The central concept is a designated security trust fund (DSTF), which is defined in section 69 of the Insurance Act 1973 and picked up by this instrument. It is a statutory trust created to secure insurance liabilities of Lloyd’s underwriters in respect of Australian policies. The trustee of a DSTF is the entity appointed under the trust deed approved by APRA under the Lloyd’s Security Trust Fund Arrangements. The instrument does not create the fund; it regulates how the trustee must operate it.

Excluded asset is a key definition. An asset is excluded if it would not count as an asset for Part III of the Act were it held by Lloyd’s underwriters, Equitas Limited or Equitas Reinsurance Limited, and the holder were a licensed insurer. An asset is also excluded if it is re-invested through an interposed body corporate, trust or partnership with the Lloyd’s entities. And an asset is excluded if it is not acquired or maintained at arm’s length from the other party to the transaction. This is a broad test: it catches any structure that might hide risk or let Lloyd’s related parties control trust assets indirectly. A trustee cannot hold any excluded asset.

Suspense account is a practical concept for incomplete information. If funds are transferred to a trustee for a DSTF but the trustee lacks sufficient information to properly record them in the correct fund, the trustee must hold the assets in a suspense account. The trustee must not apply those funds unless APRA gives written approval or the information arrives and the funds can be transferred to the correct fund. This prevents trustees from commingling uncleared funds.

Market value is the valuation standard for assets. For letters of credit, the value is face value. This is simpler than a fair-value hierarchy but imposes a burden on the trustee to determine market value for illiquid or bespoke assets such as unlisted shares, options and unlisted unit trusts. The instrument provides no guidance on how to calculate market value when no active market exists.

Australian Auditing Standards are incorporated by reference as in force from time to time. The auditor must be approved by APRA. The audit certificate must be in a form approved by APRA. These are not free choices: APRA controls both the auditor and the format of the certificate.

Designated security trust fund Arrangements is a separate legislative instrument made under subsection 68(1) of the Act that sets the required funding level and the approved trust deed structure. The trustee must comply with both that instrument and the instrument in the Schedule.

The direct obligations fall on trustees of designated security trust funds. The instrument defines ‘trustee’ simply as any trustee of a DSTF. In practice, these will be professional corporate trustees, often subsidiaries of major banks or specialist trust companies, appointed under trust deeds approved by APRA. There is likely to be a small number of such entities: the Lloyd’s market in Australia is concentrated, and the DSTF structure is unique to Lloyd’s. The instrument imposes duties on the trustee alone, not on Lloyd’s itself, though Lloyd’s must receive enough information from the trustee to satisfy its own reporting obligations to APRA under the Act.

Policyholders and intending policyholders are indirect beneficiaries. They have a right, under paragraph 21, to request a copy of the terms of the DSTF (the trust deed) from the trustee, and the trustee must provide it. The trustee may charge a reasonable amount for copying material that has already been given to that person. This is a transparency mechanism but limited: only a party or intending party to a covered insurance contract can ask. The general public has no such right.

APRA is the regulator. It receives the accounts and statements, approves auditors, approves the form of audit certificates, and can give written approvals for suspense account applications. Part VI of the Act applies to decisions under these rules, meaning APRA’s decisions are reviewable under the Act’s internal and external merits review mechanism.

Auditors must be approved by APRA. This is an additional constraint: not every auditor qualified under the Corporations Act will be acceptable. APRA can effectively set the standard for who may audit a DSTF.

Lloyd’s itself is affected indirectly: the trustee must give Lloyd’s enough information so that Lloyd’s can supply APRA with the information, accounts, statements and actuarial reports required under the Act. The instrument assumes Lloyd’s is the conduit for actuarial reports, which are not required of the trustee directly.

Parties to contracts of insurance covered by the DSTF also have the right to request the trust terms, but the trustee may charge a reasonable amount for copying if the material has already been given earlier. This prevents repeated free requests.

The trustee’s primary duty is to comply with both the provisions of the Act that apply to trustees and the trust deed approved by APRA under the Lloyd’s Security Trust Fund Arrangements. This creates a dual compliance obligation: the Act has its own requirements for trustees (for example, under Part VC of the Insurance Act regarding winding up), and the trust deed may contain additional covenants.

The asset duties are prescriptive. The trustee must hold assets in Australia unless the trust deed permits transfer outside Australia. The trustee must not hold an excluded asset as defined in rule 10. The trustee must apply the assets in accordance with rules 8 to 11. A letter of credit is an asset only if it is from a bank, irrevocable, and provides for immediate payment at the trustee’s written direction. This is a narrow definition that excludes letters of credit from non-bank financial institutions or conditional letters.

The valuation duty is simple in form but potentially complex in execution: market value for all assets, face value for letters of credit. The trustee has no discretion to use cost or amortised cost even if market value is difficult to ascertain.

The liability restriction is absolute. The trustee must not borrow for the trust, charge trust assets, or incur a liability that is not for the purposes of the trust. This preserves the trust’s solvency and prevents the trustee from leveraging the fund for its own benefit.

The suspense account duty is a practical record-keeping obligation. The trustee must hold in suspense any funds it receives for a DSTF but lacks the information to record. The trustee cannot apply those funds except with APRA approval or after the information gap is closed. This prevents informal disbursement of uncleared funds.

The record-keeping duty requires records to be kept for seven years after the completion of the transactions to which they relate. The records must allow accounts and statements to be prepared and audited properly and conveniently, and must allow the trust to be performed, including under judicial trusteeship and winding up. This is a long retention period compared to some commercial statutes, reflecting the long-tail nature of some insurance liabilities.

The trustee must give to APRA the accounts and statements in Attachment A: Form T1 (annual statement of assets and liabilities) within 4 months of the trustee’s balance date, and Form T2Q (quarterly schedule of DSTF assets) within 45 days of each quarter end. The audited annual schedule (Form T2) must be lodged within 4 months of the calendar year end, with an audit certificate in APRA-approved form.

The right to request trust terms is held by parties and intending parties to insurance contracts covered by the DSTF. The trustee must provide a copy, but may charge a reasonable amount for copying previously provided material. This is a qualified right, not an absolute one, and the trustee has some pricing discretion.

The instrument itself does not specify penalties. It is made under subsection 70(1) of the Insurance Act 1973, and that Act contains its own penalty and enforcement provisions. Part VI of the Act is expressly applied to decisions under these rules, giving a right of review, but does not create direct penalty provisions for breach of the rules. However, a failure by a trustee to comply with the rules would likely be a breach of the Act or a breach of a condition of the trust deed, with consequences including possible directions from APRA under section 61 or other supervisory powers, civil penalties under Part 10 of the Act, or removal of the trustee.

The instrument does not state a penalty for non-lodgement, non-notification or holding an excluded asset. This does not mean there is none: the Insurance Act has general offences for providing false or misleading information, and APRA can take enforcement action for prudential contraventions. The absence of an express penalty in the rules shifts the enforcement burden to APRA’s broader powers, which means the degree of enforcement may vary with APRA’s priorities and resources.

The audit certificate and auditor approval requirements create a compliance checkpoint. If the auditor fails to give a certificate or the trustee fails to lodge it on time, APRA may treat this as a breach of the rules, but the instrument does not say what happens next. The practical consequence is likely to be a supervisory escalation, letters of demand, directions, or ultimately prosecution under the Act if the breach is serious.

The notification duties in rule 20 - intention to resign, notice of removal, failure to fund to the required level, default in payment to the trustee - are designed to give APRA early warning of problems. Failure to notify is itself a breach, but again the instrument does not prescribe a specific penalty. The enforcement mechanism is the Act’s general regime.

Because the instrument is a legislative instrument, it is subject to disallowance by Parliament under the Legislation Act 2003, but that is a legislative control on the making of the rules, not an enforcement mechanism against trustees.

The instrument is made under subsection 70(1) of the Insurance Act 1973 and must be read together with that Act. The definitions of ‘covered’, ‘designated security trust fund’, ‘insurance liability’, ‘Lloyd’s’ and ‘qualified corporation’ in the Insurance Act are incorporated by reference under paragraph 13(1)(b) of the Legislation Act 2003. The instrument does not stand alone; it is subordinate to the Act.

The Lloyd’s Security Trust Fund Arrangements, made under subsection 68(1) of the Act, is a separate legislative instrument that sets the required funding level and the approved form of trust deed. This instrument does not replace it; the trustee must comply with both. The trustee must also comply with the trust deed itself, which is approved by APRA under that arrangement. So there are three layers: the Act, the Arrangements, the trust deed, and then this instrument.

The Banking Act 1959 is relevant for the definition of ‘bank’: it means an authorised deposit-taking institution but excludes building societies, credit unions, providers of purchased payment facilities and authorised non-operating NOHCs. This means letters of credit from credit unions or building societies are not assets for DSTF purposes. The instrument incorporates the Banking Act definition as amended from time to time.

The Corporations Act 2001 interacts in two ways. First, a trustee may lodge a copy of a balance sheet that has already been lodged under the Corporations Act as an alternative to Form T1. This reduces duplication for trustees that are companies. However, the quarterly T2Q and audited T2 forms are specific to DSTF rules and have no analogue under the Corporations Act, so the relief is only partial. Second, the records must be kept for seven years, which is longer than the general five-year requirement under the Corporations Act for financial records.

The Australian Auditing Standards issued by the AUASB are incorporated by reference as in force from time to time. The audit must comply with those standards. The auditor must be approved by APRA, which adds a gatekeeping layer beyond the general auditor appointment under the Corporations Act.

The Legislation Act 2003 applies to this as a legislative instrument; it must be registered, tabled and may be disallowed.

Part VI of the Insurance Act applies to APRA’s decisions under these rules, giving a right to seek reconsideration and review by the Administrative Appeals Tribunal. This is a procedural safeguard for trustees.

The trust deed itself, which is a private document approved by APRA, may contain additional covenants, restrictions or duties. The instrument requires the trustee to comply with the deed, so any inconsistency between the deed and the instrument would need to be resolved by interpretation, but the instrument is likely to prevail as a legislative instrument.

This instrument, Lloyd’s Security Trust Fund Instrument No. 2 of 2017, was made on 12 April 2017 by Heidi Richards, General Manager, Policy & Advice Division at APRA, as a delegate. It took effect on the date of registration on the Federal Register of Legislation. The instrument replaces the earlier Lloyd’s Security Trust Fund Rules No 1 made on 9 June 2000. The express saving provision in rule 25 states that any exercise of APRA’s discretion under the previous 2000 rules continues to have effect as though exercised under a corresponding power in this instrument. This grandfathering ensures that approvals for auditors, trust deed variations, or other discretionary decisions do not need to be re-applied for immediately.

The instrument has only been found as originally made; there is no evidence of subsequent amendments in the source text provided. However, because it incorporates definitions from the Banking Act and the Australian Auditing Standards by reference to versions in force from time to time, it has been dynamically updated without formal amendment of the instrument itself. The instrument also cross-references the Lloyd’s Security Trust Fund Arrangements, which is itself a legislative instrument that may be updated separately.

The instrument does not contain a sunset clause. As a legislative instrument under the Legislation Act 2003, it would be subject to automatic repeal under that Act unless it is remade or exempted, but the source does not indicate any sunset date.

The source text does not mention any litigation concerning this instrument or its predecessor. There is no reference to any court case, tribunal decision, or legal challenge to the rules. Because the instrument applies only to a small number of specialised trustees and its obligations are largely mechanical, the likelihood of litigation is low. The review mechanism under Part VI of the Act is available for disputes about APRA’s decisions, such as refusal to approve an auditor or denial of a suspense account application, but no such cases are recorded in the source.

The excluded asset definition is broader than it first appears. An asset is excluded if it would not be included as an asset for Part III of the Act if held by Lloyd’s underwriters, Equitas Limited or Equitas Reinsurance Limited. This imports the asset recognition criteria of the prudential standards that apply to general insurers, which may exclude certain categories such as intangible assets, deferred acquisition costs, or investments in related entities above a threshold. A trustee may inadvertently hold an asset that is permissible under general trust law but prohibited by the notional insurer test. The second limb - re-investment through an interposed body corporate, trust or partnership with Lloyd’s, Equitas Limited or Equitas Reinsurance Limited - catches any indirect holding, even if the interposed entity is unrelated. The third limb - not acquired or maintained at arm’s length - requires the trustee to assess the transaction from an arm’s length perspective, which requires economic analysis for every acquisition or maintenance decision.

Valuation at market value is straightforward for listed securities but problematic for unlisted shares, unlisted unit trusts, options and other investments. The instrument gives no hierarchy or methodology. The trustee must form a view on market value for each asset, and the auditor must be satisfied that the valuation is reasonable. This creates audit risk and potential disagreement with APRA. The rounding rule to the nearest $1,000 may obscure small movements but could also be used to round down material positions if the amounts are just above a threshold.

The quarterly T2Q schedule must be lodged within 45 days of quarter end. The annual T1 within 4 months of the trustee’s balance date. The audited T2 within 4 months of the calendar year end. A trustee with a non-30 June balance date will have two different reporting timetables: Form T1 on its own balance date cycle, and Form T2 on a calendar year cycle. This mismatch can complicate internal reporting.

The trustee may charge a reasonable amount for copying trust terms only if the material has previously been given to the person. This means the first request from a policyholder must be provided free of charge. The trustee must track who has already been given the information to determine whether a charge is permissible. The instrument does not define ‘reasonable amount’, leaving the trustee exposed to a challenge from a policyholder.

The auditor must be approved by APRA. This is not a one-off approval; the trustee must ensure the auditor remains approved. If APRA withdraws approval, the trustee must find a new auditor and re-lodge the audit certificate. The audit certificate must be in a form approved by APRA, not just a standard audit opinion. The instrument does not provide a sample form; the trustee must obtain the approved form from APRA.

The suspense account rule prohibits application of funds without APRA approval or completion of information. If the trustee receives funds for a DSTF but lacks information for an extended period, the funds sit idle in suspense. APRA’s approval is discretionary, and there is no time limit for APRA to respond. This creates a practical bottleneck.

The notification duty for failure to fund to the level required by the Lloyd’s Security Trust Fund Arrangements is triggered when the trustee becomes aware of a funding shortfall. The trustee may not be the entity that funds the trust; the funding obligation may fall on Lloyd’s or underwriters. The trustee must still notify APRA. This puts the trustee in the position of monitoring Lloyd’s performance.

The record-keeping requirement of seven years after completion of transactions may be shorter than the statutory limitation period for some insurance claims. If a claim arises after records have been destroyed, the trustee may be unable to defend itself. The trustee should consider retaining records for longer as a matter of prudence.

A trustee must first ensure that the trust deed has been approved by APRA under the Lloyd’s Security Trust Fund Arrangements and that the deed is current. The trustee must comply with both the deed and the Act’s provisions applicable to trustees, which includes Part VC of the Insurance Act dealing with judicial management and winding up.

For asset holding, the trustee should implement a compliance checklist. All assets must be located in Australia unless the trust deed expressly permits transfer outside Australia. The trustee must screen every asset against the three-part excluded asset test: would it be an admissible asset under Part III of the Act for an authorised insurer? Is it reinvested through an interposed vehicle with Lloyd’s entities? Was it acquired or maintained at arm’s length? If any answer is yes, the asset cannot be held. The trustee should document the arm’s length analysis for each asset, especially for related-party transactions. Letters of credit must be from a bank as defined (an ADI excluding building societies, credit unions, etc.), irrevocable, and paying on immediate written direction. The trustee should verify the issuer’s ADI status and obtain legal advice on the letter’s terms.

Valuation must be at market value for all assets. For listed securities, market value can be taken from an exchange. For unlisted securities, the trustee must obtain a valuation from an independent valuer or apply a recognised model. The valuation should be documented and reviewed by the auditor. Letters of credit are valued at face value, but the trustee must confirm that the face value remains callable.

The trustee must maintain a suspense account procedure. If funds arrive without complete information, they must be held separately. The trustee must develop written procedures to track incomplete funds and seek the missing information promptly. If information cannot be obtained, the trustee must apply to APRA in writing for approval to apply the funds. Approval should be obtained before any disbursement.

Record keeping requires a system to retain all trust records for seven years after the completion of the transactions. The trustee should define ‘completion’ for each transaction class. Records must allow convenient preparation and auditing of the required statements and support the trust under judicial trusteeship or winding up. The trustee should consider digital storage with redundancy.

Reporting deadlines must be calendarised. Form T1 is due within 4 months of the trustee’s balance date. Form T2Q is due within 45 days of each quarter end (31 March, 30 June, 30 September, 31 December). Form T2 (audited) is due within 4 months of each calendar year end. The trustee should prepare the schedules based on the DSTF’s asset categories in the forms, rounding each dollar amount to the nearest $1,000. All statements must be signed by a director. The trustee may use a Corporations Act balance sheet in place of Form T1, but must still ensure it contains all required information.

For audit, the trustee must engage an auditor approved by APRA. The trustee should confirm the auditor’s approval status before appointment and ensure the auditor is willing to audit to the Australian Auditing Standards and produce a certificate in APRA-approved form. The audit certificate must be lodged within 4 months of the annual balance date (the calendar year end). The trustee should obtain the approved form from APRA in advance.

Notification obligations: the trustee must notify APRA in writing of any intention to resign; receipt of a notice of removal; failure to fund the DSTF to the required level; and default of more than 30 days in payment for its services. The trustee should establish internal triggers to detect these events. For funding failures, the trustee must monitor the DSTF’s funding level, which may require information from Lloyd’s. The trustee should have a contractual right in the trust deed to obtain that information.

Information requests from policyholders or intending policyholders must be fulfilled by providing a copy of the trust terms. The trustee may only charge a reasonable amount for copying if the material has already been given to that person. The trustee should maintain a register of who has received the terms, so it knows when a charge is permissible. The trustee must also give Lloyd’s sufficient information to allow Lloyd’s to report to APRA.

Finally, the trustee should note that any APRA determination made under the previous 2000 rules continues under the corresponding power in this instrument. The trustee does not need to reapply, but should confirm that the determination remains relevant. The trustee should also ensure that any new APRA decision it seeks is made explicitly under this instrument to avoid confusion.