ASIC unsurprised at govt hesitancy around DBFO post Shield, First Guardian

ASIC Commissioner Alan Kirkland isn’t surprised that the government has changed course on its approach to the Delivering Better Financial Outcomes legislation, after the $1 billion Shield and First Guardian collapse impacted progress of the reforms.

Kirkland was a critic of the Quality of Advice Review when he was Choice chief executive before he took on his current role, calling it “a recipe for another royal commission”.

It was that review which created the recommendations that became the foundation of the DBFO reforms, albeit modified under the direction of a Labor government elected after the former Coalition government appointed Michelle Levy to lead the review.

“I’m not surprised the Assistant Treasurer [and Minister for Financial Services Daniel Mulino] has said that some of those events and circumstances and the large-scale impacts they’ve had on consumers mean that DBFO need to be re-thought,” Kirkland told the FSC Shaping Advice Summit in Sydney on Thursday.

Professional Planner reported earlier this year that elements of DBFO may not survive in the wake of the Shield and First Guardian failure after Mulino dropped hints last year that the collapse would impact the reforms.

The reforms are meant to aid in expansion of the provision of financial advice by reducing red tape for advice practices and make it legally easier for super funds to give advice to more members.

Kirkland said there has always been a tension between the objective of expanding access to advice and ensuring it’s done in a way that maintains appropriate levels of consumer protection.

“That’s been a feature of the FOFA debates, the Quality of Advice Review and the debates around the DBFO reform since then, and obviously the thing that’s happening in the last couple of years has been the range of things that happened in relation to Shield and First Guardian which are a huge priority for ASIC,” Kirkland said.

“It’s hard to find somebody who doesn’t agree that making accessible, affordable, good quality advice available to more Australians is an important objective. It’s important to recognise there’s a gap between those that we might think would benefit from advice and those who will seek it. Our focus needs to be on those who seek it.”

‘Not going to prevent all investor losses’

Mulino is expected to announce the government’s next policy steps post-Shield and First Guardian in August after launching multiple consultations in the past year covering professional indemnity insurance, managed investments schemes (MISs), the Compensation Scheme of Last Resort, trustee oversight obligations and the use of lead generators.

The government has already provisioned an extra $17.8 million for ASIC for MIS oversight which the regulator previously said wouldn’t be a “silver bullet”.

Kirkland told the forum on Thursday that the MISs-related data that comes to ASIC is limited.

“We get a very small amount of data… and we don’t play a role in vetting MISs under legislation,” Kirkland said.

“We’re required to register if they meet basic requirements and documents that are required to be filed annually such as financial statements. They’re fairly limited in what they provide and there’s a lag.”

But he said what has been harder for the regulator to understand is where there might be risk with particular MISs, especially when the risk profile of the fund changes.

“Where the strategy, the nature of the underlying investments, approaches to liquidity… all of those factors that could flag a change in the risk profile, but we won’t have visibility of that now,” Kirkland said.

“We have a project underway that was announced in our corporate plan for last financial year that we’re just wrapping up soon. That was looking at red flags in relation to managed investment schemes and that’s been based on data that we have now. Some of that is things like publicly available data sets, so there are real limitations with it, but we’ve been trying to get ahead of these proposed reforms to start thinking about what sorts of data would be useful.”

Kirkland said the new change from the increased MIS data collection regime will be the ability to collect that data on a recurrent basis which would significantly improve the regulator’s ability to understand where there might be risk.

“We do have a regime where people can register high-risk illiquid managed investment schemes and make them available to retail investors in Australia,” Kirkland said.

“Even with the additional data we’re not going to be able to prevent the collapse of MISs, we’re not going to be able to prevent all consumer losses, but it is about putting us in a better position to go about our role as a risk-based regulator, trying to identify where we might need to lean in a little bit more.

“It’s going to put us in a better position than what we’re in now, but it’s not going to prevent all investor losses.”

Managed accounts

Kirkland provided a light update on the managed account review, which is still heavily in progress with a final report not due until the end of the year.

He said the review process has been broken into two streams covering product and the advice that is provided to separately managed accounts (SMAs).

“One of the reasons where we’re interested in the sector is obviously the massive growth, that will always attract attention from the regulator,” Kirkland said.

“When we looked at the products… one of the things that’s really interesting is the range of entities involved in the value chain. We’ve got advisers, advice licensees, asset consultants, portfolio managers, responsible entities, super trustees and each of them receiving remuneration of some form. There’s nothing wrong with that legally, but we’re interested in understanding what are the overall costs to clients and how they flow through the system.”

But the regulator has also taken an interest in the relationship between the different entities in the value chain.

“The other key characteristic is the relationships that exist between many of those entities,” Kirkland said.

“That’s not necessarily a problem, but it does mean there’s a heightened interest in how you’re managing potential conflicts of interest.”