In June 2013, ASIC updated its policy about platforms and published Regulatory Guide 148 Platforms that are managed investments schemes (RG 148). As the name suggests, RG 148 applies to platforms that are managed investment schemes, including investor directed portfolio schemes (IDPS) and IDPS-like schemes. The revised policy came into effect on 1 July 2014 for those platform operators that held an Australian financial services licence (AFSL) to operate a platform before 30 June 2013. Platform operators operating under an AFSL issued since 30 June 2013 had to comply with RG 148 upon the issue of the AFSL.

ASIC conducted a review of 14 platform operators’ implementation of RG 148 and has published a report of its findings – Report 408 Review of the implementation of RG 148 Platforms that are managed investment schemes (Report 408).

While Report 408 indicates that, overall, the 14 platform operators had implemented satisfactory measures to comply with RG 148, ASIC has identified some issues for further monitoring.  These include breach reporting, fees and costs, conflicts of interest, selection and monitoring of investments and implications for unadvised/orphaned clients. 

Breach reporting and fees and costs

The issues identified with breach reporting are similar to those that Deputy Chairman Peter Kell articulated in mid-September in relation to all AFSL holders, not simply platform operators. Please see our separate note on this subject: ASIC review of breach reporting.

Similarly, the issues ASIC raised in relation to fees and costs were consistent with those raised in Report 398 Fee and cost disclosure: Superannuation and managed investment products. This report sets out ASIC’s finding on the fee disclosure practices of superannuation and managed investment product issuers. ASIC is in the process of revising its policy on the disclosure of fees and costs for superannuation and managed investment products. Submissions may be made to ASIC before 17 October 2014.

ASIC is concerned about the quality of the compliance and risk management frameworks established to identify conflicts of interest in vertically integrated structures. Report 408 states that “vertical integration is increasing, with the major banks at the forefront of this trend, combining advice, platforms and fund management into single businesses”. ASIC considers that platform operators need to monitor and manage carefully conflicts of interest of all AFSL holders and their representatives in the product distribution chain, using a combination of internal controls, disclosure and, in some cases, avoidance of the conflicts altogether.

Report 408 refers to the potential for incentives paid to advisers who recommend in-house products to influence the choice of financial product recommended to consumers. Rebates paid to advice groups may also have a similar influence. 

The issues associated with conflicts, not just with platform operators, but more generally in the financial services industry, are not new. While the objective of the Future of Financial Advice legislation (FOFA), in particular with the imposition of a so-called “best interests duty” and the banning of commissions and volume-based shelf space fees, was intended to minimise potential conflicts, it is doubtful that this will be achieved. Report 408 expressly refers to ASIC possibly providing further clarification of how it expects conflicts involving the distribution chain of financial products to be managed.

ASIC recommends that platform operators:

  • have an overarching conflicts of interest policy
  • policies for addressing more specific areas
  • ensure their employees participate in regular compliance training and
  • encourage employees to voice any concerns in relation to management or compliance. 

Selection and monitoring of investments

Conflicts arise not only due to factors that influence recommendations of financial products, but also when determining which products get on a platform. If a product is not on a platform, then the possibility for it to be recommended is greatly diminished. 

RG 148 requires a platform operator to disclose to its investors the process that the platform operator undertakes to determine which products, securities and investments are offered on the platform. Having to disclose to investors the selection process for including products on a platform should, at a minimum, signal to investors that the platform does not contain the entire universe of available products. It may also, at least theoretically, expose criteria that may cause investors to consider other platforms and their product offerings. The disclosure should also mean that platform operators comply with the disclosed criteria when selecting products to be included on their platforms. 

ASIC found that platform operators use varying levels of due diligence and investment governance to determine which products will be offered on their platforms. Many have some form of investment or governance committee. Report 408 does not specify whether these committees have any element of independence to them. 

ASIC may revisit this issue to determine whether any further concerns should be addressed, such as the effect that the different standards applied in relation to selection and ongoing monitoring of investments on platforms may have on consumers’ understanding.

Implications for investors who are not advised

ASIC has noted a recent trend for platform clients to become ‘orphaned’. This refers to clients losing contact with their adviser but still having funds invested through the platform. 

ASIC has identified two factors which have driven the increase of clients without advisers. Firstly, there is a trend toward platform clients wanting to manage their own investments without the assistance of a financial adviser, and secondly, the increased popularity of self-managed superannuation funds. 

ASIC found that the responses of platform operators to dealing with orphaned investors vary. They range from allowing clients to continue to invest but with reduced functionality, to not allowing clients to continue without an adviser due to the complexity of the platform. Many platform operators, however, assume that the client is either advised or is sufficiently sophisticated to choose appropriate investments themselves.

Platform operators should have a written policy to deal with these ‘orphans’ and disclose it in the IDPS Guide or PDS.

Conclusion

Platforms have been growing steadily over the last few years, in particular with fund flows from self-managed superannuation funds (SMSF) – approximately one-third of all platform investments are now derived from SMSFs. Platforms have also been influenced by regulatory changes, increased competition and changing consumer expectations. Given the current FSI Inquiry and ASIC’s indication that a number of issues may require future monitoring, in particular conflicts of interest, and the future possible developments driven by FOFA, it is likely that platform operators should expect further regulatory developments.