Review of the Managed Investments Act 1998

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 Submissions - Australian Managed Investments Association Ltd

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Submission to Mr Malcolm Turnbull
on behalf of The Hon Mr Joe Hockey,
Minister for Financial Services and Regulation


Submitted by
The Australian Managed Investments Association (AMIA)
PO Box 4243
Kingston ACT 2604
Phone: 1800 264 200

5 September 2001

Executive Summary

• Regulation should seek to protect investors and ensure that management of the enterprise is carried out in accordance with acceptable standards.

• With extensive industry consultation and involvement self-regulation is a consideration.

• Acknowledged core curriculum for executives of projects to minimize failure of companies.

• Present requirements of compliance to the Managed Investments Act are cumbersome and are considered a hindrance to profitability.

1.0 Introduction

There can be no doubt that the impetus for the major provisions of the Managed Investments Act was the behaviour of certain scheme promoters in the 1990s. This has resulted in a very high profile attack by the Australian Taxation Office (ATO) on investors in what it describes as "Mass Marketed Tax Effective Schemes".

In general terms, the regulators of the industry being the Australian Securities and Investments Commission (ASIC), and the ATO were not doing their job. This is particularly true of the ATO who have admitted to concerns in the early 90s but not acting for some years later.

During this time the absence of scrutiny by ASIC, the granting of private rulings by the ATO, and the processing of 221d deduction applications created the appearance of acceptance by both investors and promoters. This allowed promoters to put fraudulent or marginal products on the market. We believe there were many breaches of the corporations laws in both the management and the marketing of mainly franchised schemes, and the unscrupulous operators such as those featured on the "Four Corners" program in June, were not required to be authorised representatives or Proper Authority Holders of a licensed Securities Dealer. We believe this anomaly still exists and to the best of our knowledge have had no legal or criminal action taken those who broke the laws.

We have gone from one extreme to another with the regulation in the industry being too onerous and costly. The purpose of any investment surely is to make a profit arising out of the successful management of the particular enterprise chosen by the investor. Generally profit is determined by the maximization of sales and the minimization of costs.

The present requirements for compliance by Managed Investments under the Act and through ASIC Policy statements in our view are a hindrance to profits as they increase costs and divert effort from income producing activities without increasing the protection given to investors.

For instance, certain aspects under the compliance section are commercially unrealistic and need to be reconstructed. Under section 787 and 787(1) it states, "within one day after the happening of the event constituting a contravention of a licence the licensee must submit written notice of the event". This should be seen as unreasonable, as a seven-day period would be in line with usual commercial business practise. We also seek to recommend the administration of the Act be streamlined with particular emphasis on requirements for Licences and Prospectus.

2.0 Objectives of Regulation

Regulation should seek to protect investors and ensure that the management of the enterprise is carried out in accordance with acceptable standards. In our view, too much regulation is as harmful as too little. This is particularly true where the cost of regulation has no appreciable impact on investor protection or management standards.

In our submission to the Senate Economics References Committee into Mass Marketed Tax Effective Schemes, we advocated self-regulation for the industry. This was because of the limitations that the public regulators have in their statutory duties and they're past failures. An example of this is a concern raised by the Chairman of the Senate Economics References Committee, Senator Shayne Murphy, of the benefits that flow to the project manager in the form of inflated fees. Clearly this cannot be written in to legislation, however the industry has a vested interest in ensuring that some of the excessive benefits claimed by managers in the past are not repeated.

We have not been prescriptive about how this regulation would work but have raised it in a conceptual sense to offer an alternative to public regulation. We believe that public regulation as displayed in this industry in the 90s, and concerns raised in recent times about public regulation of the superannuation industry does not fill us with confidence. If self-regulation were to be considered, it would require wide industry consultation and participation.

3.0 What is needed

In reality, offers of investments which attract the provisions of The Managed Investments Act, are so structured generally to allow the deductible expenditure, which will be incurred, to be claimed by the individual rather than the Corporation issuing the prospectus. It is a marketing incentive to attract investment into projects, which may have a higher risk than others. Otherwise funds sufficient to establish and run the identical enterprise would be by way of share issue only and the provisions of the Act would not apply and the attendant bells and whistles of a Responsible Entity, Compliance Committee, Disputes resolution committee and extra audits would not be required.

What extra protections should the funding of an enterprise under one structure with the same management team, require over another and how effective are they.

Take Northern Rivers as an example.

Unlisted Company NRL offers shares. It will establish 1000 ha of tea trees to grow, harvest and produce oil at a profit. All monies are received by the company and disbursed under the authority of the board. The board must rule by exception, that is appoint competent management and staff to ensure the project is established and run profitably. Their duties are clearly defined by the Corporations Law. They must prepare and distribute annual audited accounts to the shareholders and (if requested) an annual report.

As a reporting entity they must have an audit review of accounts at 31 December, which, like the annual accounts must be filed with ASIC. The accounts must include a Directors report. There are no bells and whistles to add to cost and reduce the bottom line.

If the project and therefore the Company fail, again the performance of the Directors may be scrutinized and if applicable they can be sued or prosecuted.

Under the Managed Investments Act, there must be a Responsible Entity, which holds a dealers license. There must be a Compliance Committee, a Compliance officer and a disputes resolution procedure.

In our view most time is spent on statutory compliance rather than emphasizing the need to professionally progress the enterprise. Whilst an independent Compliance Committee is put in place to review the performance of the Responsible Entity it is our view that their role is generally passive and/or its decisions based on information provided by the Responsible Entity itself.

Just like trustees in Prescribed Interest Schemes the damaged is generally done before they are aware of any real problem and then they are either powerless or unwilling to do anything.

An investment will only give returns if it was viable as projected in the Prospectus and is then properly managed. Again we ask if ASIC believes that the Corporations Law affords sufficient protections to shareholders in a farming corporation, what changes when it's a tax effective structure? The cash provided for the same enterprise will both be applied in accordance with the Prospectus and managed efficiently or it will fall over and the monies lost. The end result to the investor is the same.

The solution in our view is to require directors to demonstrate qualifications to perform the task (as required by Responsible Entity) and then impose strict responsibility upon them if they do not perform their duties efficiently and in accordance with the law. The requirement to have non-productive parties superficially overseeing their performance in the case of the managed investments is an added cost affording ineffective protection. At best the Committees etc might be able to ultimately explain why the enterprise failed and the investor lost his money but not prevent it from happening. This added compliance is costing the bottom line of each project approximately $100,000.00 per annum without value adding to the Project or investors.

We believe that the Parliament has correctly identified the competence of advisors who have to achieve an acceptable level of training before they can sell managed investments.

Importantly there is no such training requirement on the project manager. The competence of the project manager is critical to the success of the project, yet people with no experience in the sector or worse still those who have failed before can still meet the statutory requirements but may not be able to manage the project.

We believe that a recognized course in management for Project Directors and Chief Executive Officers would help to minimize project failures. This is clearly in the interests of investors and the economy generally.


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