Managed Investment Schemes under review

Treasury has released its long-awaited consultation paper on its review of Managed Investment Schemes.

Those interested in the progress of the Compensation Scheme of Last Resort through Parliament will remember calls for that scheme to include unpaid AFCA determinations against MISs. This followed high profile MIS cases such as Sterling Income Trust, Trio Capital and Timbercorp.

The CSLR is designed to compensate consumers as a last resort when a determination from AFCA is unable to be paid by the firm against whom the complaint is made. While AFCA’s jurisdiction covers MISs, investors who make complaints to AFCA against schemes in administration are left empty handed. This has led to calls by consumer groups and industry bodies to expand the CSLR to ensure that in the event of a MIS collapse, investors with complaints can lodge them with AFCA and, if successful, be compensated by the scheme.

Interestingly, when in opposition, Labor pushed for MISs to be included in the CSLR but once in government, passed the bill, essentially in its original form, while announcing that it would conduct a review into the MIS regulatory framework.

The MIS review will examine whether the regulatory framework is fit-for-purpose, identify potential gaps, and consider what enhancements can be made to reduce undue financial risk for investors.

It will consider reform options, focusing on:

  • whether the thresholds that determine whether an investor is a retail or wholesale client remain appropriate,
  • whether certain MIS investments should be able to be marketed and sold to retail investors,
  • the various roles and obligations of responsible entities and whether the governance, compliance and risk management frameworks for MISs are appropriate, and
  • interactions between Commonwealth and State laws when regulating real estate investments by MISs (including issues arising in relation to the failure of the Sterling Income Trust).

Treasury will also consider:

  • whether ‘investor rights’ for people who invest in MISs are appropriate;
  • liquidity requirements for MISs; and
  • whether an insolvency regime is required for MISs.

Wholesale clients

There is a focus on the wholesale investor thresholds in the review with feedback being requested in response to the following questions:

  • Should the financial threshold for the product value test be increased? If so, increased to what value and why?
  • Should the financial thresholds for the net assets and/or gross income in the individual wealth test be increased? If so, increased to what value and why?
  • Should certain assets be excluded when determining an individual’s net assets for the purposes of the individual wealth test? If so, which assets and why?
  • If consent requirements were to be introduced:
    • How could these be designed to ensure investors understand the consequences of being considered a wholesale client?
    • Should the same consent requirements be introduced for each wholesale client test (or revised in the case of the sophisticated investor test) in Chapter 7 of the Corporations Act? If not, why not?

While the review is limited to the regulatory framework of managed investment schemes, the questions are aimed at the wholesale investor definitions more broadly.

SIAA undertook some work in this area last year and published a Thought Leadership Paper entitled Does the wholesale investor test need to change. The paper covers many of the questions asked in the Treasury consultation paper. The link to the paper is here