Greater RE independence needed

A clear separation of the responsible entity (RE) from the fund manager and product promoter will increase investor protection significantly, according to Equity Trustees’ Harvey Kalman (pictured).

Kalman’s business unit at Equity Trustees acts as an external RE for about 40 fund managers. He said the need for greater independence of REs was an issue missing from the current debate about investor compensation. There are strong arguments to strengthen the role and independence of REs, “yet this discussion is not taking place”, said Kalman.

 “The recent settlement achieved by Fincorp investors proves the benefit of having an independent RE still standing after a collapse of a fund manager,” he said. “While [the Australian Securities and Investments Commission] called for feedback on ways to strengthen the financial resources of REs last year, I believe there are other areas that need examination.”

Kalman said that investors in collective investments, such as managed funds, should be able to rely on the role of the RE to protect their savings.

“But REs have been found wanting when fraud or inappropriate behaviour has occurred where managers used an in-house RE,” he said. “With few if any exceptions, the problems brought to light in the aftermath of the global financial crisis have been caused when the RE fund manager and promoter have been inextricably entwined.”

He added that the current structure for REs also reduced investors’ ability to seek recourse in the event of wrongdoing.

“In addition to compensation, and the associated costs and possible inadequacy of this, in the event of wrongdoing we need to ensure there is an RE with adequate financial resources still standing,” said Kalman, adding that this would increase the likelihood of investors recovering all or most of their original investment.

He asserted that while larger organisations may have the resources and structure to ensure the independence of an in-house RE, smaller entities should have an external RE.