US and UK-style restrictions unnecessary for MISs

law Hall and Wilcox DDO product intervention powers ASIC managed investment scheme

18 August 2023
| By Laura Dew |
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Proposals to place US or UK-style restrictions in the Australian market would be “radical” when ASIC already has significant product intervention powers, according to a law firm. 

In early August, the Treasury published a consultation paper on the regulatory framework for managed investment schemes. This covered areas such as the suitability of scheme investment for retail schemes, opportunities to modernise the regulatory framework, and whether obligations for responsible entities should change.

Under the section covering suitability of scheme investment, the paper referenced investment conditions in the UK and US and how they regulated this. 

In the US, retail clients can generally only access registered open- or closed-ended funds operated by managed investment companies. Open-ended funds could hold no more than 15 per cent of assets in illiquid investments while closed ones are recommended to hold no more than 15 per cent in private funds. This restriction tends to preclude them from being used widely by retail investors to invest heavily in private investments, such as private equity.

In the UK, collective investment schemes can only be promoted to retail investors if the scheme is authorised by the regulator, Financial Conduct Authority. For example, UCITS funds are prohibited from investing directly in real property, gold and unregulated schemes, and can only temporarily borrow up to 10 per cent of the value of their assets. 

Hall & Wilcox partner, Vince Battaglia, felt the design and distribution obligations (DDO) in Australia did a sufficient job at consumer protection without the need for bringing in these US and UK-style measures.

DDO requires financial products to be designed and distributed with clear and contemporary consideration of the objectives, financial situation and needs of the consumers and retail investors being targeted.

“The consultation paper describes the limitations on investment offerings to retail clients in the US and UK, being limitations which could – in general terms – be characterised in terms of the nature of the offeror, the investment vehicle, and the investable universe (including restrictions on illiquid assets and the use of leverage)," he said.

“The consultation paper states that the design and distribution obligations are ‘proving to be an effective gatekeeping mechanism for ensuring investment products are appropriately targeted towards relevant investors’, and notes ASIC’s use of its product intervention power in relation to some products (i.e. short-term credit products, continuing credit contracts, contracts for difference, and binary options).

“It would seem that proposals to place US-style or UK-style restrictions in the Australian market would be radical, and may be unwarranted at this stage in circumstances where the DDO regime is proving to be an effective regulatory tool and ASIC has significant product intervention powers.”

The managed investment scheme consultation is open until 29 September 2023. 

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