A look at ASIC's proposed investment fund policy changes

by Hamish Ratten
20 December 2017

In brief

Our domestic funds market and a new corporate collective investment vehicle and Asia Region Funds Passport.

ASIC's consultation paper outlines their proposed regulatory guidance for investment funds

In October 2017 ASIC issued consultation paper 296 which outlined their proposed regulatory guidance for investment funds which includes managed investment schemes, corporate collective investment vehicles (CCIV), passport funds under the Asia Region Funds Passport (Passport), platforms (comprising investor directed portfolio services and like services) and Managed Discretionary Accounts (MDA). 
 
Both the CCIV and Passport were proposed in the Australian Financial Centre Forum's Report, Australia as a Financial Centre: Building on Our Strengths, published in November 2009, commonly referred to as the Johnson Report.

Should we be paying attention?

The proposed policy changes are useful in understanding how investment funds may be regulated upon commencement of the CCIV and the Passport. The proposals provide insight into regulatory areas that are topical to ASIC for investment funds, such as compliance and oversight, wholesale funds and licensing and technology.
 
Looking at this now is important. It allows for strategic thinking and planning for fund managers and service providers for the regulatory requirements and environment that may lie ahead and issues to consider now for existing operations.

Compliance and oversight

ASIC has proposed new guidance for effective and responsive compliance management systems.  We consider this approach is:
  • to capture compliance broadly across a business
  • in response to the use of technology in systems 
  • to reflect the use of a group compliance framework.  
ASIC's guidance does incorporate tailoring for the fund, platform and MDA service and so it's not a one size fits all policy approach.
 
There are requirements for a compliance management system to address the values, purpose and strategy of the licensee.  
 
ASIC has brought together its current compliance plan regulatory guides, and applied the policy to registered schemes and retail CCIV. A key policy consideration appears to be the interaction of the compliance plan with the audit process. It appears there is an intention to ensure that the compliance plan includes sufficient detail to allow the operator, ASIC and the auditor of the compliance plan to assess compliance with the compliance plan. Also, that any non-compliance is reported to the compliance committee, operator (its board) or ASIC as required.
 
ASIC has taken an additional step by including a table that identifies key areas of compliance risk by fund type. A useful tool for assessing existing compliance arrangements and for due diligence purposes.
 
An extensive policy is included for oversight. The proposed policy captures the compliance committee and includes an expectation that members have appropriate experience, qualifications and competence. This approach may sound implicit.
 
ASIC also includes guidance for Australian passport fund operators on the requirements under the Passport Rules for an independent oversight entity and annual implementation review.  Essentially, ASIC indicates that this function can be part of the oversight and compliance plan audit process.
 
The role of compliance and oversight are possibly more topical in the context of the CCIV and role of the depositary. We suggest fund managers and custodians stay engaged with the proposals and framework for this. It is a key part of many international fund frameworks and is an important structural consideration for the CCIV. Domestically, it will be important to consider how oversight will be managed across all investment fund vehicles at a retail and wholesale level. 

Wholesale funds

In the most recent report for Australia's Financial Sector Assessment Program undertaken by the International Monetary Fund in 2012, some matters were raised with the regulation of wholesale funds. This is clearly a consideration for ASIC in its policy design for investment funds and for Treasury in its legislative design for the CCIV.
 
For the CCIV, a regulatory framework is proposed for wholesale CCIV. This provides an opportunity for ASIC to consider policy that covers all wholesale funds.

Australia as a host economy

ASIC has published a standalone regulatory guide for foreign passport funds. The guide will be a useful source of information to foreign operators on how to passport into Australia. It won't provide a complete outline as it will only assist in respect of the law under ASIC's regulatory mandate. Foreign operators will need to consider other laws relevant to passporting, in particular tax, privacy, anti-money laundering and counter terrorism financing.
 
The guide  includes an outline for proposed entry and ongoing requirements for foreign passport funds as well as ASIC's powers and responsibilities in determining whether to accept or reject entry. It also provides guidance on the use of ASIC's powers and responsibilities in a passport fund context.  Understanding the regulatory powers available assists investors to understand their rights and the manner in which ASIC may approach misconduct and any compensation. 

Discretionary powers - inclusion of nature, scale and complexity

The regulatory guide on ASIC's discretionary powers is useful in that it brings together common forms of relief ASIC may provide in relation to investment funds. The guide also proposes that ASIC may consider the nature, scale and complexity of the operator and fund in assessing whether the relief sought is appropriate. This terminology is not in the current regulatory guidance for relief, although could be considered as part of a general consideration of cost and regulatory detriment analysis. The terminology is consistent with ASIC's regulatory guidance on risk management where it serves to consider what may be appropriate on a case-by-case basis.

Licensing

The proposed law and ASIC's proposed regulatory guidance do not cover licensing for a CCIV and passport fund. Licensing is a key issue and the foundation regulatory requirement for the provision of financial services. Business continuity and transition will be important considerations for the licensing requirements across investment funds for commencement of the CCIV and the Passport.    

Regulatory Technology

The proposed changes demonstrate that ASIC, has gone back to the future, and is considering its regulatory technology (RegTech). ASIC has identified an online registration and reporting system for investment funds. We expect this would support the development of ASIC's RegTech and data needs underlying the future regulation of funds in Australia.
 
Note: Colin Biggers & Paisley has been engaged with the development of the policy and legislative regimes.  This includes involvement over many years by the writer of this article in the development of the CCIV and Passport through government and regulatory work.

This article has been published by Colin Biggers & Paisley for information and education purposes only and is a general summary of the topic(s) presented. This article is not specific legal advice. Please seek your own legal advice for any questions you may have. All information contained in this article is subject to change. Colin Biggers & Paisley cannot be held responsible for any liability whatsoever, or for any loss howsoever arising from any reliance upon the contents of this article.