Given the recent release of Treasury's highly anticipated public consultation paper on the review of the managed investment scheme (MIS) regulatory framework, we anticipate industry will engage in significant debate which may well ultimately herald a new regime.
MISs are Australia's primary investment vehicle, and any review of the framework may have significant implications for our domestic investment landscape.
Partner Elliott Stumm and lawyer Matt Hinde explain what fund managers need to know now.
ESSENTIAL TAKEOUTS
- The Albanese Government has tasked Treasury to review the regulatory framework governing managed investment schemes and consult with industry before reporting findings to government by early 2024.
- The review examines whether the regulatory framework is fit-for-purpose, identifies potential gaps, and considers what enhancements can be made to reduce undue financial risk for investors.
- Reform to all matters being considered by Treasury may have a significant impact on the MIS space.
SCOPE OF THE REVIEW
On 8 March 2023, the Albanese Government announced it had tasked Treasury to conduct a review of the regulatory framework governing MISs and consult with industry before reporting findings to government by early 2024.
The review examines whether the regulatory framework is fit-for-purpose, identifies potential gaps, and considers what enhancements can be made to reduce undue financial risk for investors. The review is looking at reform options, focussing on-
- whether the thresholds that determine an investor as a retail or wholesale client remain appropriate
- whether certain MIS investments could 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 MIS are appropriate, and
- interactions between Commonwealth and state laws when regulating real estate investments by MISs.
TREASURY IS ALSO CONSIDERING-
- whether 'investor rights' for people who invest in MISs are appropriate
- liquidity requirements for MISs, and
- whether an insolvency regime is required for MISs.
OUTSIDE THE SCOPE OF REVIEW
The review does not consider-
- whether MISs should be brought within the scope of the Compensation Scheme of Last Resort
- litigation funding schemes or time-sharing schemes
- issues relating to the tax treatment of MISs and investors
- any changes to the corporate collective investment vehicle regime, and
- the rights and obligations of custodians.
CRITICAL QUESTIONS
The following key questions (among others) arise from the consultation paper which possess the potential to notably impact fund managers:
- Should the financial thresholds for the product value and the individual wealth tests be increased?
- Should certain assets be excluded when determining an individual's net assets for the individual wealth test?
- Should consent requirements be introduced in relation to wholesale client arrangements?
- Should responsible entities be required to have a majority of external board members?
- Should restrictions be imposed on agreements or clauses in scheme constitutions that disincentivise scheme members from replacing a responsible entity?
- Are any changes required to the voting requirements or meeting provisions to replace a responsible entity?
- Are any changes required to the obligations of responsible entities to enhance scheme governance and compliance?
IMPLICATIONS FOR FUND MANAGERS
While Treasury's contemplation of reform to the critical aspects mentioned above could have a significant impact on the MIS space, wholesale fund managers should pay specific attention to the potential revision of the retail and wholesale client tests.
Revisions to the monetary thresholds for 'wholesale clients' have been a longstanding topic of discussion, yet they have remained unchanged for more than 20 years.
With respect to investment products, the Corporations Act (Act) currently provides (among other tests) a person will be a 'wholesale client' if they provide a certificate from a qualified accountant that states the person has net assets of at least $2.5 million or gross income for each of the last two financial years of at least $250,000. Additionally, the Act provides that a person will be a 'wholesale client' if, for example, the value of the product being acquired is $500,000 or more.
These thresholds were set more than 20 years ago and have not been subject to indexation. If indexed to the consumer price index, these thresholds today would be closer to double what they currently are.
If the monetary thresholds are materially increased, this may substantially reduce the pool of potential investors that may invest in fund managers' wholesale funds, which would impact the success of wholesale fund offerings in the future. In practice, a material amendment to the tests may lead to some formerly 'wholesale' fund managers moving into the more regulated 'retail' space.
While there is no visibility on how much (if at all) the thresholds may increase, wholesale fund managers should consider the implications of potential revisions to these thresholds to their business. For example, what impact would it have on your ability to raise funds from your current investor base if the thresholds were to double?
WHAT'S NEXT?
We expect this review will ignite a wide and lengthy debate in the funds management and broader financial services industry. McMahon Clarke is making a submission and responses to Treasury's consultation paper can be submitted up until 29 September 2023. The findings of the review will ultimately be presented to Government in early 2024.
WE CAN HELP
We can assist with any consultation submissions and are well-placed to assist fund managers prepare for these potential changes. Please reach out to discuss any queries with a member of our Funds Management team.