The title of this article is not a mistake, nor as silly as it sounds. It relates to an interesting regulatory outcome that I have observed over the last six months whereby MDA operators, and those that have recently received the licence variation, have suddenly started using their discretionary powers…discretionally.
Managed Discretionary Account Services (‘MDA’) operate under a Class Order issued by ASIC, CO 04/194 and a ‘limited’ MDA, no action letter, issued by ASIC in November 2004. They allow a licensee, under agreement with the client, to buy and sell assets on a discretionary basis without the need for ongoing Records of Advice.
Whilst full MDA licenses have been difficult to obtain due to licensee requirements, the benefits and efficiencies that can be gained by an advice firm can be significant. Clients should also benefit from the arrangement if investment decisions, timing and implementation, such as tactical or dynamic asset allocation, are sound.
So why are those with the ability to operate under this utopian regime suddenly changing the status quo or simply not implementing at all?
The answer lies in the significant uncertainty which was introduced when ASIC released a Consultation Paper (CP200), with a view to amending the current requirements.
As with the other FOFA enquiries, the Labor government encouraged industry participation. There were a number of submissions received by ASIC in response to the Consultation Paper, with the proposed financial requirements being one of the most contentious issues. In effect, these requirements were rumoured to align closely to those of a responsible entity and would require a large minimum capital reserve to be held.
For boutique licensees operating MDAs, where FUM might be typically well north of $100m, the proposed regime seemed to signal the end of an era, as the difficulties they would face in raising the required capital sunk in. For those recently licensed, and still celebrating their achievement, the party was short-lived.
Thankfully, with a change of government, and one substantial delay already, ASIC has decided to adopt a ‘wait and see’ position, postponing a further review until the impact of FOFA is understood.
Whilst this has allowed many to exhale deeply, ASIC is committed to, and needs to, make changes by 2016 to avoid the class order expiring.
If this were to happen, and let’s hope it doesn’t, all MDAs would be treated as a Registered Managed Investment Schemes (MIS). They would be subject to a far more complex operating environment, including the introduction of capital requirements so clearly opposed.
Whatever the outcome, ASIC will most likely provide transitional provisions for any changes made. Those already operating an MDA should always stay abreast of the ever changing environment and can at least enjoy business as usual for the moment.
Matthew Heine joined Netwealth in 2001, focusing on marketing, distribution and branding. He is a member of Netwealth’s investment committees.
