Watchdog's master stroke: costs set to soar

Master trust operators may be slugged with a price hike under a recently released policy from Australian Securities and Investments Commission (ASIC).

Law firm Freehill Hollingdale & Page says the much anticipated policy paper on master trusts and wrap accounts could mean investors cop higher MERs and could deter smaller dealer groups from operating their own wraps.

Master trust operators may be slugged with a price hike under a recently released policy from Australian Securities and Investments Commission (ASIC).

Law firm Freehill Hollingdale & Page says the much anticipated policy paper on master trusts and wrap accounts could mean investors cop higher MERs and could deter smaller dealer groups from operating their own wraps.

ASIC’s paper on what it calls investor directed portfolio services (IDPS) treats master trusts and wraps as services. This means they will be regulated under secu-rities licensing requirements as opposed to the Managed Investments Act (MIA). IDPS operators will be required to hold a securities dealer’s licence specifically authorising them to operate such a scheme. Information memorandums will be re-placed by the requirement for full prospectuses.

Luke Gannon, financial services partner at Freehill Hollingdale & Page, says the new policy will increase the compliance costs of operators, thereby reducing the competitiveness of master funds and wraps compared to retail offerings.

“Will the MERs (management expense ratios) rise to soak up the costs? Alterna-tively, some operators will look closely at fee arrangements. One way or another, management fees will rise. The question is, who will wear it,” Gannon says.

Gannon also criticises the minimum start up costs outlined in the policy. Operators will be required to maintain at least $50,000 in net tangible assets (NTA). If the operators don’t outsource the reporting and transactional functions of their product, they will be required to hold 0.5 per cent of the value of assets in the vehicle, capped at $5 million.

“For a lot of the smaller operators, they’ll have to outsource a lot of their functions to outside parties and I’d query how much money they’ll make from these serv-ices,” Gannon says.

However, BT Funds Management’s chief legal counsel Geoff Lloyd sees the policy as a boon for the industry. Lloyd says the policy paper provides certainty and gives investors a higher level of disclosure. He refutes the notion that investors will have to pay for added administration costs.

“It will assist us to keep costs down and maintain the competitiveness of wraps as opposed to master funds,” Lloyd says.