‘No evidence of harm’ to justify MIS changes: SIAA

In its submission to Treasury’s review of the regulatory framework for managed investment schemes (MIS), the SIAA said that while inflation and a “sustained boom in Australian home values in parts of the country” have resulted in more investors meeting the wholesale qualifications criteria, there is little evidence of harm resulting from this.

“SIAA has yet to be presented with evidence that there is a market failure in relation to financial advice servicing the higher end of the income and asset distribution, particularly when such individuals have taken deliberate steps to opt out of the retail investor regime,” the SIAA submission said.

“Without evidence of harm or a market failure, SIAA does not consider that there are sufficient grounds to introduce law reform.”

The SIAA added that “well-intentioned but ill-founded” policy and regulation has had a “deleterious impact” on access to and affordability of financial advice, with the unintended negative consequences now in the process of being reformed.

“The Quality of Advice Review found that the regulatory framework for financial advice is an impediment to consumers being able to access affordable, high-quality advice and preventing consumer harm,” the SIAA said.

“It is important therefore that any review of the wholesale investor test take into account the need to not repeat regulation that has a deleterious impact on access to and affordability of financial advice,” it added.

“We consider that, in light of the significant implications for stockbrokers, investment advisers and their clients should any change to the wholesale investor test be introduced, it is important that any call for change be supported by evidence of harm.”

Moreover, the SIAA said it also considers it important to “seek the voice” of the client and consider the views of wholesale clients who would be impacted by any change, in order to ensure that there is not a repetition of “well-intentioned regulation that disadvantages consumers rather than benefits them”.

The association further placed the responsibility of the failure of managed investment schemes – such as Trio Capital and Mayfair 101 – on the schemes themselves, rather than advisers working with either wholesale or retail clients, likening the situation to car dealerships being held responsible for faults in motor vehicles rather than the manufacturers.

“To the extent that investors losses are caused by the failure of a scheme, it is the scheme operators that should be responsible for compensating investors for loss. It is important that these losses are not imposed on other industry subsectors such as financial advice,” its submission said.

“Imposing the compensation of investors who have suffered losses on other subsectors would create the moral hazard of providing those responsible for managed investment schemes with the knowledge that other parties would bear the economic consequences of consumer exposure to the risks attached to their products, which risks may be insufficiently disclosed or incorrectly marketed.”

The SIAA also stressed that although there is no obligation for firms that advise wholesale clients to join the AFCA complaints process, SIAA members still treat complaints seriously.

“Our members have reported (unsurprisingly) that they treat complaints from wholesale clients the same as they do retail clients. This means that in the first instance they consider the client complaint as part of their internal dispute resolution process. If the client lodges a complaint with AFCA (as some wholesale clients do), the firm can then argue that the client is a wholesale client,” the association said.

Following an announcement in March that the government would review the regulatory framework for managed investment schemes to ensure it remains fit for purpose, identify potential gaps, and consider what enhancements can be made to reduce undue financial risk for investors, Treasury released a consultation paper in August.

In a statement announcing the consultation paper, Financial Services Minister Stephen Jones said: “The government is also seeking views on opportunities to reduce regulatory burden without detracting from consumer outcomes. We welcome submissions from all interested parties.

“The Albanese government is continuing to strengthen regulatory settings in the financial services sector.”

The paper added that the underlying regulatory framework for managed investment schemes has remained largely unchanged since its introduction.

“However, as regulated entities in the broader financial services sector, scheme operators have experienced significant reform in recent years. This can cause increased compliance burden and associated costs,” the paper said.

“Well-designed regulation is important for boosting productivity and enhancing protections for consumers. Conversely, poorly targeted or unnecessarily complex regulation can impose additional costs on entities and investors.”