Jane Eccleston outlines the various issues ASIC is dealing with in the MDA sector, and explains how the regulator continues to work with IMAP on a small number of transitional and implementation issues.
Jane Eccleston
Senior Executive Leader, Investment Managers and Superannuation, ASIC
Once viewed as a boutique offering, the managed discretionary account (MDA) industry has experienced significant growth in recent years. The growing significance of the MDA industry means that ASIC’s interaction with the industry is expanding.
In September 2016, ASIC introduced the Corporations (Managed Discretionary Account Services) Instrument 2016/968 and revised RG 179 Managed Discretionary Accounts.
We thought it timely to raise a few issues that have emerged as a result of ASIC’s work on MDAs.
Emerging issues
There are some regulatory issues that are unique to MDA products and the MDA industry.
ASIC recently intervened to improve disclosure on a number of web sites about the past performance of certain MDA services. The sites promoted MDAs offering trading in foreign currency, futures and/or commodities. Each site contained the usual disclaimer that ‘past performance is no assurance of future performance’ and the risks of investing.
Some of the claims included: “over 630 per cent growth since inception”; “30 per cent return per annum”; and “the system has achieved good average returns ranging from 5-20 per cent per month”.
On one web site, a “Case Study: 20 per cent return in one week” recounted how an investor who had a negative experience with another firm, invested $300,000 and made sufficient profit in a week to obliterate their trading loss.
Enquiries made by ASIC about the basis for these claims led to a range of responses.
One explanation was that the trader’s actual returns were approximately 180 per cent over a three year period, however, the firm did not want to overemphasise the benefits and used a 30 per cent figure instead.
In another instance, the claimed returns were said to be based on a single audited brokerage account with a trading history prior to the introduction of the relevant trading strategies of the MDA.
ASIC did not accept the explanations provided and this advertising ceased following ASIC’s intervention. Part of ASIC’s role is ensuring that investors are provided with disclosure that complies with the law and assist them in making informed investment decisions.
From an industry perspective, a key component of a firm having a sustainable business is its ability to match investor expectations with the benefits that a financial product or service can actually deliver. Poor disclosure practices – particularly around disclosure of past performance – is detrimental to the investor and can ultimately prove detrimental to the firm, too.
These matters focused ASIC’s attention on the issue of what is the approach of the MDA industry to disclosure of past performance, particularly given the unique features of MDAs.
In many instances, MDA providers and advisers are offering a bespoke service. Even where a model portfolio is used, there may be scope for the portfolio to be further tailored to the client’s needs.
Then there is the variety of underlying financial products that can be provided through MDA services. Some MDA services are offering a vehicle to invest in securities or managed investment schemes, while other services are essentially offering the trading skills of their foreign currency or futures traders.
ASIC’s good practice guidance on advertising (see Regulatory Guide 234: Advertising financial products and services) stresses that advertisements need to give a balanced message about returns, benefits and risks.
Care needs to be taken not to create unrealistic expectations. While important, it is not sufficient to only draw attention to the fact that past performance is not indicative of future performance. The nature of MDAs mean there will be real challenges, in particular, in giving the right balanced messages about past performance in product advertising.
Going forward, ASIC will be engaging further with the MDA industry on this and other issues unique to the industry.
Current issues
ASIC has been working with IMAP in relation to a number of transitional and implementation issues arising from some of the policy or procedural refinements introduced by the Corporations (Managed Discretionary Account Services) Instrument 2016/968 in September 2016.
This engagement is important, as it enables us to provide further feedback in relation to a number of policy changes and refinements.
Prohibition on investing in unregistered managed investment schemes
The regulatory framework for MDAs now prohibits the inclusion of unregistered managed investment schemes in investment portfolios offered to a retail client through an MDA. This requirement took effect on 1 October 2017.
We recently confirmed that there is no grandfathering to allow retail clients to retain existing investments in unregistered managed investment schemes as an asset in their client portfolio under the MDA service after 1 October 2017.
However, ASIC may consider relief applications from an MDA provider where there is a compelling reason to depart from this requirement in circumstances where ASIC’s policy objectives are met. For example, ASIC recently granted individual relief to allow an MDA provider to continue to include certain offshore Exchange Traded Funds in its portfolio.
Obligation for MDA providers to review SOAs of external advisers
One issue raised with us is in relation to the obligations for MDA providers who are using an external MDA adviser to prepare an investment program for retail clients.
The requirement is for the MDA provider to review the Statement of Advice (SOA) in relation to that investment program before entering into the MDA contract, and not enter into the contract if they have reason to believe that the MDA is not appropriate to the client’s relevant circumstances.
MDA providers are not expected to ‘second guess’ the appropriateness of the advice provided in the SOA by the external adviser. MDA providers are, however, expected to draw on their own knowledge and experience both about the service they are offering and their clients/client profiles when reviewing the SOA.
The MDA provider is not to enter into the contract if they have reason to believe that the MDA is not appropriate to the client’s relevant circumstances.
MDA Contracts and the handling of assets on termination
One of the requirements is that an MDA contract is to make provision for how and when a client’s portfolio assets will be disposed of, or transferred to the client, if those assets are not held directly by the client. This requirement is imposed by the Corporations (Managed Discretionary Account Services) Instrument 2016/968.
ASIC acknowledges that at the time an MDA contract is entered into, it is not always possible for an MDA provider to know what assets will be in a client portfolio at the time the contract is eventually terminated.
ASIC accepts that it is sufficient for most MDA contracts to specify that, on termination of the portfolio services, the assets are to be transferred to the client, or their nominee, as soon as it is reasonable, having regard to the liquidity of assets.
Ongoing issues
There are still a small number of transitional and implementation issues that ASIC will continue to discuss with IMAP. These issues concern various disclosures:
- Whether it is possible to streamline the disclosure of information about the investment program offered, given there may be duplication of information in the investment program, MDA contract and statement of advice;
- The inclusion of external MDA adviser details in an MDA provider’s Financial Services Guide (FSG), which may pose difficulties if the FSG is not an individually-tailored document; and
- Whether further clarity can be introduced around the meaning of ‘total management costs’.
The regulatory regime in the Corporations Act has required adaption for the MDA industry.
Part of ASIC’s role is business facilitation. In exercising its powers, ASIC takes appropriate account of investors to promote investor trust and confidence.
The release of the instrument and the revised Regulatory Guide provide a policy framework as the MDA industry grows, and also provides an opportunity for businesses to examine their operations and adapt to the future.
Jane Eccleston, Senior Executive Leader, Investment Managers and Superannuation, ASIC.
