So, at a minute to midnight the day before the managed discretionary account (MDA) Class Order was due to expire, ASIC released an update of the MDA regulations – an updated regulatory guide (RG 179) and a corporations instrument to replace Class Order 04/194.
It also released a response to the submissions to the consultation paper CP200 issued in 2013.
However, remembering Mao Zedong’s, “Let a hundred flowers blossom” quote (note 1), ASIC has recognised in the latest regulation of MDAs that there are many ways this flexible and innovative service can be offered.
The effect of the new regulations will be very positive for this important segment of retail financial services – now up to $31 billion of funds under management (FUM) and growing strongly. Firstly a few observations about the material they released. Read the regulatory guide (but leave the corporations instrument for your lawyer). It’s clear and relatively simple to follow the thinking it embeds. You’ll most likely be able to easily fit your current business models into one of the operating models they spell out and work out what changes are required to their current operating procedures.
Next, what are the key takeouts?
Key takeouts
Multiple operating models: ASIC has explicitly recognised that MDA services are provided under a fairly wide variety of service models – standalone complete service including custody; asset holding in client’s own name; operated on platforms; advice by MDA provider or by an external adviser and so on. This recognition, and the flexibility they have supported in allowing various operating approaches may be the most valuable aspect to come out of this update.
ASIC’s decision not to impose net tangible asset requirements on MDA providers: This could be a recognition of the fact that ASIC agrees that MDAs have been almost completely free of even minor client losses since 2004 or it could be that ASIC is genuinely adopting a light touch approach. Either way, MDA providers have escaped what many saw as an unnecessary cost imposition.
Windup of the limited MDA: ASIC has given advisers two years to find an alternative arrangement. This may include becoming an MDA operator or partnering with one while continuing to use conventional platforms.
Other changes include a more detailed approach to the documents included in an MDA service and MDA provider obligations and real focus on the best interests duty (BID) and management of conflicts of interest.
So what does this all mean?
Relatively easy to understand
This new piece of regulation is pretty well written and relatively easy to understand. An advisory business reading it will be easily able to understand what the requirements are to act as MDA provider, or external MDA adviser or to give advice on the SMA / MIS versions. Each will find it easy to assess whether the requirements are consistent with the service they want to offer and are equipped to offer to their advisers and retail clients.
And many will find that the flexibility that MDAs offer is very appealing for a variety of reasons:
- Quality of service to clients
- Adviser efficiency
- Compliance and predictability
- Revenue potential and total cost to client
- Manageable migration path from their current service
Consequently, many Australian financial services licensees (AFSLs) will decide that this should be a central or cornerstone of the way they deliver service to retail investors.
The Institute of Managed Account Professionals (IMAP) will be presenting a question and answer session on the new regulations on October 26, at 4.30 pm in Sydney and Melbourne with ASIC and Claire Wivell Plater (Sydney) and an alternative lawyer (Melbourne). More details at www.imap.asn.au
Note 1: Mao Zedong, 1957. A year later saw the Great Leap Forward which created famine and lead ultimately to the Cultural Revolution and the death of up to 2 million people. ASIC probably won’t take this Mao thing too far.
