ASIC crashes the MDA party

ASIC has been (fairly) criticized in past years for being slow to detect and react to problematic practices in the wealth industry, slamming the stable door after the horses have bolted.

With managed discretionary accounts (MDAs), ASIC seems to be trying to get ahead of the game. Its Consultation Paper 200 (CP200) released in March is causing considerable angst in the growing MDA industry. This is a good sign.

So what is an MDA? There is a lot of confusion and argument about what constitutes an MDA (part of the problem is the inherent lack of standardisation), but in practice we see 3 main approaches:

– An MDA proper, also known as an individually managed account (IMA): a portfolio model (which could include shares, funds, or pretty much anything) operated by an MDA licensee, who has the authority to trade without client consent for each transaction. Found on and off platform.

– Model share portfolios: a standardised share portfolio operated by a normal AFSL licensee, who must get permission each time they trade. Becoming increasingly common and where the big growth has been lately. Found on and off platform.

– Separately managed accounts (SMAs): standardised portfolios (usually shares), offered as an MIS by an RE, with assets held separately for clients. The client retains beneficial ownership. Found on platform.

Formal MDA operators tend to be financial planners and stockbrokers, although only a small percentage of licensees (just under 200 in total according to ASIC) are operating or advising on an MDA.

So this may seem like a trivial issue. But there is clearly movement at the MDA ranch given that 25% of MDA licensees are relatively new to the game, and it may be a larger issue given that others are relying on “no action” letters. MDAs give the operator a lot of power, and there are concerns that some are not well qualified to take on this responsibility. It’s a lot harder than it looks to do well.

The growth which has attracted ASIC’s attention partly reflects that in a post-FoFA world, distributors are seeking to replace banned remuneration streams. MDAs allow distributors to vertically integrate into manufacturing, but can also introduce conflicts of interest around investments and prioritising client interests.

A factor which ASIC does not focus on, but which we think is key, is the role of technology. Running separate portfolios for clients has been so operationally challenging that MDA operations have remained cottage. But rapid advances in wealth management technology have made scaled up MDA businesses a feasible proposition, and it will only improve from here.

Technology advances + MDA = financial planner as fund manager. Not in a complete sense of course, but certainly in terms of some of the key aspects, including making the investment decisions and collecting the associated management income.

In CP200, ASIC is recognising this change in role, formalising it, and forcing MDA operators to take on regulatory requirements which typically apply to fund managers. There are a range of measures,

– Introducing NTA requirements which start at $150,000, and go to $5m, or $10m if providing retail custody services
– Removing the no action letters which allow a “shadow MDA” industry
– Prohibiting investments such as CFDs which are not limited recourse
– Applying FoFA concepts such as best interests to the MDA environment

MDA operators are not happy, to say the least. The above measures will be impossible for some to satisfy, and having to hold substantial capital will certainly make it less profitable for all.

But it’s hard to argue with the direction of raising the bar on capital and governance standards. While not all MDAs are the equivalent of funds management, it can be pretty hard to distinguish…if it walks like a duck and quacks like a duck…well, it’s a duck.

The direction of regulation suggests that the MDA industry will eventually become dominated by those already satisfying the new requirements – ie fund managers, and especially vertically integrated groups which own both platforms and distribution. It has been too small an opportunity in the past to merit much effort. But that’s changing – important segments (eg SMSFs) have shown a preference for direct asset ownership, and technology is making this easier and more economical for the industry to deliver in scale.