ASIC has released new Class Orders that apply to operators of an investor directed portfolio service (IDPS), and responsible entities of IDPS-like schemes. These new instruments were accompanied by revised guidance in Regulatory Guide 148 Platforms that are managed investment schemes, which sets out ASIC’s objectives and approach to regulating these platforms.
The new Class Orders:
- replace the old IDPS Class Order and IDPS-like Class Order;
- place new obligations on IDPS operators and IDPS-like scheme responsible entities;
- change the basis on which relief from certain requirements of the Corporations Act 2001 (Cth) (the Act) is granted to operators of those platforms, and
- are subject to a one year transition period for operators of existing platforms as at 30 June 2013.
Approach to relief under the new Class Orders
Changes have been made in new ASIC Class Order [CO 13/763] (new IDPS Class Order) and new ASIC Class Order [CO 13/762] (new IDPS-like Class Order) which have the effect of altering the consequences of failing to comply with a condition of relief.
Under ASIC Class Order [CO 02/294] (old IDPS Class Order) and ASIC Class Order [CO 02/296] (old IDPS-like Class Order), a failure by a platform operator to comply with certain conditions of relief may result in the relief ceasing to apply. This has potentially significant implications for a platform operator – for example, an IDPS operator to which the old IDPS Class Order applies could be in breach of the requirements under the Corporations Act to register the IDPS as a managed investment scheme and to issue disclosure documents for interests in the IDPS and underlying products if it breaches a particular condition of relief.
The approach to relief under the new Class Orders has been changed so that the relief granted under them is not conditional on compliance with the requirements that the Class Orders prescribe for platform operators. Instead, the new Class Orders operate to insert new provisions into the Act. A number of these new requirements, particularly for IDPS operators, are characterised as obligations of the operator as an Australian financial services (AFS) licensee.
Accordingly, a breach of a requirement under a new Class Order will not automatically result in the loss of relief under the relevant instrument, but will result in a breach of the financial services laws with which AFS licensees are obliged to comply.
New operational requirements for platform operators
The new Class Orders introduce a number of changes in operational requirements for platform operators:
- IDPS operator must be a public company – An IDPS operator must now be a public company. It was possible under the old Class Orders for an IDPS operator to be a proprietary company, in which case it was subject to special AFS licence conditions;
- Voting policy – A platform operator must ensure that a policy in place relating to the exercise of voting rights arising from accessible investments. The IDPS Guide or PDS for the platform must disclose that a copy of the voting policy is available free of charge on request;
- Policy for investors who do not opt in to receiving financial product advice – A platform operator must ensure that a policy is in place relating to the consequences for a client who has not engaged a person to provide financial product advice in relation to the platform or to give instructions in relation to accessible investments. The IDPS Guide or PDS for the platform must disclose that a copy of the policy is available free of charge on request;
- Facilitating dispute resolution – A platform operator must now take reasonable steps to facilitate the resolution of a dispute notified to it by a client between the client and an issuer of accessible financial products. These steps include informing the client whether the issuer of the accessible investment has an internal dispute resolution system that is available to the client;
- Consent to use disclosure document for accessible investments – It is no longer necessary for an issuer of an accessible investment to consent to the use by the platform operator of the disclosure document for that accessible investment as disclosure to platform clients.
In addition, there are new financial requirements for AFS licensees acting as platform operators or custodians under the new ASIC Class Orders [CO 13/760] and [CO 13/761]. See our separate alert on these class orders.
New disclosure requirements for IDPS Guides
The new IDPS Class Order introduces a number of new disclosure requirements for IDPS Guides, and addresses some of the disclosure difficulties that are currently faced by IDPS operators.
ASIC’s overriding intention to “treat IDPSs and IDPS-like schemes similarly where there is no regulatory basis for different treatment” is apparent in the approach that has been taken in connection with the new IDPS disclosure requirements.
Key changes to the IDPS disclosure requirements include the following:
- General disclosure test – the new IDPS Class Order introduces a general disclosure test, which requires an IDPS Guide to “include all information a person would reasonably need for the purpose of making a decision, as a retail client, whether to become a client of the IDPS”. This new requirement is similar to the formulation of the general disclosure test for product disclosure statements in section 1013E of the Corporations Act;
- Clarity of disclosed information – the information included the IDPS Guide must now be “worded and presented in a clear, concise and effective manner”, which mirrors the requirement applicable to PDSs under section 1013C(3) of the Corporations Act;
- Schedule 10 of the Corporations Regulations – the new IDPS Class Order requires an IDPS Guide to include “information about fees and costs in relation to the IDPS that complies with Part 2 of Schedule 10 of the Corporations Regulations”, except that costs incurred for accessible investments are not required to be included as management costs. This is a significant departure from the fees and costs disclosure requirements under the old IDPS Class Order. The disclosure requirements under Part 2 of Schedule 10 include the fees and costs template, additional explanation of fees and costs, worked examples and consumer advisory warning. The new IDPS Class Order also sets out IDPS Guide-specific requirements relating to fee examples and advisory warnings. The interplay between the Schedule 10 requirements designed for PDSs, and the disclosure requirements that are particular to IDPS Guides will need to be considered carefully;
- Incorporation by reference – the new IDPS Class Order makes provision for information to be incorporated by reference into an IDPS Guide. The new requirements for incorporating information by reference into an IDPS Guide essentially reflect the incorporation by reference provisions that apply to long-form PDSs (as currently set out in regulation 7.9.15DA);
- Updating information if not materially adverse – under the new IDPS Class Order, IDPS Guides may be updated (without issuing a supplementary IDPS Guide) in circumstances where the updated information “is not materially adverse from the point of view of a reasonable person as a retail client of the IDPS”. This is similar to the process for updating non-materially adverse information in a PDS, as permitted by ASIC Class Order [CO 03/237]; and
Additional matters required to be disclosed – an IDPS Guide is required by the new IDPS Class Order to disclose information that a person would reasonably require to understand:
- the differences between the rights of a direct investment holder and an IDPS client’s cooling-off rights voting rights and withdrawal rights in relation to accessible investments under section 724 and 1016E;
- the consequents of not engaging a person to provide financial product advice to the client in relation to the IDPS, or to issue instructions in relation to accessible investments;
- how and to whom a complaint may be made in relation to the operation of the IDPS, accessible financial products held through the IDPS, and financial product advice in relation to the IDPS (other than advice provide by or on behalf of the IDPS operator(s)); and
- how the operator will determine the accessible investments for the IDPS (ie factors considers in and processes followed in creating the investment menu);
As is the case under the old IDPS Class Order, the new IDPS Class Order provides that a document it taken to be given by to a person when it is received in accessible form by that person or their “eligible agent”, and this eligible agent cannot be an operator of the IDPS or an associate of the operator). New ASIC Class Order [CO 13/797] relaxes this restriction in limited circumstances (permitting disclosure documents for accessible investments to be received by an agent who is both appointed by the client and is an associate of the operator).
Transitional provisions and next steps for platform operators
The transitional provisions in the new IDPS Class Order and new IDPS-like Class Order preserve the operation of the old Class Orders for “an operator of an existing IDPS” and “a responsible entity of an existing IDPS-like scheme”, until the earlier of:
- the time that the operator or responsible entity (as applicable) opts into the operation of the relevant new Class Order; or
- 1 July 2014.
This is inconsistent with the information in Regulatory Guide 148, which states that if AFS licensees were licensed to operate a platform on or before 30 June 2013, they will have until 1 July 2014 to comply with the new requirements. The provisions of the Class Orders require more than just licence authorisation, and actually require the relevant licensee to be operating an existing IDPS or IDPS-like scheme (as defined) immediately before 1 July 2013.
New operators of a platform after 1 July 2013 will therefore need to comply with the new Class Orders immediately.
Licensees who operated platforms immediately before 1 July 2013 will have a year to plan for the operation of the new requirements. For some operators (for instance, IDPS operators who wish to rely on the new provisions to incorporate information by reference into the IDPS Guide, or to update non-materially adverse information), it may be advantageous to opt in prior to 1 July 2014.