Fund manager conflicts left untouched

The corporate regulator’s moves to tighten the rules for responsible entities of managed investment schemes are positive, but don’t go close to addressing the conflicts of interest inherent in the current structure, according to Equity Trustee’s head of funds management, Harvey Kalman.

The Australian Securities and Investments Commission (ASIC) last week indicated it would consider raising the bar on the financial requirements applying to responsible entities.

ASIC’s consultation paper came hot on the heels of industry discussion on the potentially problematic structure of managed investment schemes, and just weeks after a Supreme Court decision outlining some of the conflicts present in the current structure, which allows one entity to act as both responsible entity and fund manager of a scheme.

This could be damaging for investors — particularly where a responsible entity might act in its own interests rather than those of unitholders in circumstances where their interests are not aligned.

Kalman said recent investment collapses, and the decision from Justice J Judd, had highlighted the need for a “broad review of licensing criteria for responsible entities”, with the current approach “clearly failing many investors”.

Kalman said there was now increasing evidence that the existing licensing criteria was “weighted too heavily in favour of fund promoters”. He said the concept of a ‘responsible entity’, relatively recently introduced and not used elsewhere in the world, had “generally evolved into something less than was envisaged at the time [of its introduction]” — and as such the investor protection it was intended to provide had also been eroded.

Kalman said while the financial strength of a responsible entity and the strength of those running the fund are important, “there are other areas requiring examination that are just as critical”.

In particular, there is a need for “a greater degree of separation between a fund manager and the responsible entity”.

He pointed to the role of the responsible entity in funds such as the Astarra Growth Fund and MFS Premium Income Fund as examples of the failure of the model.

“The common denominator in these cases is an internal responsible entity which, as Justice Judd said, can be severely conflicted.”

Kalman said weaknesses in the model had been exposed during the financial crisis, and that issues surrounding the structure must be examined now “before the next boom starts and the before the current problems are forgotten”.

Equity Trustees is one of the companies that would stand to benefit from a requirement to separate funds management operators from responsible entities.