The FSC’s fund management reforms for government

The Financial Services Council (FSC) has announced a range of proposals ahead of the federal election which it hopes will increase the competitiveness of Australia’s financial services sector, including a focus on fund managers. 

These are focused on three areas: promote investment and economic growth, make Australia’s tax system more efficient, and reduce and streamline regulation. 

The six proposals which relate to fund managers are:

• Simplify the breach reporting (reportable situations) framework.
• Allow for the rationalisation of legacy superannuation and managed investment products.
• Provide a level playing field under the foreign investment framework.
• Introduce a product labelling regime for sustainable and responsible investments.
• Reduce uncertainty with design and distribution obligations (DDO) compliance. 
• Promote Australia as a regional and global financial centre.

“Our modelling demonstrates that the FSC’s policy recommendations would generate an additional $19 billion of GDP over the next decade; almost $2 billion a year in export revenue for the financial services sector by attracting additional capital into Australia; and an $800 million a year increase in the sector’s productivity through a combination of reducing costs, lowering fees and increasing returns to consumers,” FSC chief executive Blake Briggs said.

Further details on the fund management reforms below:

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Simplifying the breach reporting (reportable situations) framework

Breaches that do not result in financial loss or consumer damage should be exempt from the regime, it said, as these place strain on ASIC and industry resources. Simplification of the regime will save businesses $183 million in net compliance costs over 10 years and 34,000 hours a year, the FSC estimated.

ASIC chair Joe Longo has already stated the breach reporting regime has had a counterintuitive effect to its original intent.

“One of the challenges we have encountered in administering and enforcing the regime has been the number of modifications, and the number of pages of guidance that have been required to help industry meet their obligations and ensure the regime meets its objectives – in other words, to make it work. In short, the complexity of that regime is affecting how we translate its intent to get the full benefit.”

Allow for the rationalisation of legacy superannuation and managed investment products

A measure that can be legislated within the first year of the new government’s term, a product modernisation mechanism can enable the closure of legacy managed investment products and facilitate the movement of consumers into more modern, high-performing products. It will also mitigate tax and social benefit consequences and can deliver $16 billion to consumer outcomes by 2050. 

Introduce a product labelling regime for sustainable and responsible investments 

A product labelling framework for a wide range of financial products will provide regulatory certainty to product issuers and encourage the growth of investment products with sustainability-related or ethical-themed investment strategies. This will mean greater choice for consumers to invest in alignment with their values and greater capital flow to meet Australia’s net zero and sustainability goals.

Last year, the government introduced a proposal to introduce laws that set out rules for marketing investment products as sustainable and minimum standards as what qualifies as sustainable. 

Provide a level playing field under the foreign investment framework

Regulatory barriers create unnecessary obstacles to global fund managers who set up operations in Australia, and invest on behalf of Australians, which has adverse impacts on the Australian economy.

The FSC said the government should provide a level playing field for Australian domiciled global funds under the Foreign Investment Review Board (FIRB) regime by exempting trusted investors who are fiduciaries for Australians’ savings and should reverse the decision to double fees on FIRB applications for low-risk investors to prevent the further stifling of investment.

Money Management previously covered how overseas fund managers are considering their overseas reach due to high distribution costs. 

Reduce uncertainty with DDO compliance

The board scope of DDO presents challenges for financial services businesses, and technical changes are needed to obtain greater clarity on the scope of the obligations and to ensure greater product choice for consumers. Current problems include fund managers withdrawing from the retail market due to uncertainty regarding “reasonable steps” obligations, difficulties in drafting distribution conditions for ETFs, and a narrow definition of “excluded conduct”.

Promote Australia as a regional and global financial centre

The final reform proposal for fund managers, which will be ongoing throughout the term, concerns Australia’s reputation as a regional and global financial centre. Currently, only $170 billion is managed on behalf of overseas investors out of $3.9 trillion in AUM.

“Complex and uncompetitive tax settings are a key barrier to the export of Australian funds management expertise, and limit our potential as a regional and global financial centre. In order to achieve the full benefit of Australia’s expertise in funds management services, the attractiveness and competitiveness of Australia as an investment destination must be improved.”

It recommended modifying rules for start-up funds to quality as managed investment trust by extending the existing qualification time frame to five years, improving rules for tax treatment of foreign exchange hedging, introducing a rollover regime for the Corporate Collective Investment Vehicle (CCIV), and simplifying withholding tax for all payments by passport funds.