media release

IR 04-01 ASIC policy approach to the regulation of managed discretionary account services

Published

The Australian Securities and Investments Commission (ASIC) announced today it has finalised its policy approach to the regulation of managed discretionary account services (MDA services).

Under the final policy, operators of MDA services (MDA operators) are exempted from the managed investments provisions in Chapter 5C of the Corporations Act 2001 (the Act) and the product disclosure provisions in Part 7.9 of the Act. To have the benefit of this relief, MDA operators must comply with the licensing and conduct provisions in Parts 7.6 and 7.7 of the Act and some additional conduct requirements designed to promote consumer protection.

Attachment A to this Information Release sets out a brief summary of the new policy.

The final policy was adopted after public consultation, and takes the same approach as foreshadowed in ASIC’s consultation. A formal policy statement setting out ASIC’s policy on MDA operators in some detail will be issued by early February 2004 (together with accompanying class orders).

‘ASIC’s final policy in regulating MDA services treats MDA operators as the provider of a financial service rather than as an issuer of a financial product. This approach will remove regulatory overlap without reducing the consumer protection outcomes intended by the Act. We have also provided flexibility for those transitioning to the relief under the policy, so that most existing MDA operators can continue operating MDA services with minimal changes to their current practices until 10 December 2004’, ASIC Executive Director, Policy and Markets Regulation, Mr Malcolm Rodgers, said

‘We have announced our final policy in advance of the issue of the policy statement to give MDA operators as much notice as possible of our policy approach, including our transitional arrangements’, he said.

The new policy comes into effect on 11 March 2004. ASIC will provide transitional relief to give existing MDA operators time to comply with the requirements of the relief. Generally, existing operators will have some time to comply fully with the new policy. A summary of the transitional arrangements that apply is set out in Attachment B.

Background

MDA services are discretionary trading arrangements undertaken by dealers where:

  1. the client gives to the dealer (MDA operator) their money or money’s worth or access to money or money’s worth (client contributions);
  2. the MDA operator agrees to carry out trading in financial products using client contributions without prior reference to the client for each transaction; and
  3. the MDA operator also agrees to manage the client’s investments as a discrete portfolio belonging to that client.

    Generally, ASIC considers these arrangements to be both managed investment schemes and a facility for making a financial investment. Therefore, the offer of MDA services to retail clients would generally involve the offer of financial products and financial services (such as offering of and trading in financial products, operating a managed investment scheme that must be registered and giving personal advice).

Attachment A - Summary of MDA policy

Below is a brief summary of the key aspects of ASIC's new policy on the regulation of MDA operators. People should rely on the Policy Statement to be issued in early February 2004 for the details of our policy.

Broad relief and key conditions that will apply to MDA operators under the new policy

Relief we give

Key conditions of relief applicable to the MDA operator

The MDA service will not be required to be a registered managed investment scheme under Chapter 5C of the Act.

The MDA operator will not be required to be authorised as a responsible entity under Chapter 5C and 7 of the Act.

The MDA operator will not be required to comply with the product disclosure statement provisions under Part 7.9 of the Act in relation to the operation of the MDA service.

The MDA operator must:

  • have an AFS licence authorisation to provide MDA services. However, until 10 December 2004, they can operate MDA services without this express authorisation by self-certification of compliance and lodging with ASIC a reliance notice: See Attachment B.
  • also have other AFSL authorisations relevant to the MDA service they operate. These include authorisations for dealing in financial products (for example depending on the nature of the financial products in which the MDA portfolio assets are invested) and, unless outsourcing these services to another AFS licensee, custodial services and financial product advice
  • comply with certain obligations modelled on Chapter 5C (such as s601MA and s601FC(1)(a)(b)(c) and (e)). For example, to act in the best interests of their MDA clients. The MDA operator's responsible officers and employees must also comply with similar obligations
  • include certain additional information in the Financial Services Guide (FSG) they give to a client about the MDA service
  • enter into a contract with the client (MDA contract) to operate the MDA service in a certain manner
  • include in the MDA contract an investment program (ie: an individual portfolio mandate) that complies with personal advice conduct requirements in Division 3 of Part 7.7
  • ensure that the investment program for each client is reviewed at least once every 12 months
  • ensure that each MDA client’s portfolio assets are managed as a discrete portfolio belonging to that client
  • comply with the client’s instructions on corporate actions and communications about portfolio assets
  • provide to each client information about the performance of the client’s portfolio
  • not make investments in unregistered schemes, except in certain circumstances
  • maintain PI insurance that meets certain requirements

Attachment B - Transitional arrangements for MDA operators

The table and explanation below outline when MDA operators must comply with our new MDA policy.

Type of MDA Operator

When you must transition to the new ASIC policy

What you must do

Group 1 – Existing market participant MDA operators

You are already operating MDA services before 11 March 2004 under ASIC's:

  • no-action position adopted in favour of ASX participants (see [IR 02/11]);
  • class order relief given to SFE participants (see [CO 02/186] and [CO 01/1598]); or
  • class order relief given to ex-associate participants of SFE (see [CO 02/1022])

You can either:

  • choose to delay your transition to the new ASIC policy until 11 December 2004 (Option A);
  • OR
  • transition to the new ASIC policy at any time between 11 March 2004 and 10 December 2004 by making a self certification (Option B)

Option A

You must:

  • comply with the conditions of your current relief (which will be extended until 10 Dec 2004); and
  • apply for and obtain an AFS licence authorisation for MDA services with effect from 11 December 2004

Option B

You must:

  • until your transition to the new ASIC policy, continue to comply with the conditions of your current relief;
  • form a reasonable view (ie make a self certification) that you could comply with the conditions of our new policy;
  • lodge a reliance notice with ASIC within 3 months from the date of your self certification; and
  • apply for and obtain an AFS licence authorisation for MDA services with effect from 11 December 2004.

Your transition takes effect from the time of your self-certification.

Group 2 – Existing non-market participant MDA operators

You are not in Group 1, but operate MDA services lawfully on 11 March 2004

You must transition to the new policy by 11 June 2004.

You must:

  • form a reasonable view (ie, make a self certification) that you could comply with the conditions of our new policy before 11 June 2004;
  • lodge a reliance notice with ASIC by 11 June 2004; and
  • apply for and obtain an AFS licence authorisation for MDA services with effect from 11 December 2004.

Group 3 – New MDA operators before 11 December 2004

You are a new MDA operator (whether or not an ASX or SFE participant) starting between 11 March 2004 and 10 December 2004

You must operate MDA services under our new policy

You must, before operating MDA services under our new policy:

  • form a reasonable view (ie, make a self certification) that you could comply with the conditions of that policy; and
  • lodge a reliance notice with ASIC; and

You must also apply for and obtain an AFS licence authorisation for MDA services with effect from 11 December 2004

Group 4 – New MDA operators on or after 11 December 2004

You are a new MDA operator (whether or not an ASX or SFE participant) starting MDA services on or after 11 December 2004

You must operate MDA services under our new policy

You must apply for and obtain an AFS licence authorisation for MDA services before operating MDA services

Explanation

  1. In general, you must obtain an AFS licence authorisation for MDA services under our new policy with effect from 11 December 2004. We will make a further announcement later in the year about when applications for this authorisation can be made (however we anticipate they will be able to be made from around September 2004). We note that although you will be required to apply for an AFS licence authorisation for MDA services before 10 December 2004, you will be able to provide MDA services under that authorisation only from 11 December 2004.
  2. MDA operators who are relying on the current relief (ie, under Option B in Group 1) or who wish to commence operating MDA services between 11 March 2004 and 10 December 2004 (ie, Group 3) may wish to apply for the AFS licence authorisation for MDA services instead of relying on our new policy by making a self certification. This means delaying their application for the authorisation to operate MDA services until after ASIC has announced when it can receive applications of this kind (ie: around September 2004). By doing this, these MDA operators could avoid having to both lodge a reliance notice with ASIC and then later apply for the AFS licence authorisation for MDA services.
  3. All MDA operators must comply with both the conditions of the relevant relief that apply to them (such as the current relief applicable to ASX or SFE participants or the relief under our new policy) and their AFS licence conditions. For example, your AFS licence may contain conditions relating to the operation of discretionary portfolio account services (DPA conditions). You must continue to comply with these DPA conditions until they are removed at the time you obtain the AFS licence authorisation for MDA services. These DPA conditions are consistent with the conditions of relief under our new policy.
  4. When you make the self certification for the purposes of our new policy, you must keep a record of it, including the processes you followed in making it. You must have your responsible officer/s sign off on the self certification.