FMA 'suggested' Diversified sell to Fisher

The Financial Markets Authority says it “suggested” Diversified Investment Strategies talk to Fisher Funds about buying its Law Retirement KiwiSaver Fund – but did not recommend or broker the sale.

Monday, August 29th 2016, 6:00AM

by Susan Edmunds

Norman Stacey

The sale of the KiwiSaver fund, and subsequent break-up of the Diversified business, happened because of concerns about the scheme's fees.

From 2013, the Financial Markets Authority required fund managers to supply details of KiwiSaver funds’ total expense ratio. The LRKS fees were high because it was a “fund of funds” and was small. Director Norman Stacey said new regulatory requirements had added significantly to the fees.

“Even if we had charged no fees, the fixed costs would have been too high.”

Diversified was eventually given an ultimatum to solve the TER problem by March 31, 2014, or have the scheme closed by the FMA.

Diversified tried to sell the fund but by the deadline a deal had not been done. The company was given another three months by the FMA to find a solution.

A recent court hearing into the actions of Stacey's co-director, Vicki Watson, was told FMA suggested it approach Fisher Funds about the sale.

Stacey said Fisher Funds was the only fund manager the FMA mentioned in its discussions with Diversified. “I’m not sure if another of similar size and structure might have been acceptable.”

He said FMA had been “systematically” shutting down smaller funds. “They seem intent on directing the business to the bigger part of town.”

An operator such as Generate might have been a better fit, he said, but he was told by a broker it would not be acceptable to the FMA.

Massey University director of academic programmes and finance specialist Claire Matthews said it was potentially problematic that Fisher had been suggested.

“Suggesting just one possible buyer to approach in the form of Fisher Funds is not ideal because that means the FMA could be seen to be endorsing that particular sale option."

But legal expert Sue Brown, formerly head of the FMA’s regulatory team, said she did not see anything unusual about the FMA suggesting Fisher Funds as a solution.

“[It could be] the FMA saying ‘there are people in the market buying these things, we’ve heard Fisher Funds is buying...”

She said she did not get the sense the FMA was trying to force Diversified down a particular route.

“It is more that time had gone by and there was no sale. The FMA is there to work for good outcomes for investors. It’s not a good outcome if they are charging excessive fees on a TER basis or it goes into winding up. So it’s entirely appropriate that the FMA would have the conversation to [achieve] the best possible outcome for investors.”

Brown left the FMA in June 2014 but did not have any involvement in the meetings with Diversified.

An FMA spokesman said it never made a recommendation that the fund be sold to Fisher Funds, nor brokered the transaction.

“To clarify, the FMA was speaking to the manager and trustee of the Law Retirement KiwiSaver Fund, in the course of normal supervisory work. As part of those discussions, the FMA was given to understand that DISL Management was finding it difficult to divest their interest in LRKS. The FMA suggested they may want to consider talking to Fisher Funds who had acquired two other KiwiSaver schemes and done successful amalgamations but did not make a recommendation in that respect.”

It was not appropriate to discuss the case further, he said.

Brown said there could be other fund managers in Diversified’s position, looking for a sale, with the December 1 deadline looming for licensing under the Financial Markets Conduct Act.

“There will be quite a few thinking ‘can we get across the line, and if not, what do we do? This judgement shows the difficulty of being in that situation.”

Tags: Diversified Investment Strategies FMA