ASIC has reported on the findings of its’ proactive surveillance of responsible entities’ compliance with their legal obligations. These are entities that operate managed funds on behalf of retail investors.
ASIC Commissioner John Price said, ‘While responsible entities demonstrated a broad commitment to complying with their obligations under the law, there were a number of areas where the they fell short including: managing conflicts of interest; breach reporting; custody; risk management systems; rewards and incentives; and whistleblowing.
‘As the gatekeeper of significant investor funds, responsible entities are expected to act lawfully and in the interests of the investors they represent.
‘ASIC’s 2016-17 Corporate Plan makes clear our expectations about the conduct and behaviour of responsible entities, addressing and building on the issues identified in our previous proactive surveillance work.
‘As a minimum, responsible entities must ensure a managed investment scheme is operated in accordance with the Corporations Act and that they comply with their obligations as a responsible entity, as well as the conditions of their Australian financial services (AFS) licence. However, in order to meet higher standards more aligned with growing consumer expectations, our surveillance showed there is still some work to be done’, Mr Price said.
To assist responsible entities, ASIC has made recommendations to improve their compliance in line with a model of ‘what good looks like’ in the funds management sector including:
- ensuring professional indemnity coverage is adequate for the nature, size and complexity of the responsible entity’s business;
- reviewing and, where necessary, strengthening their conflicts management measures;
- reviewing custody measures to ensure they meet the requirements;
- accountability from top management about disputes;
- reviewing and strengthening existing cyber resilience measures; focusing on the board’s role in influencing the culture of the organization;
- alignment of remuneration, rewards and incentives with the values of the responsible entity;
- having in place appropriate whistle-blowing measures; and
- measures that reflect a consumer-focussed culture.
The full findings of the report are contained in REPORT 528: Responsible entities’ compliance with obligations: Findings from 2016 proactive surveillance program, across 12 key areas (REP 528).
In addition, ASIC has issued a range of guidance in the funds management sector:
- ASIC has recently issued regulatory guidance on risk management in RG 259 Risk management systems of responsible entities;
- last year, ASIC released Report 474 Culture, conduct and conflicts of interest in vertically integrated businesses in the funds-management industry;
- ASIC also expects to release its Review of Custody arrangements in Funds Management shortly.
‘We will be undertaking further surveillances of some responsible entities whose conduct fell short of required standards and remind the sector more broadly that ASIC will act when we identify compliance failures’, Mr Price said.
Three responsible entities remain the subject of further, more targeted surveillance work. ASIC has required the remaining responsible entities to address specific concerns that were identified in our report and required those responsible entities to rectify concerns and provide ASIC with details of the actions taken.
Under its proactive surveillance program, ASIC reviewed 28 responsible entities, managing over $49 billion in scheme property across 336 schemes using a risk-based profiling methodology. The surveillances analysed responses provided by responsible entities on governance, risk and compliance with the Corporations Act and licence conditions, disclosures, cyber-resilience and use of fund assets.
ASIC sought to identify any breaches specific to a responsible entity, as well as whether there were systemic issues across the funds management industry. The surveillances also identified responsible entities that require further, more targeted surveillance work.
ASIC uses a number of different regulatory tools, including surveillance, to ensure responsible entities are continuing to meet their obligations. For a number of years, ASIC has undertaken an annual, risk-based surveillance program of responsible entities with a focus on areas that pose the greatest risk to investors.
Through these proactive surveillances, we have identified, and subsequently resolved, a range of issues identified in the general sector and individual responsible entities. The outcomes against specific responsible entities include imposing additional licence conditions, withdrawing disclosure documents or issuing revised or supplementary disclosure, as well as rectifying breaches and changes to compliance and risk management frameworks.
ASIC has set out its vision of ‘What good looks like‘ for the funds management sector in its 2016-17 Corporate Plan.
© Australian Securities & Investments Commission. Reproduced with permission.