On 13 June 2017, ASIC released Report 528 following their surveillance of responsible entities of registered managed investment schemes. The report indicates the areas where responsible entities fall short in their compliance with legal obligations and outlines ASIC’s expectations and recommendations for the future.
The regulatory landscape for ‘responsible entities’.
As the holder of an Australian Financial Services Licence and the gatekeeper of investor funds, responsible entities of registered managed investment schemes must comply with a number of obligations under the Corporations Act (Cth) 2001 including:
- acting in the best interest of the members of the scheme;
- ensuring scheme property is clearly identified and held separately from the property of the responsible entity; and
- providing all services in an efficient, honest and fair manner.
These obligations seek to ensure that responsible entities are competent and provide financial services that are in the best interests of investors in their schemes. The obligations also ensure that if something goes wrong, investors have protection under the law.
What findings did ASIC make?
ASIC’s findings in Report 528 come from a review of 28 responsible entities, who in total manage over $49 billion in scheme property across 336 schemes.
While ASIC noted that these responsible entities demonstrated a commitment to complying with their obligations, there were a number of areas of compliance that fell short of ASIC’s expectations in key areas such as insurance, breach reporting and risk management systems.
What did ASIC recommend?
To assist responsible entities going forward, ASIC has made a number of recommendations in line with their view of 'what good looks like' in the funds management sector. Some of ASIC’s key recommendations include:
- Take a more proactive approach towards PI insurance: ASIC noted that responsible entities should regularly review their PI insurance arrangements to ensure that the minimum levels of cover are met, and that the overall level of cover is adequate in context of the nature, size and complexity of their business.
- Strengthen conflicts management: ASIC found that ‘conflicts management’ was not a standard board meeting agenda item for a number of responsible entities. ASIC has urged all responsible entities to re-review the contents of ASIC RG181 and strengthen their conflicts management measures to ensure they are adequate, implemented and maintained.
- Review breach reporting measures more regularly: ASIC found that breach reporting measures were reviewed infrequently by responsible entities. A responsible entity should ideally review their breach reporting measures on an ongoing basis to ensure that all breaches are picked up.
- More involvement from the Board: ASIC considered that Boards of responsible entities should focus more on developing ‘culture’, including setting the tone from the top and putting in place governance structures to ensure this tone is implemented in an effective way throughout the entity.
ASIC also made findings about the risk management and cyber resilience practices adopted by responsible entities, and recommended the broad introduction of internal ‘whistleblowing’ regimes to support an open and transparent culture within the entity.
In light of ASIC’s continued surveillance of this sector, it is important that responsible entities continue to review and update their compliance procedures.
Our Financial Services team has extensive regulatory and compliance experience and are dedicated to assist financial services businesses. If you would like further information or would like assistance on fulfilling your compliance obligations, please do not hesitate to contact Hillary Ray or one of our Financial Services team.