Compliance
The shades of grey in the managed accounts world
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There has been a lot of attention by the law makers and the regulators over the last few years in the advice business. Specifically in the managed accounts world, we have seen an impact from FOFA, the updated regulatory guide 179 (RG 179) and now most recently the Royal Commission. As a result, financial advisers, investment managers and MDA providers are like soldiers left walking through a minefield with some choosing to run apocalyptic-style for the hills!

How did we get to such a place and can we navigate out without blowing up? Compounding the problem is that the minefield is made up of grey zones that do not offer a clear pathway to safety.

In efforts to provide guidance, ASIC interprets the laws (i.e. legislative instruments) for us to help identify risks and manage them. In addition, ASIC provides further interpretations in the form of regulatory guides, which are often designed with the aid of the industry. On the most part, it works well although gaps and grey zones can appear as nothing is ever truly defined until it is challenged in a court of law. Lawyers love grey zones and the winners in courts are always the lawyers.

When attempting to define something, things are not always black or white. Try to get ASIC to define an exchange-traded fund (ETF) for example. It can be many things, a managed investment scheme (MIS), a derivative, an exchange-traded security. One practice I know of wanted to advise and deal in ETFs, and had all three of these authorities mentioned, but were advised by lawyers to vary their licence to include 'MIS other'; a costly exercise that basically involves re-applying for your licence. Was this an overly conservative approach by the lawyers? Maybe; was this ridiculous? Probably; however it was required by the practice in order to secure the business.

In the wake of the updated RG 179 issued in 2016, the small MDA advisers/operators that were operating under a 'no action' letter were forced to either vary their AFSL to include MDA authorisations (by October 2018) or move onto an external MDA provider's platform. Some were able to get their variation through without disruption to their businesses. Great! Some chose the latter and some chose to run for hills.

Another strategy that these 'no action' MDA operators could have chosen was to move their clients into a separately managed account (SMA) on a regulated platform. This entailed changing their business from offering an advice service to offering a financial product.

For those that have gone through the exercise of transferring their clients to an external MDA provider and those that chose the SMA route, the grey zones just got greyer. The Royal Commission concentrated heavily on conflicts of interest and the best interests duty (BID). The two go hand in hand.

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