ASIC has proposed a series of changes to managed discretionary accounts (MDA) that would result in the refinement of the sector's investment program and financial advice as well as more stringent financial requirements for MDA operators.
The corporate regulator's proposals were revealed on Friday as part of an announcement that it is reviewing the guidance and regulation of MDAs.
"We were prompted to commence a review of the MDA sector and our regulation of MDAs in light of the recent and future anticipated growth in the number of MDA offerings," ASIC said in its "Consultation Paper 200 Managed discretionary accounts: Updates to RG 179" (CP 200), also released on Friday.
The regulator said it felt a review of MDAs was also necessary to address the "development that has occurred in the industry" since ASIC's original consultation paper on the sector was released in 2004.
It said it also believed it was important to address the similarities between ASIC's guidance on investor directed portfolio services (IDPS) and IDPS-like schemes and its guidance on MDAs.
In August 2012, 193 Australian financial services licensees (AFSL) had licence authorisations permitting them to operate an MDA or give advice on MDAs, the paper said.
"Approximately 25 per cent of these [AFSLs] had only obtained their MDA authorisations since 1 January 2011, indicating the significant growth in this sector in recent years. These figures do not include AFS licensees that offer MDAs by relying on our no-action positions," it said.
"In particular, we have seen an increase in the number of MDAs that are structured as separately managed accounts – also known as model portfolios. MDA operators that offer these accounts devise a series of model investment portfolios, each with its own investment strategy and mandate.
"Similar investment decisions apply to all clients whose investment program aligns with that model portfolio. This type of MDA service can facilitate greater economies of scale. In the United States, these types of account are the dominant type of discretionary account."
ASIC proposes to refine the conditions relating to the MDA contract, investment program and financial advice to make it clear the investment program that forms part of the MDA contract must contain an investment strategy.
The proposal said the MDA investment strategy must contain sufficient detail to permit an opinion to be formed on the suitability of the investment program for a particular client, and it should also form part of the MDA contract; and the MDA operator or an external MDA adviser must provide personal advice about the MDA contract, including the investment program, on an annual basis.
"We think there is some ambiguity in our current guidance about the content of the investment program and the interaction between the investment program, the MDA contract and financial advice about the MDA," the paper said.
"We propose to clarify the requirements in [CO 04/194] to resolve these ambiguities."
The regulator also proposes to increase the financial requirements for MDA operators to ensure these correspond with the requirements that have applied to responsible entities of managed investment schemes since 1 November 2012 and with its proposed financial requirements for platform operators.
"It is important that MDA operators maintain adequate financial resources to operate their MDAs effectively and compliantly," the paper said.
"We think that increased financial requirements will assist in achieving this objective, and will also ensure that our regulatory requirements for MDA operators are similar to
the requirements for comparable investment arrangements, including registered schemes (including IDPS-like schemes) and IDPSs."
Commenting on the release of the consultation paper, Institute of Managed Account Providers (IMAP) chair Toby Potter said it would result in an "excellent outcome for investors and MDA providers alike".
"It's a great example of a regulator being ahead of the curve in anticipating evolving market and regulatory conditions and ensuring that regulation provides a timely and supportive framework for well-managed market innovation," Potter said.
"ASIC has been working on the review of MDAs for some time and IMAP together with other organisations has been part of that review."
Submissions to ASIC's CP 200 are due by 19 April.
To read a copy of "Consultation Paper 200 Managed discretionary accounts: Updates to RG 179" in full, click here for a PDF copy.
Source: Financial Observer online, March 11 2013