The Treasury and ASIC are working together to recover around 88% of the cost of ASIC’s operations from the industry it regulates. ASIC forecast that the investment management and superannuation sector will have to front around $50m in FY18 for the pleasure of its services. This includes a $26m employee expense bill and around $5m in IT costs. We can expect our first invoice in FY19.
Industry funding is probably the right outcome, and an adequately resourced funds management regulator is appropriate for the protection of the integrity of our markets (not to mention retail investors’ retirement savings). Paying for ASIC will sharpen our focus on performance. We will want to see ASIC providing greater accessibility to decision-makers and achieving a more cooperative (and coordinated) approach to policy development.
While a levy may be appropriate, it seems there are some fundamental issues with the proposed levy calculations. My list of issues are below:
Responsible Entities (REs) will have to collectively pay $23.5m in funding to ASIC. Each RE will have to pay a base levy of $7,000 plus 24c per $10,000 in FUM above $10m. The top 30 REs in Australia control around $1.18 trillion in FUM*. Under ASIC’s calculation, these 30 entities alone would pay about $940,000 each (on average) or a total of $28.5m. This amount greatly exceeds ASIC’s funding requirement and does not take into account the 460 other REs that must also contribute! The maths doesn’t work.
Inequality sees those good citizens of the industry paying for the the cost of ASIC prosecuting the bad operators. Over 50% of ASIC’s forecast costs relate to it taking enforcement action. When you think of the major enforcement action taken in the investment management sector, litigation involving Trio Capital, the agribusiness MIS (Timbercorp, Great Southern), Prime Trust, Westpoint and LM come to mind. Surely a better result would be that the defendants in proceedings are left with ASIC’s bill if they are found liable.
Then consider the amount of effort and cost that goes into ASIC prosecuting operators of illegal managed investment schemes. It would seem these operators would be (a) avoiding paying levies; (b) adding to ASIC’s cost base; and (c) funded by the levy-paying industry.
Wholesale Trustees will pay a flat fee of $8,000 pa and face the prospect of future FUM based increases. ASIC suggest there are around 1,749 wholesale trustees in operation but how would they know? There is no specific AFSL authorisation to operate a wholesale managed investment scheme nor any financial reporting obligations. I suspect there are a much greater number of special purpose trustees, single asset scheme trustees and deal specific trustees operating unregistered investments that fit into the very broad definition of managed investment scheme. The $8,000 annual fee may very be a significant impost on special purpose trustees operating property syndicates or bespoke investments. The levy would be completely disproportionate to the regulatory costs of such structures.
Double counting larger, vertically integrated, groups will face the prospect of double counting of FUM when calculating their total levy commitment. A superannuation trustee that directs money into a registered scheme will pay FUM-based levies at both the superannuation trust level and the managed investment scheme level. For large entities that operate in this way, each additional $10,000 invested will cost $0.29 in levies ($0.05 from the super fund and $0.24 from the scheme). This highlights the issues with using a FUM based approach.
So, we head back to consultation with ASIC and Treasury. I expect a wide variety of opinion on the new levy, and an enthusiastic response. But after the financial resource requirements (RG 166), the new custody requirements (RG 133), the infamous disclosure requirements (RG 97) and the new risk management requirements (RG 259), it all seems a bit too much like groundhog day.