Australian fund managers may have to rethink NZ distribution strategies under a looming draconian financial product rule shake-up across the Tasman.
The Australian government passed legislation last year imposing tough ‘design and distribution’ obligations on almost all financial product issuers aimed at stamping out abuses identified in the 2019 Royal Commission (RC) report.
Late in December the Australian Securities and Investments Commission (ASIC) published a consultation document laying out a compliance roadmap for the new regime that, most importantly, requires issuers to identify ‘target markets’ for financial products.
Anthony Edmonds, head of Wellington-headquartered Implemented Investment Solutions (IIS), said the new regulations could see more Australian managers structure products specifically for the NZ market rather issuing trans-Tasman retreads.
“At first glance it seems the new rules will force Australian fund managers to change how they release products in NZ,” Edmonds said. “For example, ASIC makes it clear that fund managers have to take into account the tax implications of their products in target markets.”
He said as many Australian-domiciled funds experience ‘tax slippage’ for NZ investors, the ‘target market’ requirement could lead to better disclosure of the risk and/or a move to locally-domiciled products.
“It could encourage more Australian managers to issue PIE [portfolio investment entity] funds if they’re serious about servicing NZ investors,” Edmonds said.
As a fund-hosting specialist, IIS, of course, may benefit from the regulatory-prompted shift but he said the Australian ‘design and distribution’ revolution would inevitably have an impact in NZ.
Currently, Australian fund managers can issue products in NZ under the trans-Tasman Mutual Recognition (TTMR) agreement with little concession to NZ conditions other than a one-page disclaimer.
While the opportunity also extends to NZ managers in Australia, the flow has been one-way traffic: about 1,000 of the 1,400 or so financial products (of which funds are a small subset) registered on Disclose are issued under TTMR.
ASIC has no jurisdiction in NZ but Edmonds said the ‘target market’ rule would still likely flow across to TTMR product design.
In a release in December, ASIC deputy chair, Karen Chester, said: “The design and distribution obligations reinforce fundamental business considerations for firms, their boards and ultimately their shareholders.
“What are the target markets for our financial products? Do our financial products meet the genuine needs of our consumers? Do our distribution channels mean our products will likely get to the right consumers?”
Chester said many of the problems highlighted in the RC could have been avoided if the new product rules – due to come into force next April – had been in place previously.
The Australian design and distribution rules, embodied in a couple of lengthy ASIC documents, go much further than similarly-inspired ‘conduct and culture’ legislation tabled in NZ last month.
Introduced to parliament mid-December, the Financial Markets (Conduct of Institutions) Amendment Bill proposes new responsibilities for financial product design and distribution on a limited range of entities – primarily banks and insurers.
Although the government reserves the right to extend the conduct obligations to other financial businesses (including funds management) at a later date, the NZ bill is far less prescriptive than the allegedly ‘principles-based’ Australian legislation.
Australian issuers and distributors, with few exceptions, must carefully define ‘target markets’ for financial products and ensure they are not sold to consumers outside those borders.
“The introduction of the design and distribution obligations recognises that the provision of mandatory information (or disclosure) to consumers does not necessarily result in ‘informed consumers’ and often does not correlate with good consumer outcomes,” ASIC says. “The regime seeks to rebalance—between consumers and industry—the onus for effecting good consumer outcomes, and avoiding poor ones, in the provision of financial products.”
ASIC has also been handed wide product intervention powers under the Australian legislation, which it has already exercised.