To kick off the start of the third quarter of 2014, we set out the seven key regulatory issues driving risk, operations and market trends for asset managers this financial year.

1. FoFA

The Future of Financial Advice (FoFA) reforms, which started on 1 July 2013, have recently been the subject of close political scrutiny and continue to pose significant challenges for Australian distribution in 2014. The long awaited Corporations Amendment (Streamlining Future of Financial Advice) Regulation 2014 was registered at the 11th hour on 30 June 2014, and has since survived two disallowance motions in the Senate. The Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014, which includes certain key amendments to FoFA is before the Senate. Asset managers will need to continue to ensure that they have adequate systems in place to identify relevant monetary and non-monetary benefits, particularly in the context of distribution and client entertainment and seminars, and ensure continuing compliance with an evolving FoFA framework.

Click here for more information on FoFA.  

2. Portfolio Holdings Disclosure

The transparency measures within the Stronger Super reforms will become effective on 1 July 2015. The breadth of the portfolio holdings disclosure requirements will likely pose significant compliance burdens on superannuation trustees, asset managers, private equity funds and hedge funds. In fact on all those who ultimately receive money from Australian superannuation funds. There are still significant outstanding issues and the whole proposal remains under Government review. Our view is that it should be scrapped. 

Click here to read about this topic in detail in our recent Bullseye Report.  

3. Superannuation


From 1 January 2014, default superannuation guarantee contributions (in other words, the bulk of employer contributions) are required to be paid into a MySuper product. Over the next few years, accrued balances will also need to be transferred into a MySuper product. MySuper is designed to be a simple, cost-effective superannuation product which means that trustees of funds offering a MySuper product are facing strong downward pressure on fees. As a result, portfolios are being reviewed and there is an overall trend away from alternative asset classes such as private equity and increased reliance on passive management. Asset managers will face sustained downward pressure on fees, particularly in relation to MySuper products.

Liquidity in superannuation

The portability rules embedded in the superannuation legislation assume that investment options will either be inherently illiquid or inherently liquid, such that investors can be warned before investing that a longer timeframe will apply should they seek to rollover their investment. Of course we have seen that in practice, investment options that were expected to be liquid can unexpectedly become illiquid, creating headaches for trustees. APRA has flagged with some trustees that it will not routinely approve requests for extensions of time to process benefit rollovers where this occurs. Trustees are increasingly focussing on the liquidity of their portfolios, and the way in which the risk of illiquidity is presented in the fund’s disclosure documents. Trustees are likely to seek assurances from their asset managers about the potential liquidity risk associated with particular assets and asset classes.  

4. ASIC investigations

Following the recent Senate report on the performance of ASIC, we have observed a marked upturn in regulatory scrutiny of the financial services industry.  In conjunction with this, ASIC has been placing particular emphasis on the obligation of financial services licensees to self-report breaches.

Our regulatory litigation experts have published a refresher with recent insights on breach reporting, a key observation being to adopt a strategic and thoughtful approach to preparing breach reports with a view to framing the agenda for any dialogue with ASIC.

Click here to read our recent insights on breach reporting.  

5. Tax information exchange: FATCA and OECD Common Reporting Standard

In accordance with the Australian Intergovernmental Agreement (IGA) in respect of the U.S. Foreign Account Tax Compliance Act (FATCA), Australian reporting financial institutions (which include many trustees, custodians, funds and other financial institutions) must register with the U.S. Internal Revenue Service (IRS) by 31 December 2014, conduct FATCA due diligence on their new and existing account holders and report details of certain account holders (including U.S. persons and U.S. controlling persons of particular types of entities) to the Australian Taxation Office. Trustees and managers should ensure that they have:

  • determined the FATCA status of their funds (in addition to their own FATCA status) and registered with the IRS if appropriate by year end;
  • updated their disclosure documents, application forms and onboarding processes for FATCA;
  • updated their investment due diligence processes, particularly for offshore investments, so that they can satisfy themselves as to any risk of 30% FATCA withholding being deducted within the investment structure.

When updating documents for FATCA, trustees and managers may wish to consider including general disclosures that may permit them to collect the information required under the OECD Common Reporting Standard for Automatic Exchange of Financial Account Information in due course, without requiring additional changes to documentation.

Click here to read more on FATCA.  

6. European impact - AIFM Directive

Implementation of the EU directive on alternative investment fund managers (AIFMD) affects Australian and Asian based funds and fund managers which market to EU investors. Additional minimum conditions, and specific disclosure obligations, apply to EU private placements. Notification to, or approval by, the regulators in each EU Member State in which marketing is undertaken is required, even when marketing is only to major institutional investors. The applicable conditions, extent to which marketing is permitted and, where permitted, the timing for applications and approvals vary in the different EU Member States. If approval is obtained for marketing in any EU Member State there are significant ongoing regulatory reporting obligations in that state. In the next stage of implementation of the AIFMD, which is due to be considered in 2015, it is proposed that an option will become available for non-EU fund managers to submit voluntarily to the AIFMD in order to obtain an EU wide “passport” for non-EU fund managers to market to professional investors on the same basis as authorised EU fund managers. If this regime is introduced it would require the fund manager to apply for authorisation in an EU member state of reference on the basis of full compliance with the AIFMD.

Click here to read more on AIFMD.  

7. Custodial and depositary services

In November 2013 ASIC issued an updated version of Regulatory Guide 133: Managed investments and custodial or depository services: Holding assets (RG 133). The updated RG 133 extends beyond dealing with scheme property of registered managed investment schemes and now also imposes obligations on other asset holders such as licensed custodians, IDPS and MDA operators. The updated requirements have been applied through various ASIC Class Orders. They include general ‘minimum standards’ that must be satisfied by the various types of regulated entities (which generally take effect from 2 January 2015), as well as specific provisions that are required to be included in written agreements entered into by the regulated entities with custodians and sub-custodians in respect of the assets (which generally take effect from 1 November 2015).

Providers of custodial or depository services are currently:

  • implementing programs to review all existing custody and sub-custody contracts for compliance with the content requirements detailed in RG 133 and the related Class Orders; and
  • reviewing existing practices and procedures associated with their custody businesses to ascertain the extent to which they comply with the broader standards applicable to holders of assets (for example, in relation to ‘organisational structure’, record keeping and reconciliation procedures).
  • Offshore providers of custodial or depository services (including prime brokers) will also be impacted to the extent that they have Australian clients who hold an Australian financial services licence. These offshore providers can expect that clients falling within this category will seek to renegotiate existing arrangements regarding the holding of assets, in order to address the updated requirements.