ASIC Update 8th December 2019
Earlier this week Dr Rhys Bollen, Senior Executive Leader of the Investment Manager Team within ASIC spoke at the Professional Planner Researchers Forum and much of his speech focused on the Platforms and MDA Review ASIC are currently undertaking.
Below is IMAP's view of the high level takeouts from his presentation and some of the considerations for licensees who advise on managed accounts or act as portfolio managers or MDA providers.
While it’s clear that ASIC understand the difference between MDA’s and MIS type managed accounts, the casual use of jargon means even ASIC tend to use the term “MDA” ; to refer to the broader managed account area and while some of the issues are specific to MDAs because of the separate regulatory regime, most, such as Best Interest, apply universally.
They are very conscious of the growth in the segment and quoted IMAP’s most recent FUM Census data to highlight this
They appear concerned that the growth stems in part or large part from “revenue replacement” post FOFA Dr Bollen highlighted the differences between MDA regulation and Corporations Act MIS regulation, in particular in the area of capital requirements for PI
ASIC’s best interest concerns include:
- High fee levels overall
- Use of related party investments as part of the portfolios
- Cookie cutter approaches in the use of standardised advice and
- Where there is almost universal use of a managed account across an advice business’ client base ASIC equates some of these concerns to the practice by some advisers of automatically recommending an SMSF
- ASIC questioned whether the degree of competence required is always evident in the investment decision making process
- ASIC does not accept that a reason for recommending a managed account is that the practice will be more efficient as this is not necessarily in the CLIENT’S best interest
Enforcement action over the past 6 years has been modest but regular but has mostly focused, with one exception, on disclosure, reporting of fees and performance and conduct which ASIC regarded as misleading and deceptive, rather than in areas such as overtrading, fraudulent activity or fee for no service.
They have completed a report of their findings which is being considered within ASIC but will not be publicly circulated.
ASIC is now in a policy review phase which will identify those areas of policy or guidance which need review.
There will probably be a consultation paper with draft policy changes issued in 2020 with a response period of 1-2 months
Following this any amendments to affected regulations will be published.
The entire process from here is likely to take a further 12 months, so perhaps effective by December 2020.
Our assessment, from what was not said, is that the review has not, and was not intended to, uncover evidence of very poor behaviour. Nor does it appear to have led ASIC to conclude that this is an area of widespread misconduct. For example there have been 39 complaints to ASIC relating to MDA’s over 3 years. While every complaint is unfortunate, to put this in context, AFCA received 35,000 complaints within its first six months of operation (ASIC 2018-19 Annual Report p 143).
Managed accounts will be subject to ongoing review and monitoring and this might be expected to increase because “ASIC is expected to be more forceful” .
Expect policy change in the area of aligning the regulatory regimes between different types of managed account. For example:
• Capital requirements
• Disclosure of fees and costs based on RG97
• Annual review for all forms of discretionary portfolio
• Suitability of the service for a client’s specific circumstances – Design and Distribution Obligations will also address this
Guidance is likely to focus on;
• Strengthening the investment management and governance processes within those who act as portfolio managers
• Clear focus on best interest duties of both advisers and managed account issuers
Advice businesses which act as MDA Providers, portfolio managers or give advice on managed accounts should be strengthening their focus on meeting best interest obligations and ensuring that, if they hold themselves out as competent to manage portfolios they have the necessary level of resources to do so.
The IMAP Regulatory Group is to meet with ASIC later this month and we will continue to ensure that we articulate to ASIC a clear presentation of the benefits that managed account provide to retail investors. As the consultation paper is issued, we’ll be inviting you to become involved so that we can present a balanced response to the questions it raises.
The IMAP Regulatory Group comprises:
Jenny Mulders QRC Consulting – Convenor
Simon Carrodus – The Fold Legal
Eylem Kamerakkas – Macquarie
Toby Potter - IMAP
Luyen Tan - Praemium
Jesse Vermiglio - Holley Nethercote