Following a three and a half year consultation, the revised regulatory regime for MDA service providers was finally announced in late September 2016. Despite the fears of the MDA community, the sky did not fall in!
The most significant change was the abolition of the ‘no-action position’, which had been interpreted by many to allow unfettered discretionary investment management services to be provided within regulated platforms – without an MDA authorisation.
According to ASIC, the no-action position had only ever been intended to permit portfolio rebalancing. So, it was probably inevitable that it would be clawed back at some time.
The MDA community’s biggest concern – a net tangible assets requirement equivalent to those applying to responsible entities and custodians – was not realised. ASIC has chosen to put this on watch and will revisit the need for it in 2-3 years.
For the most part, the rest of the changes are transparency mechanisms; they clarify MDA providers’ obligations and aim to achieve consistency in MDA service delivery.
But they bear careful examination, because a few surprises lurk amongst them and as always, the devil is in the detail.
Claire Wivell Plater
Managing Director
The Fold Legal
Two key issues that the MDA sector will need to watch out for are ensuring they have the correct AFS licence authorisations and, for businesses operating under the no-action position, whether their responsible managers will have adequate experience to meet ASIC’s expectations.
MDA adviser authorisations
In a somewhat inexplicable omission, neither the new regulatory instrument (as class orders are now called) nor the MDA Regulatory Guide (RG 179) explain what licence authorisations are required by advisers who recommend MDA services to their clients.
ASIC has informally told a number of people in the MDA community that no special authorisations are needed, and that it’s sufficient for MDA advisers to hold the following authorisations in relation to retail and wholesale clients:
* Provide personal financial product advice on managed investment schemes; and
* Deal by way of applying for an interest in a managed investment scheme on behalf of another.
That will be a great relief to MDA advisers who feared they may need to apply to vary their AFS licences to include specific MDA product authorisations.
But it would be helpful for ASIC to include this in RG 179, as many people are confused about this, following contradictory information provided by ASIC (albeit informally) in 2015.
MDA provider authorisations
The most profound change brought about by the revised regime is the need for all MDA providers to hold an AFS licence containing specific MDA licence authorisations, even if they are operating through a regulated platform.
MDA providers relying on the no-action position (who won’t have these authorisations) have until 1 October 2018 to apply for a variation to their licence. Which leads us to the next challenge.
Responsible managers
MDA applicants will need to nominate one or more responsible managers with appropriate knowledge, skills and experience.
Despite ASIC’s assurance that it will take experience gained under the no-action position for regulated platform MDAs that is “equivalent to the MDA business that the licensee proposes to undertake” into consideration, there is scant guidance on what this means.
According to ASIC, responsible manager candidates will need to have knowledge and skills that demonstrate they can provide the MDA services honestly, efficiently and fairly, that they understand the legal and compliance obligations relating to MDA services, and that they understand the investment and operational issues of all the types of client portfolio assets under management.
ASIC also says that it will assess applicants’ experience in relation to RG 132: Compliance plans and RG 133: Managed investments and custodial and depositary services, as if references to managed investment schemes were to MDA services.
This seems to indicate that the required standard will be similar to what is expected of responsible entities. While some may consider this to be a significantly higher standard than before, in our experience, ASIC has long required responsible managers for MDA service providers to have had relevant experience in operating registered managed investment schemes.
As MDA providers who operate through regulated platforms do not manage or hold title to clients’ portfolio assets, it seems reasonable to expect that the custodial, administration and reporting aspects of these standards should not apply to them.
However, with ASIC’s more stringent approach to assessing responsible manager experience in recent times, all MDA variation applicants should be prepared in advance to demonstrate their discretionary investment management capabilities to ASIC.
Claire Wivell Plater is the managing director of The Fold Legal.