Upfront commissions for listed investment company (LIC) offers could be banned in the wake of an Australian government investigation launched last week.
The Australian Treasury “targeted public consultation” follows widespread criticism of the ‘stamping fee’ exemption that allows LICs to bypass the country’s long-standing ban on investment fund commissions.
Many Australian LICs also distribute in NZ via the trans-Tasman mutual recognition (TTMR) regime with brokers and advisers scooping upfront fees that typically range between 1.5 to 3 per cent.
Australian banned all commissions on most new investment products under the Future of Financial Advice (FOFA) reforms in 2012: last year the government extended the ban to ‘grandfathered’ commissions in legislation due to take effect in 2021.
However, FOFA did not cover initial public offering (IPO) broker fees, which opened the door for the LIC exemption. Over the last few years the ASX has seen a surge of new LICs and similar listed investment trusts, which often mirror unlisted fund strategies.
The Treasury consultation covers all listed investment companies and trusts, including real estate investment trusts, Australian Treasurer Josh Frydenberg said in a statement
“Public consultation will allow the government to make an informed decision on whether to retain, remove or modify the stamping fee exemption in order to ensure that the interests of investors are protected and capital markets remain efficient and globally competitive,” Frydenberg said.
The Australian Securities and Investments Commission (ASIC) found 42 LICs paid stamping fees since 2015, collectively returning -7.3 per cent from inception.
Furthermore, the Australian regulation found LIC upfront impost was correlated with higher management fees and funds that trade at a discount to net tangible assets (NTA).
Rod Bristow, Clime Investment Management chief, admitted part of the LIC discount to NTA was related to the “costs associated with listing being borne by the manager at the expense of the investor: an undesirable structure”.
“This has been addressed in recent listings such as those completed by Magellan and VGI Capital Partners,” Bristow said in a release. For example, last year the Australian global shares giant Magellan launched the stamping fee-free High Conviction Trust, which passed on bonus units to investors amounting to 2.5 per cent – equivalent to what would have been traditional broker/adviser upfront distribution costs.
Bristow said LICs must also bear the ongoing costs associated with all listed entities, which impacts NTA figures.
However, he said the post-2015 LIC results should also be weighed against unlisted funds over the same period “to compare how these have performed against their objectives and LIC’s issued during the same period”.
“While of course the unlisted structures will be trading at NAV [net asset value], the performance figures could be instructive,” Bristow said.
Nonetheless, he said the Australian government focus on the LIC sector “will lead to improved outcomes for all stakeholders over time”.
Bristow said new LICs must offer investors “a dollar of value for a dollar of investment on day 1”. Other “non-negotiable” LIC features also include “appropriate compensation for risk” and regulatory compliance, he said.
Australian regulations don’t automatically apply in NZ but if a stamping fee ban is introduced, LICs may struggle to apply different distribution terms to TTMR offers.
Submissions on the Australian Treasury stamping fee review are due by February 20
ASIC is currently consulting on new financial product ‘design and distribution’ regulations that could also impact how Australian fund managers sell into the NZ market.