Managing the managers: Treasury weighs in on investment schemes

Major regulatory shake-ups are on the horizon for managed investment schemes after high-profile fund collapses triggered Treasury intervention – here’s what the proposed reforms mean for the property industry.

Introduction

Following the collapse of 2 major investment schemes:

• the Shield Master Fund (having ~$480 million in assets and operated by Keystone Asset Management Limited); and
• the First Guardian Master Fund (having ~$400 million in assets and operated by Falcon Capital Limited),

the Australian Government has published a consultation paper regarding the general oversight of managed investment schemes (MIS).

This publication sets out 5 proposals relating to the regulation of registered schemes and 1 relating to superannuation. In the property sector, registered MIS generally relate to retail investors.

The proposals are looking to:

1. Enhance the regulatory framework for compliance.
2. Require a majority of external directors on the boards of responsible entities.
3. Prohibit responsible entities of registered MIS’ from conducting related party transactions.
4. Amend the framework for setting financial requirements for responsible entities.
5. Increase ASIC’s data collection powers on the retail MIS sector.
6. Require superannuation trustees to alert ASIC about ‘superannuation switching’.

These proposals, if implemented, will have a have significant impact on the operation of MISs. MISs are important vehicles for property developers. Consequently, these proposals will be of particular importance to the property industry.

Proposal 1: Enhancing the regulatory framework through the introduction of compliance plans and compliance committees.

This proposal stems from a 2025 review conducted by ASIC which found that the standard of responsible entities’ compliance plans was recorded as being ‘poor practice’ due to responsible entities amending documents even after registration.

This item proposes to:

• introduce stricter compliance plan requirements, making assurance standards compulsory for auditors;
• establish compliance committees where less than half of the responsible entity’s directors are external directors; and
• require compliance committees to notify ASIC of the appointment, removal or resignation of any committee members.

Proposal 2: Requiring a majority of external directors on the boards of responsible entities.

Under this proposal, the majority of a responsible entity’s board must be made up of external directors.

The aim of this proposal is to improve the standard of independent compliance management, although it would likely require substantial company restructuring and associated costs.

An ‘external director’ is defined as someone who has not been an employee, senior manager or substantially involved in the business dealings of the related body corporate in the previous 2 years. Additionally, the external director cannot have a material interest, or be the relative of a person with a material interest, in the related body corporate.

Proposal 3: Prohibiting responsible entities of registered MISs from conducting related party transactions.

Currently, a responsible entity must obtain approval from its members to provide a financial benefit to themselves or a related party of the entity, unless the transaction is given at arm’s length or on terms less favourable to the related party.^[1]

Although many business structures utilise related party transactions (which haven’t resulted in consumer harm), as a result of the Shield and Guardian scandal, this item proposes a prohibition on registered MISs from conducting related party transactions, with limited exceptions.

One proposed exception is where the investment manager of a MIS is a related party of the responsible entity, as the transaction generally won’t be performed by the same entity.

Proposal 4: Amending the framework for setting financial requirements for responsible entities.

Under the Corporations Act 2001 (Cth) (Corporations Act), all Australian financial services licensees must hold adequate resources to provide those financial services covered by their licence and to carry out supervisory arrangements.^[2] Additionally, all licensees are subject to more stringent requirements,^[3] known as the MIS Financial Requirements.^[4] In the consultation paper, Treasury poses questions as to whether more specific financial resource requirements should be imposed on the relevant responsible entities in addition the requirements under the Corporations Act. The paper notes that this can be done through either legislative means or ASIC’s own imposition.

Proposal 5: Increasing ASIC’s data collection powers on the retail MIS sector.

Currently, regulations make it difficult for ASIC to collect data from specific entities, as their power is limited to those offered by superannuation trustees and members. As such, this proposal recommends increasing ASIC’s data collection powers by suggesting that ASIC could collect:

• data at the point of registration about the nature of a MIS;
• ongoing recurrent data about aspects of MIS operations; and
• alerts on certain types of events.

By doing so, this would enable ASIC to:

• use their existing powers more effectively;
• promote better governance standards; and
• arguably, promote competition and transparency where data is published.

Proposal 6: Alerting ASIC about superannuation splitting.

Most members will undertake ‘superannuation switching’ from an underperforming fund to a higher-performing fund. Treasury notes that superannuation trustees who process these switches have access to data whereby misconduct could be identified. However, there are no requirements for these trustees to report any suspicious behaviours to ASIC. This paper proposes placing an obligation on superannuation trustees to report suspicious or anomalous patterns of behaviour.

This proposal explores whether:

• new reporting requirements will be specifically defined;
• trustees will be required to exercise their own judgement; or
• if having super funds sharing member updates more often will suffice.

Key takeaways from the paper

• For registered MISs:
  • The regulatory framework for compliance will be strengthened through the introduction of stricter compliance plans and compliance committees.
  • Responsible entities may be required to have a majority of external directors on their boards to improve independent compliance management.
  • Responsible entities may be prohibited from conducting related party transactions.
  • Frameworks under the Corporations Act may be amended to create more stringent requirements for responsible entities to prove they have adequate finance.
  • ASIC’s data collection powers may increase, enabling them to collect a wider variety of data for individual registered schemes.
• Superannuation trustees may be required to alert ASIC about any ‘super switching’ transactions that are the subject of potential misconduct.

Conclusion

This consultation paper, whilst outlining some modern proposals, also exhibits an impactful shift in regulation resulting from the monumental collapse of both the Shield Fund and First Guardian Master Fund. If implemented, these reforms will have a profound effect on the operation of MISs.

MISs are a significant part of the landscape for investment on real estate. These reforms, if implemented, will have a profound effect on this sector of the property industry.

Disclaimer

The information contained in this publication does not constitute legal advice and should not be relied upon as such. You should seek legal advice in relation to any particular matter you may have before relying or acting on this information. The Lavan team are here to assist.

Footnotes

^{[1] Corporations Act 2001 (Cth) s 210 (‘Corporations Act’).}

^{[2] Ibid s 912A(1)(d).}

^{[3] Ibid s 926A.}

^{[4] ASIC Corporations (Financial Requirements for Responsible Entities, IDPS Operators and Corporate Directors of Retail CCIV’s) Instrument 2023/647.}