ASIC has told a Parliamentary committee that it can’t functionally monitor all managed investment schemes (MISs), even as the government considers policy changes that would strengthen MIS standards.
In a 52-page submission provided this month to the Parliamentary Joint Committee on Corporations and Financial Services covering the regulator’s recent enforcement work, ASIC said that with more than 400 responsible entities collectively operating 3500 schemes, it’s not possible to review each separately.
Instead, the regulator has been relying on a risk-based approach.
“If we become aware that a responsible entity is not complying with its obligations, we may conduct further inquiries,” ASIC said.
“We may also take enforcement action as appropriate. The enforcement action may be administrative, civil or criminal action.”
That surveillance involves attending the premises of the responsible entity (RE) and conducting interviews, requesting and assessing documents including product disclosure statements and target market determinations.
ASIC said that to register an MIS, the RE must lodge an application with ASIC that includes the scheme’s constitution, compliance plan and directors’ statement that the constitution and the compliance plan meet the requirements of section 601EA of the Corporations Act.
Furthermore, the regulator said it is compelled to register a MIS within 14 days of lodgement if those conditions are met.
The government is consulting on new laws that would introduce stricter compliance plans and governance standards for MISs.
The consultation asks whether there should be new laws introduced for the recurrent collection of data by ASIC for MISs, including what data could be collected and used to detect risks; and what event notices should be given to ASIC (for example, redemptions being frozen or suspended) and what the impact on compliance costs of doing this would be.
The consultation follows previous policy proposals, including an MIS review launched by former Minister for Financial Services Stephen Jones.
Introduced via the 2022 Federal budget in October after the Albanese government came into power, the MIS review examined the rules around managed investment schemes, most notably the threshold for how sophisticated and wholesale investors are defined.
The regulator made several recommendations to the review, including updating the wholesale investor threshold, beefing up retail investor protections and increasing MIS data collection powers.
“There are some fundamental issues in terms of its permissiveness, how easy it is to set [an MIS] up and have it registered, the insolvency regime [and] the failure regime around MISs isn’t fit for purpose, which isn’t good for investors when things do go wrong,” ASIC chair Joe Longo told a Parliamentary committee last year.
“Reasonable minds will differ as to what might need to change. My view is that it does need to be changed there.”
Oversight of MISs returned to the regulatory and policy spotlight after the $1 billion collapse of the Shield and First Guardian master funds.
ASIC acted against the Shield and First Guardian funds over concerns that investor money was being misused on high-risk investments, pet projects of the directors and personal expenses.
Investment in the funds grew rapidly due to a sophisticated network of lead generators that contacted people who used online “superannuation health check” advertisements and used high-pressure sales tactics to refer them to advisers.
Minister for Financial Services Daniel Mulino announced a suite of policy changes in December, including more oversight of advice fee deductions, changes to anti-hawking laws, lifting platform governance, as well as adding more stringent requirements for MIS registration and oversight.
“We need to ensure that there are sufficient consumer protections in place that we stop these insidious industrial scale practices happening in the future,” Mulino said.
“We need to ensure that we stamp out the abuse of mum and dad investors that we’ve seen in the First Guardian and Shield collapses.”
To say that there are too many MISs to appropriately and “effectively review” is a poor answer to the problem. A solution may be that MIS proponents should pay a higher fee to become registered. Financial Advisers trust that the authorities have vetted products before they are offered. Sure, Advisers and Licensees need to do their own research and due diligence too. However, for the Financial Advice sector to have to effectively insure clients against MIS risk because of a lack of oversight and review by the authority seems unreasonable.