ASIC recently provided guidance on the managed investment sector – in particular, registered managed investment schemes (or just registered schemes).
By way of background, managed investment schemes may either be retail or wholesale. A wholesale, or unregistered, scheme has fewer legislative and regulatory obligations that than of a scheme in which retail clients may apply. A registered (or retail) scheme has a number of defining characteristics, including (but not limited to):
The Responsible Entity (that is, the entity that manages or operates the scheme) must be an Australian public company.
The Responsible Entity must have an Australian Financial Services (“AFS”) Licence which authorises it to operate a Registered Scheme. This is separate to the standard dealing authorisation.
The Responsible Entity’s AFS Licence must also include authorisations covering any other relevant financial services in relation to the scheme and its underlying assets.
Chapter 5C of the Corporations Act 2001 (Cth) (“the Act”) specifically covers the responsibilities and obligations of registered schemes and that of the Responsible Entities. One such requirement is to maintain a Constitution (Part 5C.3 of the Act) and a Compliance Plan (Part 5C.4 of the Act).
The Compliance Plan of a registered scheme must set out adequate measures that the Responsible Entity is to apply in operating the scheme to ensure compliance with the Act and the Scheme’s Constitution. Since the Compliance Plan is an integral part of a registered scheme, the Responsible Entity needs to lodge a copy with ASIC as part of the registration process. The Responsible Entity may modify the Compliance Plan, or even repeal it and replace with a new Compliance Plan, however, the revised or amended version must be lodged with ASIC within 14 days after the modification is made or the old plan is repealed.
Each year, a registered auditor must review the Compliance Plan and provide the Responsible Entity a report which states, that in their opinion:
The Responsible Entity complied with the Scheme's Compliance Plan during the financial year; and
The Compliance Plan continues to meet the requirements of Part 5C.4 of the Act.
This is a fundamental requirement which forms the basis of retail consumer protection.
So, getting back to the ASIC report, which stated that it assessed 50 Compliance Plans and found that there was a high degree of non-compliance. In particular, there were three main areas of responsibility that were not addressed in the documents:
Design and distribution obligations (“DDO”);
Internal dispute resolution (“IDR”); and
Reportable Situations.
These three areas were the subject of new reforms in 2021. As such, it appears that many of the Compliance Plans were not properly updated to take into these new(ish) requirements, or that Responsible Entities simply used current Compliance Plans for new schemes, and these documents failed to consider the recently introduced reforms.
So, I applaud ASIC for undertaking this type of assessment, since it provides Responsible Entities with not just guidance, but more of a warning, as to what it must do to ensure ongoing compliance.
I can’t say the same for the auditors whose job it is to review a scheme’s Compliance Plan. Sure, the licensing laws place the onus onto a licensee, however, it is also true to say that a licensee (in this case, the Responsible Entity) would place a certain amount of trust and confidence in the skills and competencies of their auditor. Did the auditors lock themselves in the licensee’s office, undertake a standardised tick ‘n bash exercise for each Compliance Plan operated by a Responsible Entity and send a bill for services rendered without demonstrating due diligence?
There are more than enough laws and regulations that a licensee must comply with. They don’t need to start second guessing the advice or reports provided by supposed experts in their field.
Should you have any queries about ASIC or other issues involving compliance, licensing, or corporate governance, please contact Jeremy Danon, director of Ariel & Associates Pty Ltd on (02) 8379 1263 or at jeremy@ariel.associates. Further details on our website – www.ariel.associates.