Restricted investment schemes may be granted relief from some expensive administrative burdens under proposals tabled by the regulator last week.
The mooted Financial Markets Authority (FMA) class exemption would drop the requirement for restricted managed investment schemes (MIS) to supply an annual audited custodian assurance report.
Currently, restricted schemes – which include corporate-only, occupational or other niche member groups – must provide the FMA each year with an independently-audited report confirming appropriate custodial and administrative systems are in place.
The rule – which was put into practice for the first time over the 2016/17 financial year – in effect forces most restricted schemes to pay for two audited reports: one to review in-house custodial procedures; and, another from third-party administrators.
Unlike their public offer MIS counterparts, restricted MIS schemes can opt to manage custody themselves – a path the majority have gone down.
“In cases where restricted schemes sought both an administration manager’s assurance report and a custodian’s assurance report, that resulted in extra costs to the restricted schemes,” the FMA consultation document says. “We understand approximately two-thirds of the cost of obtaining the assurance engagements was in respect of the custodian’s assurance report rather than the administration manager’s assurance report.”
Ben Trollip, Melville Jessup Weaver (MJW) principal, said the exemption proposal was an “excellent” development.
“The auditing costs have been quite substantial as a proportion of funds under management for smaller schemes,” Trollip said.
MJW provides administration to about 25 schemes – including corporate super and other restricted entities.
The FMA proposed class exemption would drop the annual custody reporting duties for only those restricted schemes that used third-party administrators and held mostly vanilla investments “domiciled in New Zealand or Australia”.
“This restriction reflects the level of confidence in the general securities framework of both jurisdictions, and limits the exemption to restricted schemes with relatively straightforward investment structures,” the FMA says.
Schemes could invest up to 5 per cent of their portfolios in “non-standard” investments and still be eligible for the exemption. The non-standard threshold would rise to the greater of 20 per cent of assets under management or $2 million for small defined benefit schemes (defined as under $20 million), the FMA says.
However, the regulator is seeking feedback on whether the exemption should be open to the five restricted KiwiSaver schemes.
“Those schemes remain open to new members and are larger than many other restricted schemes. KiwiSaver is the main, or only, investment for many New Zealanders and is a major focus for the FMA,” the consultation document says.
The two biggest restricted KiwiSaver schemes – the Medical Assurance Society and Supereasy (which serves local council employees) – reported respective funds under management of about $630 million and $240 million as at the end of March this year. At the other end of the scale, the Exclusive Brethren BCF scheme managed just under $7.4 million followed by the Maritime Retirement Scheme ($13 million) and Christian KiwiSaver ($43 million).
According to the FMA, while the annual assurance requirements “do not eliminate the risk of fraud and poor custodial practices, they do encourage custodians to establish and maintain appropriate policies, procedures and controls to protect the scheme property”.