Two-tiered regulatory process needed for REs

ASIC funds management equity trustees financial services licence australian financial services

10 January 2013
| By Staff |
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Responsible entities (REs) for managed funds should be subject to a two-tiered regulation process that weeds out those that do not have the skill set to assess complex products, according to Equity Trustees Harvey Kalman.

Kalman said there should be an entry level for gaining an Australian Financial Services Licence (AFSL) which allowed REs to run simple products such as long-only equities with no more than 10 per cent allocated to shorting, derivatives, over-the-counter, gearing and other complex products.

"They (the Australian Securities and Investment Commission [ASIC]) have already got the concept in their heads about complex and simple - it's not that difficult for us to reapply for our AFSLs.

"If you had to prove to ASIC that you had the skill set to run certain assets, then you're more likely to be able to eliminate the tyre-kicker REs and the internal REs that do not have the skill set," he said.

Kalman said ASIC should give preference to external REs that were free from conflicts of interest and focused on their fiduciary duty as their core activity.

Australia's negative perception of external REs - compared to the situation faced by their overseas counterparts - had resulted in "draconian capital requirements for external REs" that did not foster international competition, according to Kalman.

The debate about internal/external REs - and the resulting pressure and competition around fees - was a disservice to the industry, Kalman said, as the situation could end up like the debenture market where trustees were not paid enough to run the investments.

Internal REs were able to do the job themselves, he said, but should have to prove it. Of the 190 AFSLs currently in the marketplace, Kalman believes only 10 to 15 should have 'complex' licences.

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