KEVIN RUDD told managers of frozen mortgage funds last night that they would have to behave like banks and undergo the same levels of scrutiny if they wanted the Government's guarantee on deposits.
The Prime Minister issued the challenge as he announced financial regulators would be given an extra $83 million to help them speed up applications by mortgage funds wishing to be reclassified.
Amid the global financial crisis about 250,000 customers of mortgage funds have had their accounts frozen. But Mr Rudd ruled out extending the Government's guarantee on savings in banks and other authorised deposit-taking institutions to mortgage funds.
"No Government can, in good conscience, put taxpayers' dollars at risk to support financial institutions which are not open, transparent and properly accountable to Australian regulators," Mr Rudd said in a speech to Australian and global corporate leaders in Melbourne last night.
But the new funding, spread over four years, is unlikely to provide a solution to the problem of frozen funds. One industry executive said it was ludicrous to expect fund managers to become banks.
Calls to some of the biggest funds, including Perpetual, Challenger and AXA, were not returned last night. One analyst said: "While it might provide a short-term political solution for the Government, it certainly doesn't provide a viable long-term solution for customers or managers or mortgage trusts."
Becoming an authorised deposit-taking institution requires funds and others to meet new strict requirements from the prudential regulator, including holding a certain amount of capital in reserve to back their loans.
Finding the capital would be difficult in the current tight financial conditions, and fulfilling the regulatory requirements could take months or years.
Also yesterday, analysts urged customers with deposits of more than $1 million - the limit at which the bank deposit guarantee is free - to split their money in two of more guaranteed institutions to avoid paying the Government's new fee. Such depositors typically include wealthy individuals, local councils and small to large businesses.
An analyst at Deutsche Bank, David Plank, warned that allowing such a split could "seriously undermine the intent of the threshold", which was to stem the flow of funds from other investments into deposits. As mortgage funds do not qualify for the Government guarantee, many have had to freeze all further withdrawals to stop their customers' money hemorrhaging to the banks. Small-time investors such as retirees have no access to these frozen nest-egg deposits, although most continue to receive their dividend payments.
Mr Rudd denied the decision to provide an unlimited guarantee on bank deposits prompted this. He said investors had been "shifting out" of such funds for some time as the global crisis worsened, "and it became clearer that the assets underpinning these investments were being buffeted".
A strategist at TD Securities, Anthony Everett, said the Government attempts to boost confidence with its guarantee had instead created "confusion, volatility and general frustration".
"What the Rudd Government has done is tantamount to nationalising the banking system and setting adrift the rest of the once-thriving financial service industry. The fund management industry has for all intents and purposes been made redundant."
The Opposition Leader, Malcolm Turnbull, said the Government was squarely to blame and had bungled.
The Government is considering measures to enable investors in mortgage funds limited access to their deposits for emergencies or reasons of hardship. The Finance Minister, Lindsay Tanner, said yesterday: "Clearly there are some people that are suffering adverse consequences as they had plans to take their money out for particular purposes."
National Seniors Australia called for the funds to release up to $20,000 to individuals who needed it. The lobby group's chief executive, Michael O'Neil, cited as examples of hardship those who had substantial commitments or medical conditions.
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