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29 Mar 2012

ASIC looks at revising regulation of platforms

by Matthew Daley, Vanessa Pallone

ASIC proposes to treat IDPSs and IDPS-like schemes similarly where there is no regulatory basis for different treatment.

The Australian Securities and Investments Commission (ASIC) is revisiting its regulation of platforms — which include both investor directed portfolio services (IDPS) and IDPS-like schemes — with the release of Consultation Paper 176: Review of ASIC policy on platforms: Update to RG 148 (CP 176).

ASIC states that it is reviewing platforms, in light of the growth in the platform sector, as well as the developing and expanding nature of platforms, via a trend towards new forms of vertical integration between parties in the product–distribution chain. According to ASIC, dealer groups are also increasingly restructuring their operations to become platform operators.

According to ASIC, the emerging issues and risks facing the platform market include:

  • the emergence of less mature and less experienced platform operators, particularly through the use of "private labelling" arrangements (as distinct from the more traditional "white labelling" arrangements); 
  • increasing consumer demand for new investment types on platforms (eg. structured capital protected products) and new means of interacting with platforms (eg. self-directed investment without an adviser);
  • the inability to take full advantage of options for delivering disclosure documents electronically; 
  • the lack of specific experience, knowledge and/or training requirements advisers are obliged to have to give advice about platforms; 
  • illiquid investments resulting in clients on platforms having restrictions in redeeming investments and/or moving to alternate platforms without adequate information about open windows for redemptions;
  • portability obstacles arising from ageing technology and industry consolidation through increased mergers and acquisitions activity;
  • increased use of outsourcing for infrastructure and technology; and 
  • for larger players, inconsistency in compliance requirements between products offered (eg. platforms and superannuation master trusts).

What is the impact?

ASIC does not intend to alter the primary foundations on which its regulatory approach is established; instead, its preference is to continue to regulate platforms by way of guidance provided in ASIC Regulatory Guide 148: Investor Directed Portfolio Services (RG 148) and accompanying ASIC Class Order relief. ASIC will instead seek to supplement the existing guidance and class order relief in order to reflect existing and emerging issues and risks in platforms.

The proposed amendments to RG 148 and the class orders are set out below.

Disclosure requirements affecting platforms

ASIC propose a number of changes to its current regulatory approach in respect of disclosure requirements. Some examples of ASIC's proposed changes to disclosure requirements include (but are not limited to): 

  • amending the current specific content requirements for IDPS Guides to introduce a general obligation to disclose and present in a clear, concise and effective manner any information that might reasonably be expected to materially influence a retail client’s decision to use a platform; 
  • removing the current specific disclosure requirements for PDSs for IDPS-like schemes; 
  • allowing issuers of IDPS Guides to incorporate information by reference;
  • allowing non-materially adverse information that would otherwise have to be included in a new IDPS Guide or supplementary IDPS Guide to be provided via a website; 
  • applying the enhanced fee disclosure regulations to IDPSs, such that IDPS operators must disclose fees in the same way as an issuer of an interest in a managed investment product is required to; 
  • dividend or distribution reinvestment plans and regular savings plans will not require disclosure (on the basis that investments proceed on the client's standing instructions); 
  • platform operators and trustees of superannuation master trusts will be able to shift responsibility for passing on client documents to those persons who accept responsibility to act as an agent. These documents will still need to be provided electronically to clients; and
  • IDPS operators can give documents to clients electronically, including by providing hyperlinks, if the client has agreed.

Change to operating requirements for IDPS operators

ASIC intends to align the financial requirements of IDPS operators with those that will apply to operators of IDPS-like schemes and other responsible entities from 1 November 2012, so that IDPS operators: 

  • will be required to comply with new financial requirements; and 
  • must be public companies. Considering most IDPS operators already are public companies, and the few proprietary companies in this space must comply with some obligations as if they were public companies, this is probably not a major change.

The requirement to comply with the new financial requirements will have the biggest impact on platform operators. At a bare minimum, Net Tangible Assets (NTA) capital requirements would be the greater of:

  • $150,000;
  • 0.5% of the average value of property held through any IDPS it operates (other than by clients) capped at $5 million; or
  • 10% of their average gross revenue defined as applying to responsible entities (with no maximum).

If a platform operator performs custodial functions, the NTA jumps to a minimum $5 million.

Investment menu selection

ASIC's stakeholder engagement revealed that practices for selecting financial products for inclusion on investment menus or in model portfolios varied.

ASIC is of the view that clients should at least have an understanding of the decisions underlying an investment selection process, such that the IDPS Guide or PDS contains information that might reasonably be expected to have a material influence on the decision of a client about:

  • whether or not to use a platform rather than invest directly in financial products;
  • which platform to use; and
  • ultimately, what products to invest in through the platform.

Licensed dealer groups and their adviser representatives would also be expected to consider platform operators' investment selection processes when providing personal financial product advice to clients about these types of matters.

New investor rights

ASIC is also of the view that an investor should have similar rights when investing directly or via platforms, so it's proposing platform clients should have rights covering: 

  • a cooling-off period for clients that would have otherwise be entitled to them if they had invested directly in the relevant underlying product;
  • withdrawing from an investment in circumstances where a PDS or disclosure document (as relevant) becomes defective before issue and the product issuer provides notification of an option to withdraw under sections 724 or 1016E (as relevant); and
  • dispute resolution such that platform clients are given access to the product issuer's internal and external dispute resolution system and IDPS Guides or PPSs for IDPS-like schemes outline who clients can approach about different types of complaints.

It also proposes they should have rights covering voting on company and scheme resolutions and information on corporate actions generally such that IDPS operators responsible for transaction functions must:

  • take reasonable steps to obtain client instructions about the exercise of voting rights for company or scheme resolutions in relation to assets held through the IDPS; and
  • in respect of other corporate actions, give clients any information about these actions that is made available to the custodian;

This may well be the most challenging part of the proposed reforms to implement, as there are practical obstacles to extending and exercising these rights in some aspects of platforms, a fact ASIC acknowledges.

Take voting as an example. There's no clear industry standard voting practice among platform operators. Many pass on information to clients, but others don't; some abstain from voting, while others seek client instructions. If the latter course is mandated for IDPSs (but not IDPS-like schemes), platform operators would need to pass information on to clients or their agents, and then wait for the instructions to come back, and then pass them on to the company or scheme in question.

These proposed changes are also challenging given the nature of the custodial holding of the assets (which often treat the platform operator as a whole client not entitled to the relevant investor rights), the netting of transactions and the pooling of funds through platforms.

What's not covered in this round of consultation

Since the Federal Government is currently implementing its Future of Financial Advice (FoFA) reforms, ASIC is not consulting on any reforms that are directly related to FoFA, most significantly the management of conflicts of interest.

Also off the table – for now, anyway – are:

  • complementary regulatory guidance on nominee and custody services and managed discretionary account services; and
  • portability obstacles for platform operators that arise from aging technology and industry consolidation.

The next stages

Comments are due on the consultation paper by 20 April 2012. After that, the next key dates and events are:

  • mid-2012: drafting of regulatory guide and accompanying class orders; and
  • late 2012: regulatory guide and accompanying class orders released.

Once the FoFA reforms have been enacted ASIC will open consultation on managing conflicts and some of the other excluded matters.

 

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.