In brief: ASIC's Senate submission on forestry schemes has emphasised important regulatory reform themes, with implications for managed investment schemes and financial services regulation more generally. Partner Marc Kemp (view CV), Consultant Derek Heath and Lawyer Patrick Boyle report.
- Obtaining and cancelling AFS licences
- The need for a compensation scheme
- Merit-based regulation
- And, finally, CAMAC
On 17 October 2014, the Australian Securities and Investments Commission (ASIC) published its submission to the Senate inquiry into the collapse of forestry managed investment schemes between 2009 and 2012.
Although a discussion of the business models, structures and risks of forestry schemes, and ASIC's role in regulating them, naturally comprise a large part of ASIC's submission, they are nonetheless of interest to operators, promoters and and distributors of managed investment products generally. This is not because they say anything new, but because they reinforce regulatory themes that ASIC has been assiduously promoting, notably in its 2014 report on complex products (ASIC Report 384) and its recent submissions to the Financial System Inquiry (FSI), adding to the steady drumbeat of calls for reform.
This update provides a snapshot of some of these areas of potential reform.
OBTAINING AND CANCELLING AFS LICENCES
ASIC continues to express its concern about the relative ease with which an Australian financial services (AFS) licence may be obtained and the difficulty ASIC has in cancelling or suspending a licence once granted. This problem, it says, has made it difficult to take preventative action against licensees who may cause substantial losses to investors. The problem is exacerbated by the fact that representatives of a licensee – including employees, directors and authorised representatives – are not directly approved by ASIC, making the regulation of personal conduct by representatives more difficult. This is consistent with ASIC's observations in its first submission to the FSI, and underpinned its recommendation to the FSI to give ASIC the power to ban a person from managing a financial services business or credit business.
THE NEED FOR A COMPENSATION SCHEME
Echoing its second submission to the FSI, ASIC's submission supports consideration of a 'limited last resort' statutory compensation scheme to supplement professional indemnity insurance and the formal determination of claims by external dispute resolution schemes, to address what it perceives to be the 'growing' problem of uncompensated loss within the financial services sector. A reading of ASIC's second submission to the FSI indicates that its concern is primarily with the 'relatively high levels of uncompensated loss in the financial advice sector', rather than in the operation of managed investment schemes. This is consistent with ASIC's observation that commissions (or, to use the term of the day, 'conflicted remuneration') were often used to pay advisers who promoted forestry schemes.
In its submission, ASIC points to a growing global trend towards 'merit' regulation. 'Merit' regulation is shorthand for regulatory oversight (involving an optional ‘regulatory toolkit’) that does not focus solely on disclosure (as Australia's has), but monitors all stages of what ASIC refers to in its first FSI submission as the 'financial product value chain', covering product design and issue, disclosure and marketing, distribution, and post-sale practices – the objective being more actively to influence the quality of financial services and products. This theme, which was first clearly articulated in Report 384, was picked up in the FSI's interim report. Based on that report and statements made by the Chairman of the FSI, David Murray, it is reasonable to bet that the FSI will recommend ASIC be granted greater product intervention powers. As we have reported, the question of whether those powers are needed and what form they will take, remains uncertain, although a useful comparison may be drawn with the powers given to the United Kingdom's regulator, the Financial Conduct Authority.
AND, FINALLY, CAMAC
In something of a mournful coda to the life of a useful government body (now abolished), the submission endorses (with one notable exception) the recommendations of the 2012 report of the Corporations and Markets Advisory Committee (CAMAC), and the key principal of CAMAC's 2014 discussion paper (The establishment and operation of managed investment schemes) that the regulatory regime for managed investment schemes should be aligned with that for companies, unless there are compelling reasons for treating schemes differently.
The exception is that ASIC considers the current arrangements for pooled schemes (as opposed to contract-based schemes, such as forestry schemes) to be adequate, appearing to suggest that a centrepiece of CAMAC's 2012 report, for the introduction of a 'separate legal entity' scheme structure, is unnecessary. This appears to reduce regulator support for what would be a far-reaching reform of the managed investment scheme structure.