ASIC's new and updated financial requirements includes one change for wholesale fund managers and some good news for the industry.
Partner Elliott Stumm explains how these changes to the financial requirements might apply to you.
NEED TO KNOW
- ASIC released four new legislative instruments relating to the financial requirements imposed on AFS licensees and updated Regulatory Guide 166 AFS licensing: Financial requirements (RG 166).
- For authorised providers of custodial or depository services, which includes most wholesale fund managers, the term 'revenue' is redefined which is relevant to the minimum amount of net tangible assets (NTA) that may need to be held.
BACKGROUND
On 7 September 2023, ASIC released four new legislative instruments relating to the financial requirements imposed on AFS licensees and updated Regulatory Guide 166 AFS licensing: Financial requirements (RG 166).
The following new instruments were released:
- ASIC Corporations (Financial Requirements for Responsible Entities, IDPS Operators and Corporate Directors of Retail CCIVs) Instrument 2023/647.
- ASIC Corporations (Financial Requirements for Custodial or Depository Service Providers) Instrument 2023/648.
- ASIC Corporations (Investor Directed Portfolio Services Provided Through a Registered Managed Investment Scheme) Instrument 2023/668.
- ASIC Corporations (Investor Directed Portfolio Services) Instrument 2023/669.
These instruments, which replace 'old' instruments for responsible entities (CO 13/760) and custody providers (CO 13/761), commenced on 1 September 2023.
While the new instruments purportedly only include 'minor amendments', there are some significant differences between the new and old instruments you need to be mindful of.
ONE BIG CHANGE FOR WHOLESALE FUND MANAGERS
One big change relates to authorised providers of custodial or depository services, which includes most wholesale fund managers. The new instrument re-defines the term 'revenue', which is relevant to the amount of net tangible assets (NTA) a custody provider is required to hold (if they are subject to that requirement).
In the old instrument, 'revenue' was simply defined as having the meaning given by the accounting standards. Under the new instrument, 'revenue' is expanded to include the following:
(b) to the extent it is not the licensee's revenue (within the meaning of the accounting standards)—any amount paid or payable for the performance of the obligations imposed on the licensee to provide custodial or depository services, even if those obligations are performed by another entity.
The following note is also included in the new instrument:
Note: One consequence of paragraph (b) is that the revenue of a licensee will include any revenue earned by an authorised representative of the licensee in respect of amounts paid or payable for performing custodial or depository services on behalf of the licensee.
This likely means a wholesale fund manager authorised to provide custody services that engages a professional custodian for one or more of its unregistered schemes—but not all of them—will need to factor in amounts paid to the professional custodian for those services when determining its revenue.
The above may also mean those AFS licensees that enter into arrangements of the kind contemplated in Information Sheet (INFO 251) may need to capture some of the revenue generated by the authorised representative (if the arrangement involves authorisation to provide custody services on behalf of the licensee).
SOME GOOD NEWS
One good thing to come out of the changes is the deletion of some wording in RG 166 which created some uncertainty about how 'revenue' of a licensee should be determined, at least from the regulator's perspective.
The following note previously appeared in RG 166 but has been deleted from the updated version:
Note 3: The revenue of a licensee includes any revenue of an authorised representative acting on the licensee's behalf.
The new RG 166 also helpfully notes ASIC does not consider the NTA requirement will apply to a person who is authorised to provide a custody service but does not actually provide the service (ie no assets are held by it or on its behalf), provided an agreement is in place with a professional custodian.
HOW DO ASIC'S FINANCIAL REQUIREMENTS APPLY TO YOU?
Other changes have been made when comparing the new regulatory guide and instruments against the old ones (including in relation to responsible entities). It is important you receive the right advice around how the financial requirements apply to you—particularly given the implications that may flow from a breach of those requirements.
Get in touch with our Funds Management team to discuss what ASIC's latest changes might mean for you.
