27 Oct 2016

Managed Discretionary Accounts: ASIC's "interim" response after lengthy consultation process

By Matthew Daley, Vanessa Pallone and Welton Chan

MDA operators (and advisers) should start thinking about their plan for transitioning; in particular, licensees should start reviewing their FSGs, MDA contracts, policies and procedures. 

On 29 September 2016, the Australian Securities and Investments Commission repealed Class Order 04/194 (which was due to expire on 1 October 2016) and replaced it with the ASIC Corporations (Managed Discretionary Account Services) Instrument 2016/968 and also released an updated Regulatory Guide 179 Managed Discretionary Accounts (RG 179).

Their release follows ASIC's consultation since March 2013 (Consultation Paper 200 Managed discretionary accounts: Update to RG 179) regarding proposed changes to the regulation of managed discretionary accounts (MDAs). ASIC's consultation aimed to ensure regulatory requirements that apply to MDAs are consistent with those that apply to similar financial products.

Further action in respect of the consultation process was delayed by ASIC in 2014, as ASIC waited to see the outcome of the Government's Financial System Inquiry and further amendments to the FOFA reforms. As such, the release of the Instrument and updated RG 179 is welcomed by industry who had previously voiced concerns that ASIC's inaction in this space had created an unsuitable level of uncertainty which meant that issuers did not feel confident in offering new MDAs.

Background to MDAs

There are a wide variety of arrangements that can constitute an MDA. MDAs are often referred to differently in the industry, but are commonly known as a separately managed account, individually managed account, investment advisory program or a managed discretionary portfolio service.

Broadly speaking however, an MDA involves a client making a contribution and giving investment discretion to an MDA operator, the assets being managed on an individual basis by the MDA operator at the MDA operator's discretion (subject to any agreed limitations) and the assets which are ultimately acquired being held legally or beneficially by the client.

ASIC initially granted relief under Class Order 04/194 so that MDA operators could be offered to retail clients without the need for the MDA to be registered as a managed investment scheme and without having to comply with the requirement to prepare a PDS and comply with the securities disclosure and related provisions for securities held on behalf of the client under the MDA.

While the Instrument continues to provide this relief to MDA operators, there are some changes, which we have set out in detail below.

Improved disclosure for MDA investors

Consistent with the proposal contained in CP 200, MDA operators will be required to make certain additional disclosures, including:

  • additional statements and information about outsourcing arrangements in their Financial Services Guide (FSG);
  • an MDA operator must ensure that the Investment Program has an investment strategy containing sufficient detail to permit an opinion to be formed on the suitability of an investment program for each client;
  • the FSG must also contain information about fees and costs in relation to the MDA services that complies with Part 2 of Schedule 10 of the Corporations Regulations 2001 (Cth) as if the FSG were a PDS for a managed investment product. RG 179 also states that the MDA contract must also contain this information; and
  • the MDA contract must contain certain additional information, including how the contract may be terminated.

Providing an MDA on a regulated platform under the no-action letter

Previously, providers of regulated platform MDAs could rely on the no-action position set out in ASIC's no-action letter. The no-action letter has been revoked and providers of regulated platform MDAs must hold an AFSL which authorises it to deal by issuing a financial product in respect of interests in managed investment schemes limited to MDA services, or miscellaneous financial investment products limited to MDA services. Providers of regulated platform MDAs must also comply with other requirements similar to those applicable to other MDA providers, except for the requirement to provide transactional reports and auditor reports.

Non-limited recourse products

Licensees must now seek prior written consent separate to the MDA contract to invest the client portfolio assets in a non-limited recourse product (for example, contracts for difference) and when consent is given, the client must be given a written statement including certain information, for example:

  • the key features of the product that may be material to the decision of a person as a retail client (including any significant risks associated with acquiring the product);
  • information about the degree of leverage that may apply in relation to the product; and
  • a clear and prominent example illustrating in dollars the risk of the potential liability of a person holding the product.

The MDA contract and FSG must also contain certain information, including, but not limited to the abovementioned information.

Providing MDA services to family members of a licensee or representative of the licensee under the no-action letter

Relief from the requirements to obtain an MDA licence authorisation, register the scheme and comply with certain disclosure requirements is still provided in the Instrument for MDA services provided to family members of a licensee or representative of the licensee, subject to certain additional conditions being complied with. While the previous Class Order applied to "immediate family members", ASIC has now clarified that "family members" means as a spouse or a non-adult child of that person.

Where an MDA operator invests a family member's funds in non-limited recourse products, then the above mentioned obligations must be discharged.

Breach reporting

Significant breach notifications under section 912D of the Corporations Act must be lodged within ASIC as soon as practicable, and in any event within 10 business days of becoming aware of the breach or likely breach. This extends the timeframe from 5 business days, and brings the requirement in line with other AFS licensees.

Additional ASIC guidance

The revised RG 179 contains updated guidance on a range of topics, including best interest obligations and managing conflicts of interest.

Enhanced financial requirements

In CP 200, ASIC proposed for MDA operators to meet updated financial requirements that are similar to the requirements that apply to responsible entities of managed investment schemes. This would mean that MDA operators that do not provide a custodial and depository service would be required to hold the greater of:

  • $150,000;
  • 0.5% of the average value of all MDA assets under advice up to $5 million; or
  • 10% of average revenue.

ASIC believed that it was desirable for MDA operators and responsible entities to be required to meet the same financial requirements because their functions were similar in many respects. It is then somewhat surprising that ASIC has not sought to update any of the financial requirements which apply to MDA operators. The reason being that ASIC requires further analysis be conducted before implementing changes to the financial resource requirements. In saying this, ASIC have stated that they will review the financial resources requirement over the next two years, which will arguably continue the level of uncertainty for MDA operators.

When do the requirements in the Instrument come into effect?

The requirements in the Instrument will apply in stages.

  • For licensees with an authorisation date (the date on which the licensee was first authorised to deal in or provide financial product advice in relation to an MDA) before 1 October 2016, the requirements will apply from 1 October 2017 (or earlier if the licensee opts in the new regime). A licensee may opt in before 1 October 2017 by publishing a notice on its website that it will rely on the Instrument in relation to the MDA.
  • For licensees with an authorisation date from 1 October 2016 onwards, the requirements will apply from the authorisation date.
  • For MDA providers currently offering MDAs under ASIC's regulated platform no-action letter, the new requirements will apply from 1 October 2018, including the new requirements to obtain an MDA specific dealing by issue licence authorisation.

MDA operators (and advisers) should start thinking about their plan for transitioning to the new requirements. In particular, licensees should start reviewing their FSGs, MDA contracts, policies and procedures in preparation for the new requirements. 

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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.