The Australian government will ban commissions on listed investment company (LIC) sales in a move likely to dim the prospects for the ASX-listed vehicles this side of the Tasman.
In a decision handed down last week, Australian Treasurer, Josh Frydenberg, confirmed sales commissions on LICs and the similar listed investment trusts (LITs) would go effective July 1 this year.
LICs and LITs previously escaped a 2013 blanket ban on commissions in Australian investment products under a ‘stamping fee’ exemption.
However, the stamping fee get-out clause came under Australian government scrutiny earlier this year with a consultation on a proposed ban launched in February.
Frydenberg said while ASX-listed fund capital-raisings had effectively frozen during the COVID-19 crisis it was “important that the ban on conflicted remuneration is extended ahead of any resumption” of LIC listings.
“Clarifying these arrangements will address any related risk of consumer harm and ensure that stockbrokers, financial advisers and investment managers are clear about the regulatory settings that will apply in this area and investors can continue to invest with confidence in these products,” he said.
“Extending the ban on conflicted remuneration to LICs will address risks associated with the potential mis-selling of these products to retail consumers, improve competitive neutrality in the funds management industry and provide long term certainty so that this segment of Australia’s capital markets can continue to operate effectively and provide investors with opportunities to diversify their investments.”
Closed-ended funds have long been a feature on the ASX but the popularity of the structures has spiked in recent years with the commission loophole driving at least part of the sector’s growth. Currently, the ASX holds about 110 LICs (or variants) as distinct from open-ended exchange-traded funds (ETFs).
Australian LICs are often marketed in NZ, mainly through broker networks.
While the LIC commission ban won’t automatically translate to the NZ market, it would create further complexity for Australian issuers of such products on this side of the Tasman.
Frydenberg confirmed, however, that the LIC commission ban would not extend to “equity and debt securities in trading companies (including hybrids), real estate investment trusts (REITs) and listed infrastructure investments”.
“Maintaining the existing treatment for these investments is designed to ensure that direct capital raising activities which support the economic activity of companies in the real economy are not impacted by these changes,” he said.
The Australian Securities and Investments Commission (ASIC) would “actively monitor” the LIC market in the run-up to and post the commission ban, Frydenberg said.
Like its NZ counterpart, ASIC has also put a number of regulatory programs on the back-burner due to COVID-19 distractions.
For example, many of the regulatory reforms emerging out of the Royal Commission into financial services have been delayed by at least six months, including changes to the “design and distribution obligations for financial products issuers”, ASIC says.
Initially due to take effect this June, the Australian financial product regime change – that could affect the NZ market too – has been postponed until December.