If you are providing a managed discretionary account (MDA) service, you need to ensure that your client is making a well-informed decision in entering into the MDA service. This checklist will help you verify that you are providing your clients with sufficient understanding of the underlying risks associated with an MDA offering.
Providing an FSG
A retail client must be provided with a financial services guide (FSG) prior to entering into an MDA contract. This must include sufficient information to enable a retail client to make an informed decision about whether to enter into an MDA service. This includes, amongst other things, information about any significant risks associated with investing through the MDA service, a statement that the MDA contract will include an Investment Program and Statement of Advice that meet certain requirements, and any other information that might reasonably be expected to have a material influence on a retail client's decision about whether to use the MDA service. The additional requirements are set out in ASIC Class Order [CO 04/194] and further details can be found in ASIC's Regulatory Guide 179.
Entering into an MDA contract
An MDA provider must also enter into an MDA contract with each retail client. As noted, the Investment Program and Statement of Advice must meet certain requirements. These include an outline of the discretions the provider will be authorised and required to exercise, any significant risks associated with the MDA contract, and the basis on which the MDA contract is considered to be suitable for the client.
Focus on significant risks, not products/strategies
On the basis of the guidance contained in ASIC's Regulatory Guide 179, it is our view that an adviser must ensure that a client understands the significant risks associated with the MDA offering, rather than the underlying products or strategies themselves. Of course, explaining the risks will invariably involve some explanation of the underlying strategy or products. For example, if the MDA includes a discretion to trade CFDs or other derivatives, a clear explanation of the risk is necessary but a detailed explanation of the way CFDs work in our view would not be required.
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.