After several years of consultation, ASIC has finally released its new policy in relation to the provision of Managed Discretionary Account ("MDA") services.
ASIC has replaced Class Order [CO 04/194] Managed Discretionary Accounts ("the Class Order") with ASIC Corporations (Managed Discretionary Accounts) Instrument 2016/968 ("the Instrument"), and also issued a revised Regulatory Guide 179: Managed discretionary accounts ("RG 179").
So, what does this mean for MDA Operators and MDA Advisers?
WHO is affected?
All present MDA Operators and those advisers who provide MDA services to clients either though an MDA operator or a regulated platform ("MDA Advisers"), and those that intend to provide MDA services in the future.
WHAT don't you need to do?
ASIC was proposing to impose enhanced regulatory capital requirements on MDA Operators (similar to those applying to IDPS operators). However, it decided in the end not to impose such requirements.
WHAT do you need to do?
If you currently rely on the relief provided in the Class Order to provide an MDA service, then you:
- can continue to do so until 1 October 2017;
- can choose to opt into the new requirements before then as long as you publish a notice on your website; and
- must be ready to comply with the requirements of the Instrument by 1 October 2017.
If you currently offer an MDA service under ASIC's regulated platform "no-action letter", you must:
- obtain an AFS licence authorisation to deal (issue) MDAs by 1 October 2018; and
- be ready to comply with the Instrument by the date your AFS licence authorisation is issued, and before 1 October 2018.
If you want to start providing an MDA service from now on, you will need to:
- apply for an AFS licence with an authorisation to deal (issue) in MDAs and other related authorisations; and
- be ready to comply with the Instrument immediately.
What are the major changes?
The Instrument is fairly similar to the Class Order and contains the same managed investment scheme and disclosure relief. However, the Instrument contains a number of new obligations that do not exist in the Class Order. The new obligations are:
Breach notifications under section 912D of the Corporations Act 2001 ("the Act") must be lodged with ASIC within 10 business days after becoming aware of the breach or likely breach, instead of 5 business days. This is consistent with the obligation for all AFS licensees.
There is some relief provided to MDA Advisers using a regulated platform from complying with the quarterly and annual transaction reporting requirements.
Termination of MDAs
MDA providers must have internal written policies in place which set out the steps you take to terminate an MDA contract. MDA providers must also ensure that MDA contracts include provisions relating to termination of the contract, which includes explaining your policy for ensuring the orderly exit of clients from MDA contracts.
Consent and Disclosure
MDA providers may now invest client portfolio assets in non-limited recourse products if you provide certain warnings and obtain the prior written consent of the client.
Financial services guides must be updated to include clear, concise and effective disclosure about any outsourcing arrangements that apply to the MDA.
MDA contracts must now include clear, concise and effective disclosure about voting rights.
Investment Programs must include an investment strategy of sufficient detail to allow the client to form an opinion about the suitability of the investment program.
Annual investor statement and audit reports must include specific information about total fees and costs.
Providing MDA services to family members
The Instrument still provides "family member" relief from the requirement to obtain an MDA licence authorisation, register the scheme and certain disclosure requirements. While the Class Order applied to 'immediate family members' ASIC has now clarified that 'family members' means a spouse or non-adult child.
If you invest a family member's funds in non-limited recourse products, you must provide the same warnings and obtain the family member's prior written consent as if they were a client. This is in addition to also complying with conditions relating to monitoring and supervision, disclosure and obtaining written acknowledgement.
Updated ASIC guidance
The revised RG 179 contains updated guidance on ASIC's expectations in relation to a range of subjects, including:
- best interests obligations, managing conflicts of interest and the requirement to provide a statement of advice;
- asset holding requirements;
- fee disclosure in fee disclosure statements, financial services guides and MDA contracts; and
- licensing considerations for persons providing outsourced external administration support to MDA providers.
All MDA Operators and MDA Advisers should plan for their transition to the new requirements by reviewing their MDA contracts, disclosure materials and compliance procedures to reflect these changes and incorporate ASIC's guidance.
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.