Are we simply too wrapped up in wraps?

Australia's financial services watchdog has just handed down its vi-sion of how wrap accounts should be regulated.

Australia's financial services watchdog has just handed down its vi-sion of how wrap accounts should be regulated. Tom Collins takes a look at the proposals and the deafening silence from industry groups on this critical issue.

1999 - the year of the wrap. We have already had three conferences devoted to wraps.

The Australian Securities and Investment Commission (ASIC) has re-leased its policy proposal paper (PPP) on non-discretionary portfolio services and created a new acronym for the industry - NDPs. And in July we have yet another wrap conference. ASIC's PPP on NDPs (do you like that?) begins to provide a clearer and more sensible structure for administration services. Its key proposal is to avoid treating NDPs as managed investments. It is a sensible proposal although I suspect it may upset some vested interest groups in the industry.

In summary, for NDPs:

* The managed investments provisions will not apply - this means funds can be pooled without setting up a trust;

* They will not have to issue a prospectus but must issue a services guide;

* All underlying managed investments will be required to have a pro-spectus. This means information memorandums are out;

* They will have to report to clients on a quarterly basis and pro-vide an annual audit report;

* The operator/custodial must ensure clients receive current disclo-sure documents (eg prospectus); and

* written authorisation from the issuers of accessible securities must be gained before they can be offered.

Further, if a dealer group badges a NDP service, they are then de-fined as the operator. This means a number of the regulatory require-ments applying to a responsible entity have to be met, such as finan-cial resource requirements and custodial standards for holding scheme property.

However, in many areas, ASIC's proposal raises more questions than it answers. For example, it uses the term "non-discretionary", but can or should the custodian have any discretion? And if the operator is a dealer, and some of its advisers are managing discretionary portfo-lios, are there any implications for the dealer and advisers? What if a client insists on a particular product, but the issuer of that product will not allow its inclusion in the NDP? And is the permis-sion of the issuer only needed if funds are to be pooled in the NDP?

ASIC is also silent on superannuation products. The paper does not address public offer superannuation discretionary master trusts. There are probably many reasons for this, but it means there are still two different disclosure regimes in place for basically the same events. These events are firstly when advising a client on prod-uct and secondly when implementing the plan. Many clients have both superannuation and ordinary money. It would make sense if the adviser could use similar offer documents and point of sale material.

I support the scrapping of investment memorandums. Anyone who has ever been involved in preparing one of these animals will tell you what a resource consuming, frustrating process they are.

However, I do not understand why the operator/custodian must ensure that the client has received current disclosure documents. Surely this is the responsibility of the dealer and adviser.

Also, I do not understand why a NDP must gain written permission from the issuers of accessible securities before they are sold. And why for initial public offerings (IPOs)? What ASIC is effectively saying is that for every float, NDPs have to seek the permission of the is-suers. Come on! Once again, isn't it the dealer's responsibility to seek out and endorse investment opportunities. The dealer then asks if the NDP can administer them.

Maybe the paper's author envisages there being a custodian and an op-erator of an NDP, where the operator is a dealer (of a financial planning network) and has badged the custodian's service (under the BT model). However, there are many dealers who won't be operators, but will still want to access a generic NDP. There will be some who will want to be both operator and custodian.

Another reason could be that ASIC has assumed that all accessible se-curities in the NDP will be held in either a pooled or co-mingled manner. This need not be and is not the case now. Retail products will be used in NDPs in the future and some custodians of existing wrap services keep individual holdings of listed securities. Issuers, especially where there is pooling, may want to be able to decide which NDPs they deal with, but surely this is a commercial not a regulatory matter.

Unfortunately, I think ASIC has not completely escaped what I call the continuous thinking syndrome. The NDP should be seen as a passive administration service, with the investment selection not being part of its regulatory responsibility. If a dealer is the operator of NDP, then that dealer should be seen as having two distinct roles. One role is the traditional role of researching and authorising invest-ment opportunities. The other is as operator of the NDP. In part, ASIC's proposals recognise this by requiring dealers who want to be operators to satisfy a number of the regulatory requirements applying to a responsible entity.

Back in March, I quoted Adrianna Bisogni, legal manager at Roth-schild, who said: "the emergence of wrap accounts is going to have more impact on the industry than the Managed Investments Act (MIA)". I agreed with her then and now I agree with her even more.

The evolving NDPs offer dealers an enormous opportunity to re-engineer their businesses. There are also some threats. Unfortu-nately, many dealers regard a NDP as just another product that can just be added on. Fortunately, ASIC has seen part of the bigger pic-ture.

There is the Implementing Wrap Services Conference on July 21 -23, the third day of which is dedicated to legal and regulatory issues. However ASIC requires responses to its paper by July 6. However, the proposals need more than just submissions to ASIC, they need to be discussed in forums before this date, especially by dealers.

This leads me to ask about the Financial Planning Association (FPA). In March, I wrote that the FPA was "worrying about other things". What is it doing now? Let's hope it does do something as I presume it wants to remain relevant to dealers.

If the FPA does not get into the debate now, it may be too late. Cur-rently there are near thirty of what could be classified as NDPs, and once the regulatory framework is settled there will be many more. However, the current models, and even those envisaged by ASIC, are really only prototypes. NDPs are still horseless carriages and the regulator has just decided that they no longer need to be preceded by a person with a bell.

Which gets me back to this article's headline. I think we are too wrapped up in wrap. Most of us are trapped by the continuous thinking syndrome. We think that we did it this way yesterday, so this is the way we will do it tomorrow. That is the horseless car-riage. The future is not only about centralised omnibus administra-tion services - it may not be about them at all. Wittingly or unwit-tingly (but let's give ASIC the benefit of the doubt) ASIC does al-lude to alternatives in its proposals.

Want to know more? Well, read ASIC's paper, come to the wrap conference (I'm speaking) or get the FPA to organise forums. Or if all else fails, contact me.