Prudential targeted review: Liquidity Standard

Insights report

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

This targeted review focused on educating and supporting providers to meet the current Standard.

Background

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

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

Liquidity is the ability to quickly and easily change assets into cash. Under the current Liquidity Standard providers must:

maintain enough liquidity to refund all refundable deposits that are due in the next 12 months
maintain and document a liquidity management strategy (LMS)
make sure their LMS complies with the Liquidity Standard.

From 1 November 2025, a new Liquidity Standard will be introduced . It’s currently in draft form to include feedback from our recent consultation. Under the draft Standard, providers must have enough liquidity to refund refundable deposits and meet other short-term financial responsibilities. The new Standard as it is currently drafted will apply to all residential aged care providers except state and local government providers. You can read more about this in the draft new Financial and Prudential Standards.

Our review against the Liquidity Standard

For this targeted review, we assessed providers against the current Liquidity Standard. The Standard requires providers to set, manage and maintain their minimum level of liquidity (MLL).

From October to December 2024, we reviewed 30 providers across the country. We assessed if they understood and met their responsibilities under the Liquidity Standard.

We asked providers to show how they manage their liquidity. We looked at their documentation on:

their Liquidity Management Strategy
their Minimum Liquidity Level
liquid assets
board meetings
bank account balances and lines of credit for the 2023–24 financial year
how they comply with the Liquidity Standard.

The review helped us identify compliance risks and support providers to understand and meet their prudential responsibilities.

Our approach to risk

The way we respond to any compliance risk depends on the level of risk for older people. We explain this in our Compliance and Enforcement Policy.

We expect providers to minimise risks and show that they comply with the Liquidity Standard. We may take enforcement action against providers that don’t manage risks or show how they will manage them.

Our findings

Through our review, we found that most providers complied with the Liquidity Standard.

However, we found some gaps in providers’ knowledge about their responsibility to have and maintain a written LMS. Some providers didn’t:

include what their MLL was in their LMS
record a liquidity amount in dollars in their LMS, only that they planned to maintain their MLL
maintain their MLL over a past period
regularly review and update their LMS
correctly reference the legislation in their LMS
include the factors and calculations they used to help work out their MLL in their LMS
include where, and in what form, their MLL funds were held (for example, as cash, bank bills, guarantees and credit) in their LMS
include enough evidence to prove they were maintaining their MLL in their LMS
have a clearly documented LMS that maintains liquidity for multiple providers in their corporate group* while making sure that each provider meets their MLL responsibilities.

*A corporate group is when a provider is owned by, or owns, other organisations.

We helped providers understand their liquidity responsibilities by providing support and training.

Things to consider

The new Liquidity Standard will replace the current Liquidity Standard on 1 November 2025. We encourage providers to review the draft new Financial and Prudential Standards.

We encourage providers to keep up to date with:

the new strengthened Quality Standards and other aged care reforms from the Commission
other relevant information from the Department of Health, Disability and Ageing and industry bodies such as Ageing Australia.

We also encourage providers to review and implement the following.

Liquidity management strategy (LMS) documentation

Make sure you have a documented LMS that covers your liabilities, expenses and MLL (expressed in whole dollar amounts).
Make sure your LMS includes:
- what it aims to achieve
- identified risks
- an explanation for how you worked out your MLL.
Regularly review and update your LMS.

Minimum level of liquidity (MLL)

Make sure you hold enough liquidity to refund the refundable deposits you expect over the next 12 months. Consider what you will be required to hold under the draft new Financial and Prudential Standards.
Track your MLL and recalculate it monthly.
Make sure your processes to identify liquidity risk rely more on systems than people. This lowers your risk of non-compliance.

Investment management strategy (IMS)

Make sure your IMS complies with legal requirements.
Make sure your IMS includes:
- assets allocation considerations (deciding what portion of funds you'll invest in different asset classes, like stocks, bonds and cash or cash equivalents)
- diversifying your investment (spreading your investments across and within different asset classes)
- restrictions on refundable deposit investments.
Make sure your IMS includes steps to identify, reduce, and manage risks relating to:
- liquidity
- credit
- market
- currency
- operational risks.

Governance

Make sure you have good internal financial controls.
Keep detailed records of all financial transactions.
Make sure you have a process to identify and manage compliance risks.
Make sure your governance and LMS policies and procedures:

are clearly documented
are reviewed regularly
reference the right legislation.

Make sure your policies and procedures cover:

your refundable deposit register
your financial reporting requirements
who is responsible for each step in the process.

Make sure you always have people with specialist expertise in your executive team and on your board of directors.
Make sure any software and automated systems you use to generate financial reports are accurate and working properly. This will help you track your refundable deposit balances and refund them on time.

Staff

Make sure the staff responsible for managing your LMS have up-to-date knowledge and the skills they need.
Assess your staff’s skill gaps regularly and make sure your training is effective and up to date.
Make sure you have a business continuity plan for challenges such as low staff availability or natural disasters.
Foster a learning culture. Encourage your staff to subscribe to newsletters, attend webinars and network with others in the sector.

We were pleased that providers gave us positive feedback about this targeted review. They told us the process was very informative and educational.

Commission actions

We will provide extra information and resources to help providers understand the proposed new Liquidity Standard. This includes updating the Financial and Prudential Standards webpage with the latest information.
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.