Welcome to the first edition of Financial Services Thinking for 2023 showcasing the latest news from the corporate regulators. 

We also share a ‘Hot Tip’ following ASIC’s recent flurry of interim stop orders under the design and distribution obligations. 

Please share Financial Services Thinking with your friends and colleagues, and we value your feedback.

ASIC

ASIC's ongoing surveillance of managed funds

ASIC’s ongoing surveillance of managed funds (which commenced in October 2021) has lead to it having concerns some responsible entities must do more to meaningfully oversee how their funds are marketed to investors. ASIC recently identified concerns with the marketing of five managed funds as part of its ongoing surveillance, with those funds having a total of approximately $705 million in assets under management.  

The marketing concerns ASIC identified varied across the funds. ASIC was concerned that the representations made were not consistent with long-standing regulatory guidance that—

• projected fund performance must be reasonable and include prominent and proximate qualification or warnings  
• promotion of fund benefits requires prominent and proximate balancing risk disclosure
• comparisons of funds with other products must be appropriate and reasonable; or
• recommendations should be attributed, and testimonials should be appropriate and reasonable.

Contact a member of our Funds Management team if you have questions about ASIC’s surveillance of managed investment scheme activities and advertising material.  Also, read partner Selina Nutley’s latest article about ASIC’s Crackdown on fund marketing.

ASIC pursues Amex for DDO breaches—critical learnings for fund managers

ASIC’s first civil penalty case alleging breaches of the design and distribution obligations (DDO) reveals some critical learnings for fund managers about monitoring review triggers and the steps which must be taken if one occurs.
 
On 5 December 2022, ASIC commenced proceedings in the Federal Court against American Express in relation to its credit cards co-branded with David Jones. This follows the corporate regulator taking multiple actions under the DDO regime, including issuing more than 20 interim stop orders. 

Read our latest Alert where partner Sean McMahon and consultant Jeunesse Meldrum explain ASIC’s allegations and what fund managers need to know now. Our Funds Management team can help you with—

• engaging with your compliance plan auditor about how they intend to approach DDO in your schemes’ next compliance plan audits
• conducting a desktop audit of your DDO policy and its implementation
• undertaking a wholistic review of your policy suite to ensure your DDO policy, compliance plan, and other policies all work together.

ASIC issues infringement notices against three Vanguard funds for alleged greenwashing

Vanguard Investments Australia has paid $39,960 in compliance with three infringement notices related to alleged greenwashing contained in PDSs of three of its index funds. ASIC was concerned that the PDSs may be misleading by overstating an exclusion (the 'investment screen') that claimed to prevent investment in companies involved in significant tobacco sales. ASIC noted that while the funds were structured to exclude certain investments in tobacco (such as manufacturers of cigarettes and other tobacco products), it did not exclude companies involved in the sale of tobacco products. ASIC Deputy Chair Sarah Court explained the infringements saying “where tobacco-exclusion investments are promoted, the entity making those claims must be able to substantiate the full exclusion of those investments”.

This provides important context for product issuers when considering and disclosing investments screens applied to their products.

Managed investment scheme sector risk assessment

ASIC will pay close attention to the recently released New Zealand Financial Markets Authority Managed Investment Scheme - Sector Risk Assessment. This survey of 53 licensed fund managers identified the top contributors to overall sector risk are—

• responsiveness to changes in macro-economic factors (inflation, interest rates etc)
• product management (PDSs, marketing)
• new financial instrument management
• investment operations, and
• manager oversight of outsourced investment services.

Mortgage fund managers took out top spot for ‘most risky’ while key emerging risks were recorded as cybersecurity, business continuity plans, climate-related disclosure, and integrated financial product disclosure (environmental, social, and governance investing). 

ASIC consults on sunsetting class orders

Released on 30 November 2022, Consultation Paper 365 Remaking ASIC class orders on takeovers, compulsory acquisitions and relevant interests proposes to remake, among other class orders, Class Order CO 13/519 Changing the responsible entity which was due to sunset on 1 October 2023. The Class Order is designed to make it clear that resolutions to remove the responsible entity of a listed scheme need only be ordinary resolutions.  It is proposed the instrument continue for another five years.

Austrac

Have you lodged your compliance report?

Compliance reports are due to AUSTRAC between 1 January 2023 and 31 March 2023. Login to AUSTRAC Online with your administrator access to complete the report.

APRA

Tighter governance restrictions on property funds

From January 1, APRA is boosting its monitoring of the 'selection, management and monitoring' of investments, which will include valuations of unlisted equity, property, or infrastructure. APRA’s new procedure sets out practices and principles rather than specific rules. Industry commentators have suggested APRA regulated funds, primarily super funds, will seek to impose tighter governance restrictions on how property funds value assets.

Treasury

Consultation on further improvements to corporations and financial services law

Treasury released the Treasury Laws Amendment (Measures 4 consultation) Bill 2022: ALRC 5 Financial Services Interim Report 6 Tranche 2 on 12 December 2022, building upon previous amendments aimed at reducing the complexity of Australia’s financial services laws. The latest amendments implement a single glossary of defined terms, repeal unused definitions, and simplify provisions the Australian Law Reform Commission considered unused or unnecessarily complex. Consultation on the proposed amendments closes on 15 January 2023.

HOT TIP

 ASIC issues more stop orders – are you on ASIC’s radar?

To date, ASIC has issued 22 interim stop orders under the design and distribution obligations for deficiencies in target market determinations (TMDs).  

Our latest article Are you on ASIC’s radar highlights the key takeaways from ASIC’s surveillance on both advertising materials and disclosure documents:

1. Include prominent warnings when advertising past and target returns and footnote that past performance is not indicative of future performance and may not be achieved.
2. Use appropriate comparisons for the investment strategy of the fund and include prominent warnings about the comparison. Traditional indices, such as the RBA cash rate, have been scrutinised by ASIC when used as a comparison to products which have a non-comparable risk profile without appropriate warnings, including funds investing in real estate mortgage-backed securities and asset backed securities.
3. Update the performance statistics in advertising and offer documents frequently.
4. Give balanced messages about returns and the risks of the investment. Where the returns of the product are promoted, include a reference to the risks section of the PDS.

And always remember—if it’s good enough to include in an ad, then it’s good enough to be in the offer document.

If you are unsure whether your TMD or disclosure documents are compliant or need to be reviewed, please reach out to a member of our Funds Management team.