Equity Trustees moves on RE conflicts

Equity Trustees has acted on the inherent conflicts of interest concerning companies acting as both responsible entities (RE) and fund managers, boosting its external RE service offering in a bid to take advantage of fund managers looking to drop their own in-house service.

Equity Trustees head of funds management Harvey Kalman said the decision to increase its external RE services was prompted by a warning made by Victorian Supreme Court Justice J. Judd’s last year while ruling on a case brought by a property fund manager against Melbourne adviser Chris Garnaut.

Justice Judd found there was an inherent conflict concerning investment scheme promoters that were acting as both fund manager and responsible entity. Justice Judd warned that such companies ran the risk of a profound conflict between their duty to investors and their own interests in circumstances where investors were considering removing the RE.

The Australian Securities and Investments Commission (ASIC) also released Consultative Paper 140 last year, which proposed to strengthen the regulation of RE.

Kalman said Equity Trustees was getting a lot of enquiries from fund managers as a result of the court decision and ASIC’s paper.

Complex products such as fixed interest funds, funds that were illiquid, or had an added ability to short the market should never be associated with an in-house RE, unless they had full resources and were independent, Kalman said.

Fund managers needed to seriously investigate whether they had the proper resources and management to be able to run a complex investment product transparently, he said.

Overseas fund managers were reluctant to introduce products into Australia because Australia had weaker corporate governance thanks to these conflicts of interest, Kalman added.