MIS compliance plan scrutiny ‘exonerates’ advice from product failures: AIOFP

According to an Australian Securities and Investments Commission (ASIC) review, most responsible entities (RE) are failing to address the most important requirements across the design and distribution obligation (DDO), internal dispute resolution and reportable situations regimes.

The regulator assessed 50 compliance plans used by REs in the operation of a combined 1,471 funds – with managed investments totalling almost $1 trillion – and found a range of issues, including some failing to even address DDO at all.

This suggests, ASIC commissioner Alan Kirkland said, that “they haven’t been meaningfully reviewed since 2021”.

“These plans set out how responsible entities comply with the law, yet many plans we reviewed failed to adequately set out compliance with important regulatory obligations. Failing to plan is planning to fail,” Kirkland added.

“ASIC has provided long-standing guidance to help REs maintain adequate compliance plans. There is no excuse for the scale of poor practice we have identified. In ASIC’s view, these types of deficiencies raise concerns that governance arrangements are lacking.”

The regulator urged the REs to “swiftly address inadequacies and gaps” in their plans, adding it is investigating some of those involved for potential breaches of their legal obligations.

“We will continue to monitor the quality of compliance plans going forward. This review will not be limited to the obligations we examined in our recent surveillance,” Kirkland added.

Thanking the regulator for its statement, Association of Independently Owned Financial Professionals (AIOFP) executive director Peter Johnston said the review has put the focus for product failures firmly on the manufacturers.

“The fundamental problem with this PDS registration process is consumers think ASIC have ’approved’ the product by analysing the business model’s sustainability and director backgrounds, but in reality, they have not,” Johnston said.

“The ASC/politicians in 1991 basically threw consumers under the bus whilst protecting their own liability with the change to this PDS format.

“This caveat emptor approach by ASIC needs to change to protect consumers – surely the circa $40 billion of failed/impaired funds since 2007 is sufficient evidence to put in place protections for consumers? It has been discussed many times over the years, but it just seems easier to unfairly blame financial advisers.”

However, ASIC’s review of RE compliance plans changes this, he said.

“This statement by ASIC, however, effectively shifts the blame to the responsible entities/product manufacturers for product failure over the past 30 years and did not mention the term ‘financial adviser’ once – a very fair and welcomed outcome,” Johnston added.

“This now finally exonerates financial advisers from any past innuendo or blame for products failing, as it should be. We thank ASIC for this statement.”

While there has been little appetite from government to extend the Compensation Scheme of Last Resort (CSLR) to managed investment schemes (MIS) and product manufacturers, Johnston believes this review provides a solid basis to convince new Financial Services Minister Daniel Mulino to roll them into the scheme.

“We will now be writing to the minister, all members of Parliament and Treasury officials about these revelations and why financial advisers cannot be held responsible for product failure within the CSLR levy structure,” he said.

Speaking on a Financial Services Council (FSC) webinar in March, then-minister Stephen Jones said the Treasury review of the CSLR was not a “backdoor mechanism” to include MISs in the scheme.

“I want to ensure that what’s occurring doesn’t become a backdoor mechanism to drag that stuff in,” Jones said in reference to MISs.

“The conscious reason for doing that, it was going to add a whole bunch of risk into a compensation scheme that I don’t think is sustainably manageable.”

This position is at odds with much of the advice profession, which has argued that unless product providers are added to the CSLR, advisers will continue to pay for product failures.

However, the FSC has been a notable outlier on this position, previously arguing that it could actually “potentially increase the cost burden on financial advisers” and that there are “more appropriate mechanisms that could reduce the cost burden”.