Focus: Regulatory landscape for Australian fund management industry
Services: Commercial, Financial Services, Mergers & Acquisitions
Industry Focus: Financial Services

The regulatory landscape for the Australian funds management industry continues to change. This article provides an overview of five key matters that should be on the radar of fund managers.

  1. FATCA

The US Foreign Account Tax Compliance Act (FATCA) allows the US Internal Revenue Service (IRS) to identify and collect tax from "US persons" who invest in US assets through non-US "foreign financial institutions" (FFIs). FFIs include investment funds, as well as banks, building societies, credit unions, specified life insurance companies, custodians and some brokers.

Under FATCA, from 1 July 2014 FFIs are required to identify US clients and disclose their details to the IRS, or deduct 30% withholding tax from distributions of US-sourced income to those clients. See our previous article for further background on FATCA.

On 28 April 2014, the Australian and US governments signed an intergovernmental agreement (IGA) in respect of FATCA. Treasury also released draft implementing legislation for public comment. A key outcome of the IGA is that Australian fund managers and other financial institutions will not have to report account holder information to the IRS, but will instead be subject to annual reporting obligations to the ATO.

All fund managers should be urgently reviewing and updating their systems, processes and account opening documentation to comply with the new due diligence and reporting obligations. From 1 July 2014, they should also be reviewing existing client accounts to determine whether any of those accounts are US reportable accounts. This will require them to apply the due diligence procedures specified in Annex 1 to the IGA (alternatively, they may elect to use any alternative procedures described in the US Treasury regulations).

  1. FOFA amendments

The Australian Government introduced the Corporations (Streamlining of Future of Financial Advice) Bill 2014 (FOFA Amendment Bill) into Parliament on 19 March 2014. The FOFA Amendment Bill was referred to the Senate Economics Committee for industry consultation on 24 March, and implementation of the changes is on hold pending such consultation.

The amendments most relevant to fund managers relate to general advice. The government's initial proposal was to exempt general advice completely from the ban on conflicted remuneration (as reflected in the exposure draft released on 20 December 2013).

However, the government has retreated from this position and now proposes to limit the exemption so that it is available only if:

  • the benefit is given to an employee of the licensee in relation to general advice given to a retail client, and
  • the employee has not given personal advice to the retail client in the last 12 months,and
  • the financial product on which the general advice is given is a product issued or sold by the licensee.

We consider that there are a number of shortcomings with the revised proposal. It does not take account of group structures, where employees are employed by a related body corporate of the licensee. Nor would the exemption apply where the benefit is given to a contractor, yet there seems no policy reason why the exemption should not apply in that situation as well.

The revised proposal also fails to address the breach identified by ASIC in Regulatory Guide 246 (at paragraphs 112 and following) of a product issuer accepting management or administration fees (which might reasonably be expected to influence general advice given to retail clients to increase or maintain their investment with the product issuer). Accordingly, at this stage product issuers will need to continue to rely on ASIC's no-action position as described in RG 246.

Fund managers should continue to monitor the progress of the FOFA Amendment Bill. They should also keep an eye out for any consultation following on from the FOFA options paper on wholesale and retail clients published in 2011.

  1. Asia Region Funds Passport

On 16 April 2014, an APEC working group comprising Australia, Korea, New Zealand, Singapore, Thailand and the Philippines released a consultation paper on the Asia Region Funds Passport (Passport).

The Passport will be a new regulatory framework to facilitate the distribution of eligible 'collective investment schemes' to retail investors in passport member countries. The Consultation Paper sets out, and invites comments on, the proposed rules and processes developed by the working group to govern the operation of the Passport. The due date for submissions is 11 July 2014.

Once implemented, it is anticipated that the Passport will greatly enhance opportunities for Australian fund managers to tap into Asia's growing investor base.

  1. ASIC regulatory guidance and relief

Fund managers should also look out for developments in the following areas of ASIC guidance and relief:

  • ASIC Class Order 12/749 is due to expire on 30 June 2015. This Class Order relieves hedge funds, multi-fund offerings and superannuation platforms from the shorter PDS regime. Watch out for consultation or developments on any permanent arrangements which are to apply after expiry of the Class Order.
  • ASIC's final guidance on risk management systems of responsible entities is overdue for release, following on from last year's Consultation Paper 204 and draft regulatory guide.
  1. CAMAC report on managed investment schemes

The Corporations and Markets Advisory Committee (CAMAC) was established by the Federal Government in 1989 to provide independent advice on the regulation of corporations and financial markets. CAMAC has, for a few years, been reviewing managed investment schemes. It issued a report in 2012 which primarily considered matters relating to schemes in financial distress, and also proposed the concept of a scheme being a legal entity distinct from the responsible entity.

CAMAC has recently released its second report, which deals with the establishment and ongoing operation of schemes. CAMAC has stated that, in formulating its proposals, its general approach has been that the regulatory regime for managed investment schemes should be aligned with that for companies, unless there are compelling reasons for treating schemes differently.

CAMAC's proposals cover a range of areas including governance frameworks, matters to be dealt with in the constitution, scheme meetings, withdrawals, disclosure and takeovers. Perhaps its most controversial proposal is that all managed investment schemes should be registered. CAMAC questions whether wholesale schemes should be exempt from registration, and advocates the abolition of the disclosure test (under which schemes do not need to be registered if all interests in the scheme have been issued in a way that does not require PDS disclosure).

These proposals might be subsumed into the government's Financial System Inquiry, announced in December 2013, and fund managers should also keep this inquiry on their radar.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.