Next set of new rules tweaked thanks to Ross Asset Management

Ross Asset Management’s collapse has prompted changes to the Financial Markets Conduct Bill, which is going through its final stages before becoming law.

Monday, April 29th 2013, 6:00AM 1 Comment

by Susan Edmunds

The Bill will replace regulations contained in a number of other Acts. All financial markets participants are likely to be affected.

Most of the attention so far has been about the Bill’s move away from requiring a full investment prospectus to a shorter product disclosure statement, which investors will have to confirm they have received.

A secondary document containing more information will then be available to investors through an online register.

But a new supplementary order paper (SOP) was released last week, which makes several changes to the bill that appear to be directly related to the RAM collapse.

Among them, investment schemes may be forced into mandatory audits, assurance and client reporting. There will be an obligation to provide confirmation of holdings to clients.

The threshold for a person to be counted as a wholesale investor – to whom advisers can offer investment advice without being authorised – has been raised by the SOP to $750,000. Trust account obligations for brokers will be extended to wholesale clients.

Discretionary investment management services (DIMS) are also under scrutiny in the Bill.

The RAM collapse highlighted them as an area of risk.

Under the SOP, exemptions in relation to providing DIMS under the FAA will not automatically apply under the new Bill.

Only AFAs will be able to provide DIMS to retail clients – QFEs will not be eligible. AFAs will have to have a client agreement with each retail client, and use a separate custodian for the DIMS.

The Financial Services Council said a major benefit of the Bill will be to enable investors to easily compare different investments. “We believe this is an area in which FSC can make a significant contribution by working with the FMA to develop standardisation of key definitions.”

It said regulations should be developed in partnership with those who would be most affected. “If the PDS requirements for managed investment schemes are not developed by the date for commencement of the FMC regime we recommend deferral rather than default requirements.”

It asked for a draft PDS that could be tested by the industry.

FMA chief executive Sean Hughes said the Bill would offer more power to tackle foreign exchange and bullion schemes being advertised as “surefire” wealth creation solutions.

The Bill is now expected to proceed through its final stages and become law within a couple of months.

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Comments from our readers

On 29 April 2013 at 10:24 am Ally said:

There is a lot of confusion over the term "wholesale" investor because it is used differently in the Securities Act and the Financial Advisors Act.

It looks like the increased limit (to 750k) applies to the Securities Act and, in this context, basically refers to a situation where a borrower or product provider doesn't have to issue an Investment Statement. But that didn't apply to David Ross; he was offering a DIM and to the extent he was operating for wholesale investors, he would have come under the Financial Advisors Act definition of a wholesale investor (assets over $1 million).

But under the Act clients have to be given the option to opt out of being treated as a wholesale investor. It's very unlikely Ross gave them that choice........

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