ASIC will once again review naming conventions for exchange traded products with the aim of creating two levels of labelling: primary labels based on product type and secondary labels for specific risks or strategies.
ASIC released Consultation Paper 356 ETP naming conventions: Updates to INFO 230 (CP 356), which sought feedback on proposals to update the guidance in Information Sheet 230 Exchange-traded products: Admission guidelines (INFO 230), on naming conventions for licensed Australian exchanges that admit ETPs.
ASIC said based on feedback from product issuers, financial advisers, industry bodies and licensed exchanges there was still room for improvement and clarification on guidance.
“Because ETPs have different structures, features, strategies and risks to traditional warrants and listed products (including listed investment companies and listed investment trusts), we consider they should be labelled in a way that differentiates them from other listed products,” ASIC said in a media release.
Arian Neiron, Van Eck head of Asia Pacific, says the changes will be of more benefit to retail investors rather than advisers.
“Most advisers are going to speak to the fund manager,” Neiron tells Professional Planner.
“It’s better for the average investor because some of these names are long and convoluted so it’s going to simplify things, but it will simplify it for the adviser as well.”
James Kingston, head of iShares, BlackRock Australasia, says BlackRock takes a long-term perspective and are advocates for greater transparency as it is “absolutely critical” for the broader industry.
“An important part of our fiduciary duty to clients and to the broader Australian investor community, is to provide guidance and education to ensure investors are informed and ultimately, their long-term best interests are considered,” Kingston says.
“We tend to use the analogy of a food labelling system – much like the food people consume, investors need to know what they’re buying before purchasing ETPs, as investors may not be aware of the ramifications if they don’t.”
Primary labels
The proposed minimum standards would differentiate between collective investment vehicles like managed investment schemes which would be labelled as exchange traded funds and eponymously-labelled structured products which will apply to open-ended products which include derivatives, redeemable preference shares or debt securities.
“If our proposal for primary labels is implemented, the definition of ‘ETF’ will be broadened, and the ‘managed fund’ label will be retired from INFO 230 naming conventions,” ASIC said in the consult.
“One of the main issues raised with ASIC regarding the current ETP naming conventions is the confusion introduced by the ‘managed fund’ label.
“In general use, ‘managed fund’ is a broad term to refer to many types of investment products, but in the context of ASIC’s ETP naming conventions it takes on a narrower use.”
Secondary labels
The purpose of secondary levels was to indicate to investors an ETP might have specific features or higher risks.
ASIC said existing naming conventions in this category, like ‘active’, ‘synthetic’ and ‘hedge fund’ in the current guidance had been difficult to apply.
“Definitions that were developed for a specific product at a point in time have proven to be poorly suited to newer, more innovative products,” ASIC said.
“Regardless of these difficulties, we remain of the view (and there is growing recognition of this international) that some ETPs may have such novel, unique or complex strategies and structures that they can pose risks to both retail and sophisticated investors.
“These products can also potentially compromise market integrity if they operate in unexpected ways.”
Active v passive unlikely to be dealt with
Neiron says the result of the consultation will not lead to any structural change to the industry, but he would still like to see ASIC differentiate between active and passive ETFs.
The active community has pushed to be more synonymous with the term ETF, according to Neiron, and he says ‘ETFs’ have become synonymous with index tracking.
“We have spoken to ASIC about this and what happened is they set the precedent years ago with active ETF launches,” Neiron says.
“My view of the world is this: active managers, if ETFs weren’t going gangbusters and a multi-trillion dollar industry, guess what? They wouldn’t want to be called an ETF.
“An ETF is synonymous with being cost-effective and importantly, transparent. Active ETFs are not.”
Submissions for the consult will close on 3 March 2022.
