The Treasury recently published a consultation paper titled Enhancing oversight and governance of managed investment schemes, signalling tighter regulation of Responsible Entities.

This forms part of the Government’s broader response to recent fund collapses, including Shield and First Guardian. There is a focus on strengthening governance, improving regulatory oversight, and reducing conflicts of interest in the managed funds sector. 

While the proposals are not finalised, they indicate likely areas of future reform and are relevant for both responsible entities and appointed investment managers.

Key proposals:

1. Strengthen the regulatory framework for compliance

• Introduce stricter compliance plan requirements, such as requiring a detailed description of the nature of the scheme and its investment strategy, and information outlining how significant risks will be identified, monitored and managed
• Amend the liability framework for compliance plans, so that liability attaches only to material contraventions of a plan to incentivise higher quality plans
• Make existing audit and assurance standards mandatory for auditors of compliance plans, and
• Require Responsible Entities to notify ASIC of the appointment, removal or resignation of committee members.

Responsible Entities may need to reassess their existing compliance frameworks to ensure they are defensible, fit-for-purpose, and aligned with regulatory expectations.

2. Majority external directors on Responsible Entity boards

Treasury is also consulting on requiring Responsible Entity boards to have a majority of external directors, removing the option to rely on a compliance committee as an alternative governance mechanism.

Responsible Entities would need to carefully assess how this proposal interacts with their existing corporate structure, group arrangements and fiduciary obligations.

3. Restrict related-party transactions

Prohibit Responsible Entities from entering into related-party transactions, subject to limited exceptions. This is aimed at reducing conflicts of interest and limiting the risk of scheme assets being deployed in ways that benefit related entities, rather than members. 

Exemptions for inter-fund investment in wide and legitimate use will need to be included as suggested in the paper.

4. Reform financial requirements for Responsible Entities

Amend the financial resource requirements applying to Responsible Entities to ensure they are appropriately calibrated to the nature, scale and risk profile of the schemes they operate.

This may include Responsible Entities assessing their capital management strategies in a way more reminiscent of APRA regulation of superannuation funds.

5. Increase ASIC’s data collection powers

Provide ASIC with expanded powers to collect scheme-level data across the retail managed investment scheme sector. The objective is to address existing data gaps and improve ASIC’s ability to detect emerging risks, monitor asset allocation trends and identify potential misconduct earlier.

As a result, Responsible Entities may face increased reporting and disclosure obligations, including the provision of more granular information about asset composition, liquidity, related-party exposure and investor concentration. This would likely require enhancements to internal reporting systems, data governance processes and compliance monitoring frameworks.

6. Introduce alerts for superannuation switching into managed investment schemes

Introduce mechanisms to alert ASIC where superannuation funds are being switched into managed investment schemes.

This proposal reflects concerns that some retail investors have been encouraged to roll over superannuation into higher-risk schemes without appropriate safeguards. The measure is intended to provide earlier visibility of switching patterns that may indicate systemic risk or conflicted conduct.

King Irving is active in industry group submissions; contact us if you would like to discuss these changes further.