Related-party responsible entities under scrutiny by upstart association

A new association will aim to bring in an industry-wide best practice code to lift governance standards of managed investment schemes, including ending related-party responsible entities.

The new association, Wholesale Investor Advocacy Australia, will be chaired by Koby Jones, the managing director of AFSL responsible manager SILC Group who has seen first-hand what happens when fund managers avoid the counsel of their responsible entity.

“I’ve seen it from an industry perspective where we were an independent trustee of other funds, whenever we push back, because we’re a fiduciary and we act on behalf of investors,” Jones tells Professional Planner.

“These fund managers get all aggrieved, say ‘bugger you I’m going to apply for my own AFSL so I can be my own trustee’.”

The second priority of the association is against advisers or brokers playing fund manager – something that Jones concedes has become less of an issue in financial advice, but is an area of concern in the mortgage broking space in the midst of the private credit boom.

“[Some] mortgage brokers want to become their own fund managers, particularly in credit funds,” Jones says.

“ASIC, again, is scrutinising the activities of credit fund managers and a number of these credit fund managers have emerged out of mortgage broking/commercial broking type firms.”

Additionally, the other focus area is that of “asset sponsors” – for example, a developer with an interest in an underlying asset who wants to set up a fund to receive flows into those projects.

“They want to start up a fund but there’s a clear conflict between them managing the capital as well as managing the underlying asset,” Jones says.

To execute on this, the group is looking to put together a voluntary code of practice for responsible entities of managed investment schemes.

“We want to point to that industry best practice, as well as educate investors as to what that looks like,” Jones says.

The catalyst for developing the association was the combination of numerous collapses including the most recent high-profile failure, the $1 billion Shield and First Guardian collapse, as well as ASIC’s discussion paper on private markets.

In the case of Shield and First Guardian, the directors of the responsible entities – Keystone Asset Management and Falcon Capital, respectively – were managing the funds.

ASIC’s paper last year highlighted issues with private market funds – and how they were being distributed to retail and wholesale investors – particularly via private credit investment schemes.

Jones says the ASIC paper shone a spotlight on some of his long-held concerns, which the code of practice seeks to address.

The intended membership base will include responsible entities/trustees, custodians, platforms, licensees and researchers; fund managers wouldn’t be members but instead apply to be certified by the code.

As for how best practice will be defined within the code, WIAA chief executive Scott Samson says transparency, conflict of interest management and board independence are among the criteria that funds will be judged against.

“Do they have real-time reporting, do they have external reviews, do they have a supermajority of independence on their board or is it just an independent board member,” Samson says.

“We’re not going to dive into their financials… it’s about the governance that people can trust.”

In addition to Jones’s experience as a responsible entity, Samson has spent a quarter of a century in federal and Victorian state politics, including as the Coalition’s adviser for financial services, super and corporations law for former Shadow Minister for Financial Services, Super and Corporations Law Chris Pearce in the 2000s.

He’s also advised former Coalition MPs Barnaby Joyce and Josh Frydenberg, and was chief of staff for the previous Victorian state Coalition government.

“The financial services market wouldn’t exist if it wasn’t for the investor,” Samson says. “The investor is the one that provides the capital to be able to undertake all these activities in the first place.”