Responsible Entities Under The Microscope

The inherent conflicts that occur when managed investment schemes (MIS) are structured in such a way that there are clear ownership or control links between the Responsible Entity (RE) and the fund or scheme manager has been rumbling away for the last few months.

Following the collapse of several agricultural investment schemes and, in particular, a recent Victorian case highlighting this exact issue , ASIC has released  Consultation Paper 140 (CP140) with a view to restricting guarantees and indemnities granted to REs. In the paper, ASIC sets out a number of important recommendations including that REs create rolling 12-month cash flow projections, an increase to the net tangible asset capital requirements and specifying the net tangible asset liquidity requirements for the REs.

The potential effects of CP 140 include:

  • Creditor and investor protection benefits;
  • A reduction in the REs cash flow resulting in more of the REs capital being set aside in cash to meet the proposed NTA requirements and therefore less capital being available for use in their businesses; and
  • With increasing obligations and financial restrictions it is anticipated that there will be greater barriers to entry and therefore a reduction in the total number of REs.

AUSTRAC To Increase Supervision and Enforcement Activities

The regulator responsible for overseeing the compliance of Australian businesses with their requirements under the AML/CTF Act 2006 has just released its Supervision Strategy for the next 12 months, as well as its Enforcement Strategy for 2010/11.

For non-banking financial services (NBFS) entities, as part of an AUSTRAC desk or site review, specifically expect the regulator to request evidence of the systems and governance frameworks that you should have implemented to manage your Money Laundering/Terrorism Financing risks, as well as enquiries into your Suspicious Matter and Threshold Transaction reporting.

As well as enforceable undertakings that may follow from these reviews, last year, within the NBFS sector, 82 assessments were completed with 128 requirements handed out and 147 recommendations.  If you have been on the receiving end of a desk review or a site visit from AUSTRAC in the last 12 months, and you fall short on their expectations, then expect anything between 2 weeks and a month out of your calendar to address these issues.

What not to do with an Enforceable Undertaking

Whilst we are on the subject of enforceable undertakings, some entities either do not know when they are drinking in the last chance saloon, or simply enjoy living on the edge . However, Taiwan’s Mega Bank  seems to be slowly changing its approach to compliance. Following acceptance of an AUSTRAC enforceable undertaking in June 2009, the bank recently agreed to implement an independent review of its compliance frameworks after concerns were raised by ASIC Perhaps this alternative enforcement approach should be used more regularly by the regulator as a way of monitoring and enforcing compliance with Australian financial services laws?

Greed isn’t that good

As part of ASIC’s supervisory role of the markets, and the regulators attempt to proactively avoid a repeat of the May 6th ‘Fat Fingers’ fiasco, ASIC have announced a list of recurring areas of non-compliance which have been referred through to their Deterrence Team in recent weeks. These areas include non-compliance with the Market Integrity Rules and unauthorised securities trading.

It is clear that Australian Stockbrokers are now faced with the largest volume of compliance obligations in the industries history. This expanding regulatory environment is here to stay, and several recent high profile collapses have only increased the spotlight on stockbrokers across the country

AFSL Core Skills Workshops

CompliSpace will be running a series of high impact workshops for Financial Services Executives on-the-go. For more information, or to register visit