Small-to-medium discretionary investment management service (DIMS) providers look set to have financial reporting relief continue under a proposed exemption extension tabled by the regulator last week.
The Financial Markets Authority (FMA) is seeking feedback on plans to roll over the long-standing carve-outs for DIMS firms with $250 million or less of retail funds under management.
In the two-tier relief system, DIMS with less than $100 million or retail money are exempt from “almost all” of the financial reporting requirements stipulated in the legislation, the FMA consultation says.
However, DIMS with retail assets from $100 million up to $250 million must still produce, and lodge, compliant financial statements – albeit without the need to be officially audited.
Among other reasons for continuing the smaller DIMS reporting relief, the FMA notes the use of an independent custodian provides more assurance than the financial strength of the advising entity.
“Where investor money and property are held by the investor or by an independent custodian, investors are less likely to place reliance on the level of financial resources that a DIMS licensee has, when assessing whether it is able to provide the service, and financial statements and audit requirements for the DIMS licensee’s business are consequently likely to be of limited benefit for investors,” the consultation paper says.
Furthermore, the FMA says the cost of providing audited financial reports for smaller businesses could act as “a barrier to becoming licensed and ultimately may lead to increased market concentration and higher costs for investors”.
The regulator has kept the retail funds threshold levels for DIMS reporting relief at status quo despite earlier feedback from industry that the $100 million and $250 million cut-off marks were too low.
Regardless, the “exemptions do not apply if a DIMS licensee is an FMC [Financial Markets Conduct Act] reporting entity for any other reason, does not have an independent custodian, or the licensee has more than $250 million in retail FUM”.
In its first sector report on the DIMS market published at the end of October, the FMA notes 29 of the total 49 firms licensed to provide the service would be subject to some relief: 15 providers managed less than $100 million of retail DIMS, as at the end of June, while 14 fell in the $100 million to $250 million range.
Wholesale DIMS, understood to be a popular option, remain outside the regulatory ambit.
The FMA report found some potential issues in the DIMS world around over-stated portfolio ‘tailoring’, conflicts of interest and risk management.
In total, DIMS providers manage some $48 billion with nine firms controlling $1 billion or more, according to the FMA numbers.
Submissions on the smallish DIMS reporting relief rollover proposals are due by November 29.