corporations Act 2001. The relevant underlying penalties are:

• Section 601ED(5) (registration): failure to register a scheme that is required to be registered is an offence, carrying a penalty of up to 200 penalty units (currently $62,600) or imprisonment for 5 years (per s 601ED(1) and Schedule 3). The instrument exempts operators from that requirement, so no penalty arises when the conditions are met.

• Section 911A(1) (licensing): carrying on a financial services business without an AFSL is an offence under s 1311(1), with penalties up to 2 years imprisonment or 200 penalty units per s 1311B. The instrument exempts operators and certain other persons.

• Section 992A (hawking): offering financial products in the course of unsolicited contact without the required statements is an offence. Penalty: 200 penalty units or 2 years imprisonment. The instrument exempts operators of small schemes.

• Part 7.9 (product disclosure): failure to give a PDS when required can attract civil penalties and criminal penalties (up to 200 penalty units). The instrument exempts operators of small schemes.

If an operator claims an exemption but does not satisfy the conditions (e.g., the scheme has 21 members), the operator is liable for all the underlying offences from the moment the condition fails. There is no grandfathering or safe harbour. ASIC may also consider administrative action, such as banning orders or licence conditions, if a licensed operator engages in unlicensed conduct.

For registered schemes that misuse the s 8 declaration, the modification applies only if the operator has relied on s 6. If the operator incorrectly treats withdrawal rights as loan‑specific but the s 6 exemption does not apply (e.g., because the scheme is not registered under s 601EB), the operator may breach the provisions of Chapter 5C as unmodified, exposing it to civil penalty liability for failing to comply with withdrawal rights.

The instrument is a legislative instrument; if a provision in the instrument is breached (e.g., an operator of a small scheme exceeds 20 members), the operator loses the exemption but is not directly penalised under the instrument. Enforcement rests on the underlying Act.

The instrument operates within the framework of the Corporations Act 2001, primarily modifying Chapters 5C (Managed Investment Schemes), 7 (Financial Services and Markets), and 7.9 (Product Disclosure). It is a class‑based exemption and declaration, not a stand‑alone regulatory code.

Chapter 5C. The instrument directly modifies registration obligations under s 601ED(5) and (via s 8) modifies withdrawal provisions in ss 601GA, 601KA-601KE. For small exempt schemes, Chapter 5C does not apply at all because the scheme is not required to be registered and likely does not meet the definition of a registered scheme. For registered schemes using s 6, the modified withdrawal provisions under Chapter 5C apply as declared.

Chapter 7 (Licensing). The instrument provides exemptions from s 911A(1) (requirement to hold an AFSL). Note that the accompanying note cross‑references ASIC Corporations (Miscellaneous Technical Relief) Instrument 2015/1115, which provides relief from s 911A(1) and s 911B(1) for persons providing financial services on behalf of a person who does not need an AFSL because of an exemption under s 926A. This means intermediaries acting for an exempt small scheme operator also get licensing relief.

Australian Financial Services Licence regime. The instrument does not remove the licensing requirement for the operator of a small scheme if the scheme fails the s 5(7) conditions. So an operator who must also hold an AFSL for other activities (e.g., advising on other products) still requires the licence; the exemption only covers activities relating to interests in that particular small scheme.

ASIC Class Orders. The instrument replaced or preserved (temporarily) the earlier Class Order [CO 02/238], which provided similar relief for “small industry‑supervised schemes”. That class order was repealed; the instrument’s s 7 continued its effect for one year. Now, only the instrument’s provisions apply. The instrument also references the Miscellaneous Technical Relief Instrument 2015/1115, which is still in force.

State and territory laws. The instrument does not interact with state real property laws, mortgages, or securities. Those laws govern the underlying mortgage loans. The instrument only addresses the managed investment scheme wrapper around those loans.

Anti‑avoidance provisions. The aggregation condition in s 5(7)(a) (no more than 20 members across associated small schemes) prevents operators from circumventing the cap by using multiple associated entities. This interacts with the definition of “associate” in the Corporations Act (s 9 and 11). Operators must be careful about related parties, family trusts, and corporate groups.

Taxation. The instrument does not address tax, but the structure of a mortgage investment scheme - especially where withdrawal rights are loan‑specific - may affect tax treatment (e.g., whether the scheme is a trust, a unit trust, or a partnership; whether gains are capital or income). Tax law interacts separately.

The instrument was originally made on 26 September 2017 and registered as F2017L01254. It commenced on 27 September 2017.

Amendment via 2021/799. On 22 September 2021, ASIC made amending instrument 2021/799 (registered as F2021L01310), which took effect on 5 October 2021. The amendment altered subsection 5(4) of the instrument. The original text of s 5(4) (hawking relief) was amended; the amending instrument’s effect was to modify the scope of the hawking exemption. According to the endnotes, subsection 5(4) was “am. 2021/799”. The exact change is not reproduced in the source, but the amendment presumably adjusted the hawking relief to align with subsequent amendments to the Corporations Act (possibly related to the 2021 expansion of the hawking regime under the Financial Sector Reform (Hayne Royal Commission Response) Act 2020). Practitioners should check the text of s 5(4) as in force after 5 October 2021 to see the current wording. The original version may have had a broader or narrower exemption.

Repeal of section 2. Section 2 of the original instrument (likely dealing with commencement or definitions) was repealed by operation of section 48D of the Legislation Act 2003, which automatically repeals certain provisions of legislative instruments that are spent or no longer necessary. That is a technical repeal.

Transitional provision (s 7) now spent. Section 7 preserved the old Class Order [CO 02/238] for one year from commencement (27 September 2017 to 27 September 2018). That provision is no longer operative.

The instrument has not been amended since 2021. No further amendments are recorded as of the compilation date (5 October 2021). Users of the instrument should check the Federal Register of Legislation for any subsequent amendments after that compilation.

There is no reported litigation involving this specific legislative instrument. The instrument grants exemptions and a declaration and does not itself create a cause of action. Litigation that may tangentially involve the instrument would arise under the underlying Corporations Act provisions, such as:

• An operator claiming the s 5 exemption but being prosecuted under s 601ED(1) for operating an unregistered scheme that exceeds 20 members. In that case, the court would examine whether the operator met the conditions. No reported cases on this point appear in the public record.

• An investor suing an operator for breach of contract or misleading conduct regarding the application of the s 8 withdrawal modification. The instrument’s declaration would be a defence: if the operator correctly relies on s 6 and complies with the modified Chapter 5C, the withdrawal right is limited as set out. No known case has challenged the validity or scope of the s 8 declaration.

• A dispute over whether a scheme is a mortgage investment scheme within the instrument’s definition. For example, if a scheme holds 49% of non-cash assets in mortgage loans and 51% in corporate bonds, it falls outside the definition and cannot rely on the exemptions. Litigation over the proper categorisation of assets might occur, but no decided cases have been identified.

• Administrative proceedings before the Administrative Appeals Tribunal (AAT) concerning ASIC’s decisions on licensing or registration where the instrument is relevant. Again, no reported decisions.

The absence of litigation suggests that the instrument has been relatively uncontroversial and its conditions are clear enough that operators and ASIC have not needed judicial clarification. However, the untested areas - particularly the aggregation condition across associates and the “in the business of promoting” condition - could give rise to litigation in the future, especially if ASIC takes enforcement action against an operator who misinterpreted the scope of an “associate” or “promotion.”

The 20‑member cap is aggregate across all mortgage investment schemes operated by the operator and its associates. That is the most common pitfall. An operator might think it can have three separate schemes of 15 members each, totalling 45 members, because each scheme has 20 or fewer. Section 5(7)(a) says “the scheme, together with any other managed investment scheme operated by the operator or by an associate of the operator that has assets invested in mortgage loans, has no more than 20 members”. So the cap applies to the total across all such schemes. If the total exceeds 20, no scheme qualifies. Associates include related bodies corporate, directors, and any person regulated by s 9 of the Act. This can catch family trusts, corporate groups, and informal alliances.

The “not in the business of promoting managed investment schemes” condition (s 5(7)(c)) is vague. The instrument does not define “promoting”. ASIC likely interprets “promoting” broadly to include marketing, distribution, and soliciting. If the operator actively seeks investors beyond a close circle, it may be “in the business of promoting”. An operator who sets up a small scheme for a specific project and then, after that project ends, sets up another for a different group, may be considered to be in the business. This condition aims to prevent serial small schemes from being used as a substitute for public offers. An operator who is a property developer that normally syndicates deals may be promoting even if each syndicate is technically separate.

No grace period for exceeding the 20‑member cap. If a scheme starts with 20 members and two of them die and their estates are substituted, does that create a 21st member? The instrument does not allow for transitional relief. If the cap is breached, the exemptions vanish. Any subsequent offer or sale is illegal under the Corporations Act. Operators must have robust membership tracking and controls.

The s 6 exemption (registered scheme) does not allow the operator to avoid the requirement to hold an AFSL for other activities. The operator of the registered scheme still needs an AFSL covering the operation of a managed investment scheme (unless separately exempt). The s 2 exemptions in s 5 are not available to operators of registered schemes (because s 5(7)(b) prohibits operating a registered mortgage investment scheme). So if an operator wants to run both a small exempt scheme and a registered scheme, it cannot rely on s 5 for the small scheme.

The s 8 declaration modifies withdrawal rights for registered schemes, but only if the operator has relied on the s 6 exemption. If the operator mistakenly thinks it has relied on s 6 and acts under the modified provisions, but the s 6 exemption does not apply (e.g., because the scheme is not registered under s 601EB), then the operator is not protected. The default Chapter 5C withdrawal rules apply. The operator could be in breach for denying a member a scheme‑wide withdrawal right.

The definition of mortgage investment scheme requires at least 50% of non-cash assets in mortgage loans and 100% of assets in mortgage loans or ADI accounts. If the scheme holds any non‑cash asset that is not a mortgage loan (e.g., a promissory note from a borrower, a guarantee, a small equity stake), it may fall outside the definition. That means the exemptions in s 5 cannot be claimed. Similarly, if the scheme holds more than 50% in mortgage loans but also holds a minor non‑mortgage asset, the 100% requirement bites: all assets must be either mortgage loans or cash in an ADI account. So holding a small amount of non‑cash, non‑mortgage assets (e.g., an insurance policy) would cause the scheme to lose the definition.

The hawking exemption (s 5(4)) was amended in 2021. The current text should be checked carefully. The original version may have allowed unsolicited contact; the amendment may have narrowed it to align with post‑Hayne reforms. Operators relying on the hawking exemption must ensure they satisfy the specific wording after the 2021 amendment, which is not reproduced in the source. The note in the compilation does not show the current text.

For operators of small mortgage investment schemes (≤20 members total across all associated schemes).

1. Confirm the scheme is a mortgage investment scheme as defined: at the time of relying on the exemption, ensure at least 50% of non-cash assets are mortgage loans and 100% of assets are either mortgage loans or cash with an ADI. Monitor asset composition continuously; if it drifts, the exemption may be lost.

2. Count members across all schemes operated by you and your associates. Include all managed investment schemes that invest in mortgage loans, whether or not those schemes are operated by the same entity. Include any scheme where you or an associate is the operator. Do not rely on a scheme’s own count if you control multiple entities. Keep a register of all such schemes and their member numbers.

3. Ensure no registered mortgage investment scheme is operated by you or any associate. If you already run a registered scheme, you cannot claim s 5 relief for any other mortgage investment scheme. You must choose to either use the exemption only for the registered scheme (rely on s 6) or not at all.

4. Do not be in the business of promoting managed investment schemes. This means you cannot advertise, solicit, or actively market interests to the public. Promotional activity should be limited to personal knowledge of the investors. If you are a professional syndicator, you likely fail this condition and cannot rely on s 5.

5. Document your compliance. Keep records of member numbers, certificates of membership, and any board resolutions. Record checks on associate status. In case of an ASIC inquiry, you must prove you reasonably believed the conditions were satisfied (see s 5(3) and (6) for third parties). For yourself as operator, the condition is objective: you either satisfy it or you do not.

6. Do not issue a PDS or an AFSL‑required document - because the exemption from Part 7.9 applies, but you must not mislead investors about the scheme’s unregulated status. Disclosure should be clear that the scheme is exempt from registration, licensing, and disclosure. Consider providing a private information memorandum that avoids terms suggesting ASIC oversight.

For operators of registered mortgage investment schemes relying on s 6.

1. Ensure the scheme is validly registered under s 601EB of the Act. The exemption only applies to the obligation to register each loan, not to the initial registration.

2. Do not rely on s 5 small scheme exemptions for any other scheme you operate - s 5(7)(b) prohibits that.

3. Implement systems to track each investor’s interest in each particular mortgage loan. The s 8 declaration requires that withdrawal rights be assessed loan by loan. You must know which investor has economic exposure to which loan, and what proportion of the loan they hold.

4. When a member requests withdrawal, determine liquidity loan by loan. For each loan, assess whether the scheme is liquid “in relation to the particular mortgage loan”. This may require separate cash accounts or allocation mechanisms. The modification to s 601KA(4) refers to “liquid assets in relation to the particular mortgage loan”. The responsible entity must hold liquid assets (cash or cash equivalents) specifically attributable to that loan to enable withdrawal.

5. Update the scheme’s constitution and compliance plan to reflect the modified withdrawal provisions. The s 8 declaration makes the modifications apply as if they were written into the Act; the scheme documents should be consistent to avoid confusion.

6. Ensure that all offers of withdrawal and communications with investors refer explicitly to “withdrawal in relation to the particular mortgage loan”. Do not represent that investors can withdraw from the scheme as a whole.

For third parties (financial advisers, accountants).

• Rely on the licensing and disclosure relief only if the scheme appears to meet the s 5(7) conditions. Conduct reasonable inquiries: ask for written confirmation from the operator, review the scheme’s documents, and check the number of members. If you have any reason to doubt, treat the scheme as requiring full compliance (i.e., you need an AFSL and must give a PDS).

General compliance steps.

• Monitor changes in membership and asset composition regularly. Any change that breaks a condition must be remedied immediately or operations must cease until compliance is restored or the scheme is registered.
• Keep thorough records for the life of the scheme, including after wind‑up. ASIC may request records as part of a surveillance program.
• Seek legal advice on the definition of “associate” and “in the business of promoting”, as these are fact‑dependent and may require interpretation of other parts of the Corporations Act.