Regulatory capital - the amount of regulatory capital held by responsible entities and APRA regulated entities may need to increase;
Wholesale / retail test - consider whether wholesale funds may need to be converted to retail;
Remuneration structures - change your fund and platform remuneration structures in anticipation of the legislative changes to conflicted remuneration;
Take advantage of recent tax changes - ensure you take advantage of recent tax changes;
Constitutions and deeds - amend fund constitutions for changes to tax legislation and recent tax and other cases;
Product Disclosure Statements and due diligence - update PDSs and due diligence procedures;
Other fund documents - review indemnities and guarantees and negotiate changes to agreements for the new Personal Property Securities regime;
Foreign funds - prepare for more foreign funds being available to Australian investors;
Offshore strategies - review offshore strategies and the existing foreign investor base; and
Next steps - participate in the debate of the future reforms.
The level of capital that financial institutions will be required to maintain seems likely to increase in both Australia and elsewhere. The low level of capital held leading up to the GFC has been criticised. For example, the report of the Financial Crisis Inquiry Commission concluded that as at 2007, five major investment banks were operating with “extraordinarily thin capital”.
For responsible entities, the Australian Securities and Investments Commission (“ASIC”) proposes that one of the following two options be adopted as the method for calculating the amount of net tangible assets that a responsible entity is required to hold:
the greater of $150,000; 0.5% of the average value of scheme property (capped at $5 million); and 10% of its average gross revenue (with no maximum); or
10% of its average gross revenue, with a minimum of $500,000 and no maximum.
A new ASIC Regulatory Guide is expected to be released in March 2011 and to have a start date of 1 July 2011 for new responsible entities.
Superannuation trustees and other APRA regulated entities should also expect to have to increase their regulatory capital. In response to the Cooper review, the Government has indicated that it accepts that capital adequacy requirements for superannuation trustees need to change. The Government has indicated that it will consult on the form and calculation of the required capital. In the meantime, trustees that are part of a financial services conglomerate group should take steps to follow the Government's further consultation on capital adequacy requirements for prudentially regulated conglomerate groups.
Wholesale funds that accept non-institutional investors should be prepared for the possibility of the definition of “wholesale client” being tightened. For more information on the Government’s options paper on the reform of the retail/wholesale client distinction in the Corporations Act, see our previous publication.
A tightening of the wholesale client definition would reduce the universe of investors eligible to invest in wholesale funds and other products. Wholesale fund operators might need to consider converting funds to retail, which would include steps such as registering the fund as a managed investment scheme and preparing a PDS.
Managers are already redesigning the commissions provided by funds in anticipation of the 1 July 2012 prospective ban on conflicted remuneration structures. You should:
review fee and commission structures in light of the Government’s response to the Parliamentary Joint Committee on Corporations and Financial Services’ Inquiry into financial products and services in Australia (see our previous publication); and
watch UK developments arising from the UK FSA investigation into platform suitability, advice through platforms and disclosure practices.
This year, we are expecting a number of proposed amendments to the tax laws to be enacted, and for further details regarding measures that have been announced to become available. Managers should be aware of these developments so they can identify and utilise opportunities as they arise on a timely basis and to gain competitive advantage.
the new MIT withholding regime — may create opportunities for new collective investment structures that invest in property. Managers should seek to ensure their property investment structures are “MIT compliant”;
the new MIT attribution regime — managers should review what new opportunities may arise under the new regime; for example, what types of new multi-class structures can be implemented;
the constituent documents, structure and ownership of any current or intended structures should be reviewed to ensure that they can obtain the benefit of these changes. The administration systems will need to be reviewed to ensure they can support the process required under the new regime;
the repeal of the foreign investment fund (“FIF”) rules, the new “foreign accumulation fund” rules expected as early as this month and the amendments to the controlled foreign company (“CFC”) rules — managers should identify what types of foreign products that they can now offer to the Australian market;
proposed new exemptions for foreign managed funds and the investment manager regime (“IMR”) from the 2010 / 2011 income year — managers may wish to examine the appointment of Australian managers to manage portfolios for foreign funds; and
the proposed new collective investment vehicle regime — may create opportunities for new collective investment structures that may be more palatable to foreign investors and may have less Australian tax risk and exposure.
Most funds offered to retail clients will need to replace existing product disclosure statements with short form PDSs from 22 June 2011. Not only will PDSs be significantly different, information to be incorporated by reference will need to be prepared and issuers should update their due diligence and verification procedures accordingly. For further details, see Mallesons’ publication entitled “Final shorter PDS Regulations released” dated June 2010.
Short form PDSs apply only to “simple managed investment schemes”, superannuation products and margin lending facilities. A determination must be made as to whether each fund is simple or not. This is not a straightforward exercise for some funds.
Even for non-simple schemes, PDSs should be reviewed to take into account:
Fund constitutions and trust deeds should be reviewed as soon as possible and amended where appropriate to take into account:
Where constitutions are to be amended, the possible requirement for a meeting and resettlement risks should be considered.
In addition to the regulatory capital issue raised in 1 above, ASIC Consultation Paper 140 also indicates that ASIC is considering prohibiting responsible entities from providing certain guarantees and indemnities (such as guarantees in their capacity as responsible entity of a scheme). Responsible entities will need to review guarantees and indemnities once ASIC releases the new Regulatory Guide (which is anticipated to occur in March 2011).
Expect counterparties to amend documents under which the fund trustee or responsible entity gives a security interest that will be subject to the Personal Property Securities (“PPS”) reform. The PPS Act and PPS Register are now anticipated to come into effect in October 2011. In addition to charges and mortgages, other agreements may include prime brokerage agreements, custody agreements, nominee agreements, and sponsorship agreements.
At this stage, we consider that it will not be necessary to amend other fund documents during the course of 2011 to deal with the proposed privacy changes (although we anticipate that this is likely to be a project for 2012).
We expect to see more foreign funds offered to Australian residents by mid 2011 for two reasons:
If you have access to foreign funds that are not currently offered in Australia, you might wish to re-consider offering them in Australia.
Managers should review their offshore strategies and their existing foreign investor base.
It will be more difficult to raise capital in some offshore countries.
Fundraising might also be easier and more attractive in some other countries. For example, since January 2011 foreign private equity investors are able to form limited partnership Renminbi funds, and qualified foreign limited partners are able to invest with RMB converted from foreign currency. For further details see our previous publication.
“You deserve the government you get” - this quote has been attributed to various people, including Joseph de Maistre and Thomas Jefferson.
We encourage you to participate in the debate regarding further reforms that could reshape your industry. Future reforms that are currently in the ‘consultation / debate’ stage, and that have the potential to significantly affect the funds industry, are set out below:
The authors wish to acknowledge the contributions made to this alert by John Malon, Andrew Clements, Michael Mathieson, James Moore, Hal Bolitho, Glenda Hanson, Will McCosker and John Sullivan.