Thinking | 16 March 2012

ASIC consults on regulatory approach to platforms

The Australian Securities and Investment Commission (ASIC)  has released Consultation Paper 176: Review of ASIC policy on platforms: Update to RG 148 (CP 176) and announced that it is reviewing its regulatory approach to platforms as part of broader efforts to promote investor confidence in the sector.

ASIC states in CP 176 that it is reviewing its regulatory approach to platforms due to the trend towards new forms of vertical integration between parties in the product–distribution chain, with dealer groups increasingly restructuring their operations to become platform operators. ASIC considers there is a risk to investors associated with the emergence of less mature and less experienced platform operators, particularly through ‘private labelling’ arrangements in response to the Future of Financial Advice (FoFA) reforms.

For the purposes of CP 176, ‘platforms’ relates only to Investor Directed Portfolio Services (IDPS) and IDPS-like schemes, and not to other investment structures such as nominee and custody services, managed discretionary accounts,  superannuation platforms and master trusts.

ASIC’s current regulatory approach to platforms is set out in Regulatory Guide 148 Investor Directed Portfolio Services (RG148) and accompanying class order relief for IDPSs [Class Order 02/294] and IDPS-like schemes [Class Order 02/296].  ASIC intends for key elements of that class order relief to be retained for IDPS operators, including the relief from the registration requirements in Chapter 5C and from the requirement to issue a product disclosure statement pursuant to Chapter 7 of the Corporations Act 2001 (Cth) (Corporations Act).

ASIC has released Consultation Paper 176: Review of ASIC policy on platforms: Update to RG 148 (CP 176) and announced that it is reviewing its regulatory approach to platforms as part of broader efforts to promote investor confidence in the sector.

CP 176 indicates that ASIC intends to amend RG 148 and the class orders relating to IDPS platforms in the following areas:

• Financial requirements for IDPS operators: from November 2012, platform operators will be required to comply with the same financial requirements that will apply to responsible entities. In addition, as with responsible entities, the platform operator will be required to be a public company.

• Disclosure about selection of investments: platform operators will be required to disclose how they select financial products for inclusion on investment menus or in model portfolios in their IDPS Guide (for IDPS) or PDS (for IDPS-like schemes).  The amended Regulatory Guide will also set out ASIC’s expectation of licensed dealer groups and their adviser representatives to consider investment selection processes when recommending the use of one platform over another, or a platform at all.

• Investor rights: ASIC intends for investors to have the same rights investing through a platform as if they invested directly in the underlying securities (i.e. as if they had legal, and not just beneficial, ownership of the underlying securities).  This will require platform operators to:

  • ensure that investors have the same cooling off rights in relation to the underlying securities as if they had invested directly;
  • give investors enhanced withdrawal rights where the issuer of the underlying security provides notification of an option to withdraw; and
  • have in place a voting policy for company and scheme resolutions and other corporate actions.

• Disclosure for IDPS: some of the content requirements for PDS will apply to IDPS Guides. The specific content requirements for IDPS Guides under Class Order 02/294 will be replaced with a general obligation that IDPS operators disclose and present in a clear, concise and effective manner, all information that might reasonably be expected to materially influence a retail client’s decision to use a platform.

IDPS Guides will also be required to comply with the Fees and Costs disclosure in Schedule 10 of Chapter 7 of the Corporations Act. However, information will be able to be incorporated by reference into the IDPS Guide, non-materially adverse information will be able to be included in an IDPS through website disclosure (along the lines of what is available to issuers of PDS under Class Order 03/237) and IDPS operators will be able to give documents to clients electronically, including by hyperlinks, if the client has agreed.

ASIC will provide relief so that an Australian Financial Services (AFS) licensee or an authorised representative of an AFS licensee can act as an agent to receive documents on behalf of the investor, although documents would still need to be provided electronically to clients by the platform operator as well. Under Class Order 02/294, the IDPS operator has an obligation to be ‘reasonably satisfied’ that disclosure regarding the underlying securities has been made to the client, and cannot simply rely on the fact that the disclosure has been given to the client’s agent (such as an adviser).

• Disclosure for IDPS-like schemes: the relief in Class Order 02/296 from certain aspects of the Product Disclosure Statement regime will be removed for IDPS-like schemes, so the responsible entity of the IDPS-like scheme will be required to issue a PDS in respect of the scheme prepared in accordance with the general requirements in Part 7.9 of the Corporations Act, including the requirements of section 1012IA in relation to securities that are accessible through the platform..

• Timing: CP 176 states that consultation will close in late April, with a view to drafts of the amended Regulatory Guides and Class Orders being released in mid-2012, and finalised by late 2012.• What is not considered: the CP notes that the FoFA reforms will have an impact on the operation of platforms, particularly in relation to conflicts of interest. ASIC states in its media release that it will take a closer look at the issue of conflicts of interest and platforms once the FoFA legislation is enacted, and may provide further guidance on this issue in due course.

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Adrian Verdnik

Adrian’s financial services law practice covers superannuation, managed funds, insurance, and financial advice. His work includes both advisory and...

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