The updates to the guidance reflect:

• the changes made to the relief provided in ASIC Corporations (Wholesale Equity Scheme Trustees) Instrument 2017/849 to trustees of wholesale equity schemes that are operated by a manager holding an Australian financial services (AFS) licence; and
• the amendments made to the financial requirements that may apply to these managers in ASIC Corporations (Amendment and Repeal) Instrument 2017/848.

Background

To remove impediments in the venture capital and private equity industry, ASIC has, since 2007, given trustees of wholesale equity schemes relief from the requirement to hold an AFS licence to provide certain financial services in connection with the wholesale equity scheme.

A ‘wholesale equity scheme’ is essentially an unregistered managed investment scheme operated by a manager that holds an AFS licence. Wholesale equity schemes primarily invest in securities of unlisted companies and all members must be wholesale clients. Wholesale equity schemes are usually structured by the manager using a multiple unit trust structure with separate corporate trustees that are related bodies corporate of the manager.

In September 2017, following public consultation in Consultation Paper 280 ASIC class order on wholesale equity schemes: Licensing relief for trustees—[CO 07/74] (CP 280), we issued ASIC Corporations (Wholesale Equity Scheme Trustees) Instrument 2017/849, which updated the relief to take into account a strengthening of financial and custody requirements in 2013, outlined in Class Order [CO 13/760] Financial requirements for responsible entities and operators of investor directed portfolio services, Class Order [CO 13/761] Financial requirements for custodial and depository services and Class Order [CO 13/1410] Holding assets: Standards for providers of custodial and depository services.

We also issued ASIC Corporations (Amendment and Repeal) Instrument 2017/848  to amend [CO 13/760] and [CO 13/761] as they apply to managers of wholesale equity schemes to make these consistent with the requirements in the new instrument.

REP 545 highlights the key issues that arose out of the submissions received on CP 280 and our responses to those issues.

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The new requirements are aimed at lifting the education, training and ethical standards in the financial advice sector.

ASIC’s website now provides an overview of the new requirements, as well as related information on:

• the scope of the reforms
• the obligations on advisers
• the commencement dates of the reforms
• the Financial Adviser Standards and Ethics Authority
• compliance schemes for the Code of Ethics, and
• updates to the Financial Advisers Register.

This information will help financial advisers, and those coming into the advice industry, prepare for the new requirements.

This information can be found on the ASIC website at Professional standards for financial advisers – reforms.

Background

The Corporations Amendment (Professional Standards of Financial Advisers) Act 2017 commenced on 15 March 2017. It introduces a number of new requirements for advisers who provide personal advice to retail clients on more complex financial products.

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ASIC has become aware of a widespread practice among financial advisers of witnessing or having staff members witness client signatures on binding death nomination forms without being in the presence of the signatory. In other cases, forms have been backdated. Each of these practices fails to comply with the law and may lead to the nominations being invalid.

Acting ASIC Chair Peter Kell said, ‘Improper and unethical practices around binding death nomination forms can lead to very poor consumer outcomes. Advisers, licensees and their staff who engage in these practices should consider this a final warning. AFS licensees have ultimate responsibility for the conduct of their representatives and need to effectively monitor and supervise their representatives.’

The proper execution of binding death nomination forms is important because this form directs the trustee of the superannuation fund to pay superannuation and insurance benefits in accordance with the account holder’s instructions. Improper witnessing of the form can make it invalid, resulting in the death nomination being rejected. The trustee may then choose to exercise its discretion in a manner other than in accordance with the account holder’s nomination, causing delays and uncertainty about the payment of the death benefit.

Australian financial services (AFS) licensees and advisers have a professional and legal obligation to comply with the law. Taking short cuts which result in important forms being invalidated and thereby jeopardising the account holder’s wishes does not meet the minimum advice and conduct standards expected by ASIC.

AFS licensees must:

Train staff on their professional and ethical obligations

AFS licensees have an obligation to ensure that their staff are adequately trained and understand their professional and ethical obligations. A high standard of adviser professionalism, judgement and integrity is vital to ensuring that consumer trust and confidence is maintained in the financial services sector.

Monitor and supervise their representatives

ASIC expects that licensees will maintain adequate monitoring and supervision arrangements as an integral feature of their risk and compliance frameworks. Part of monitoring and supervising advisers involves licensees regularly reviewing the conduct of their advisers and performing ‘spot checks’ of key documentation to ensure that they are appropriately executed.

Where irregularities are found in key documentation, licensees should conduct the necessary enquiries in a timely manner. This may include contacting the affected clients, remediating clients where appropriate and conducting broader reviews of the relevant adviser’s client files.

Remediate consumers where misconduct is found

AFS licensees must ensure that they proactively address any systemic problems caused by the conduct of their advisers and, where necessary, put processes in place to remediate their clients in a timely, fair and transparent way for loss.

ASIC has published guidance on client review and remediation in Regulatory Guide 256 Client review and remediation conducted by advice licensees (RG 256). While the guidance is directed at licensees who provide personal advice to retail clients, the principles set out in the guidance should be applied to other review and remediation situations where relevant.

Identify breaches in a timely manner

ASIC expects licensees to have effective systems in place for identifying, escalating and reporting breaches in a timely manner. Inadequate or late reporting could indicate to ASIC that the licensee has broader compliance and cultural issues and would be a red flag for closer scrutiny.

Background

Binding death nomination forms are regulated by the Superannuation Industry (Supervision) Act 1993(Cth) and are an important part of estate planning. In the event of a person’s death, they direct the trustee of the person’s superannuation fund to pay the person’s superannuation and insurance benefits (if any) in accordance with their wishes.

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The platforms sector attracts significant funds. In the last decade the level of non-superannuation-related investment in platforms has doubled to around $100 billion of funds under management.

‘The platforms sector has changed and grown considerably and continues to develop and expand,’ ASIC Commissioner Peter Kell said. ‘This is a trend we expect to continue with new forms of vertically integrated business models emerging. We also anticipate that more investors will seek to make direct investments without financial advice.’

In response to this shift in investor behaviour, ASIC proposes additional requirements for platform operators to enhance investor rights associated with investments made through platforms.

‘ASIC is proposing that clients should be entitled to the same rights concerning their investments through those vehicles that they would have had if they had invested directly,’ Mr Kell said.

Mr Kell said ASIC wanted investors to be confident and informed when making decisions to use platforms and invest through them.

‘Our proposals aim to strengthen operating requirements for platform operators, ensuring they have adequate resources to conduct their financial services businesses, supported by appropriate corporate structures and compliance arrangements,’ he said.

ASIC also proposes to require platform operators to disclose how they select financial products for inclusion on investment menus, information that can have an influence on the investment decision of a client.

Comments on Consultation Paper 176 Review of ASIC policy on platforms: Update to RG 148 CP 176 are due by 20 April 2012.

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The proposals follow an ASIC review of disclosure documents issued by responsible entities in the $28 billion unlisted retail property sector.

• ASIC found a number of key disclosures were not adequately addressed, including:
• the risks associated with the borrowing maturity profile and the extent of hedging
• details about property development activities (primarily timetables and funding)
• the basis of valuations and the risks associated with ‘as if complete’ valuations
• reasons for distributions being made from sources other than income and the sustainability of these distributions over the next 12 months
• withdrawal rights and the risks associated with withdrawal arrangements promoted to investors.

ASIC Chairman Greg Medcraft said: ‘One of our business priorities focuses on promoting confident and informed investors and financial consumers.

‘These proposals are aimed at improving the level, comparability and consistency of disclosure provided to retail investors by extending our ‘if not, why not’ benchmark disclosure model to unlisted property schemes.’

The six benchmarks address key issues including:

• gearing policy
• interest cover policy
• interest capitalisation
• valuation policy
• related party transactions
• distribution practices.

The proposals also clarify the eight disclosure principles in Section C of RG 46 and provide further guidance on how responsible entities should apply the principles.

‘Our experience indicates that investors need better quality and relevant disclosure, presented in a way best suited to investor understanding,’ Mr Medcraft said.

‘PDSs must be worded and presented in a clear, concise and effective manner to help retail investors assess an offer and make informed investment decisions.’

1 July 2012 is proposed as the start date for responsible entities to disclose against the benchmarks and amended disclosure principles.

Comments on Consultation Paper 163 Unlisted property schemes: Update to RG 46 (CP 163) are due by 6 September 2011.

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