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ASIC has recently provided welcome clarity on a number of issues raised by The Fold Legal in conjunction with IMAP regarding the MDA regulatory changes - which will be welcome to MDA providers who’ve been working hard to meet the 1 October 2017 deadline.

Here’s a thumbnail summary.

External MDA advisers

Financial advisers who recommend their clients use an MDA service and prepare their investment program do not need any special authorisations. It is sufficient for them to hold an authorisation to advise and deal on managed investment schemes.

Experience requirements for limited MDA providers

ASIC will take a like for like approach on the competency requirements for limited MDA providers, i.e. if they continue to operate their MDA service through a regulated platform, they should not need any additional skill or experience to be accepted as a responsible manager for their MDA licence variation.

Experience in providing custodial or administrative services will not be required.

Termination clauses in MDA contracts

MDA contracts are now required to specify the timeframe in which client portfolio assets will be realised or transferred to clients on termination of the MDA service. The problem is that MDA providers may not know what assets they will be managing at termination when the MDA contract is entered into.

According to ASIC, it will be sufficient for MDA contracts to undertake to transfer clients’ MDA portfolio assets as soon as reasonably practicable, having regard to the nature and liquidity of the asset. Where possible, MDA contracts should include information about the likely liquidity of asset types that they expect to use within the MDA service.

Unregistered managed investment schemes

It’s not widely known that before 1 October 2017, MDA providers could invest in unregistered managed investment schemes in limited circumstances. Now that this is no longer permitted, there is an outstanding question about whether existing unregistered managed investment scheme investments can continue to be held by retail clients within an MDA service.

ASIC has confirmed existing retail clients who invested in unregistered managed investment schemes through an MDA service before 1 October 2017 may remain in those investments. However, the investments cannot remain in the MDA service arrangement. This means the investments will need to either be realised or held and managed outside the MDA service.

ASIC will consider relief applications if there are compelling reasons to depart from this requirement. ASIC is also open to looking at exceptions from the general prohibition if its policy objectives of ensuring that investments are made into appropriately regulated schemes are met.

SoA reviews by MDA providers

There has been considerable concern amongst MDA providers regarding the requirement to review SoAs/Investment Programs prepared by external MDA advisers. MDA providers are required to:

  • Not enter into the MDA contract if they have reason to believe it is not appropriate for the client’s financial situation, needs and objectives;
  • Be satisfied that there is no reason to believe that:
    • The Investment Program does not comply with the general requirements for a SoA; and
    • Any statement in the MDA provider’s FSG about the Investment Program is misleading, deceptive or likely to mislead or deceive.

RG 179 makes it clear that the MDA provider does not endorse the investment program or suitability of the MDA contract by virtue of this review.

ASIC has clarified that:

  • The review requirement is intended to deal with circumstances where the MDA provider has knowledge about their product or the client’s relevant circumstances that the external MDA adviser does not have. It is not intended to replace or override external MDA advisers’ obligation to provide appropriate advice.
  • The test is only what the MDA provider has reason to believe, based on their knowledge, experience and skills (not the knowledge or skills of a financial adviser).
  • As long as the SOA reasonably appears compliant, the MDA provider can proceed. However, if an MDA provider has any reason to be unsure whether the client’s personal circumstances make the MDA contract inappropriate, they should clarify with the external MDA adviser, e.g. by asking for additional information.
  • It is a negative test. The MDA provider does not have to be positively satisfied that the MDA service is appropriate; they merely need to have no reason to believe that it is not appropriate.

ASIC commented that this additional obligation has been imposed in light of the exemption from the need to register an MDA service as a managed investment scheme – and that MDA providers who want to avoid having to meet this requirement can register their MDA as managed investment schemes!

Quarterly reporting requirements

We drew ASIC’s attention to some inconsistencies between the MDA Instrument and RG 179 in relation to the quarterly reporting requirements - the Instrument contains some requirements that are not noted in RG 179 and vice versa.

While not exactly admitting that any reporting requirements have been omitted from RG 179, ASIC warns that RG 179 is a summary and is intended to be read in conjunction with the MDA instrument!

So be warned! Don’t fall into the trap of relying solely on RG 179 for guidance; always check the MDA instrument (or use The Fold’s MDA Provider Policy and Procedures template which incorporates the requirements of both.)

Annual reporting

RG 179 requires MDA providers to provide clients with information about total management costs at annual reporting time (in addition to a transaction summary). The costs information must be calculated on the same basis as is required for disclosure in the FSG, i.e. like a registered managed investments scheme.

This isn’t required under the MDA Instrument and will be challenging for many MDA providers, whose technology systems are not programmed to provide information in this manner.

ASIC has advised that it will amend the MDA Instrument to clarify that:

  • The summary should be expressed as ‘TOTAL FEES YOU PAID’ (as required by cl 302, Sch 10 Corporations Regulations 2001 (Cth)), and
  • Fee transactions should be referred to as ‘management costs’ in the annual report, consistently with the fee disclosure requirements.

For more information about the changes to MDA regulation, see our blog on the What where and Who of MDA Changes.

And for detailed guidance on implementing an MDA service under the new requirements, purchase our template MDA Kit from our estore. It’s specifically designed to assist MDA providers and MDA advisers to meet the updated requirements and contains:

MDA Providers
  • FSG material
  • MDA contract
  • Investment strategy template
  • Detailed policies and procedures - including advice and guidance on managing conflicts of interest
MDA Advisers
  • SoA material
  • Annual review SoA/RoA material. Detailed policies and procedures - including advice and guidance on managing the best interests duty

All items can be purchased separately.

MDA services are complicated, especially complying with the complexities of the fee disclosure requirements and juggling the content requirements for MDA Contracts, Investment Programs and SoAs. So do seek legal advice if you’re unsure. We’d be happy to help.

Author: Claire Wivell Plater

September 2017

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