Managed Discretionary Accounts (MDA)

An external MDA adviser must comply with the new Instrument and RG179 by 1 October 2017 (or earlier by opting-in).

The following is a summary (only) of the new requirements for external MDA advisers. Please see the Instrument and RG179 for detailed requirements, and consider seeking legal advice.

If you are the party providing your client with the personal advice on the MDA and the investment program, you will be required to also comply with the MDA providers’ SOA and investment program obligations in relation to that advice. Familiarise yourself with these requirements as set out in the Instrument and RG179.

Your best interest obligations for providing financial advice extend to your MDA services including the investment program and investment strategy you prepare or review for your client.

Based on your client’s circumstances, needs and risk tolerance, you must ensure the investment program and investment strategy recommendations you make are in your client’s best interest, are appropriate for your client, and prioritise your client’s interests over your own interests and those of other parties to the MDA.

In addition to your conflict management obligations for providing financial advice, you must have adequate documented conflicts management arrangements in place for your MDA services.

You must take reasonable steps to work with other parties related to the MDA to identify relationships and arrangements that may give rise to conflicts of interest:

• identify actual or potential conflicts of interest
• evaluate and assess those conflicts
• put in place appropriate and robust control measures to manage such conflicts
• act in the best interests of each client and, where there is a conflict, prioritise each client’s interests over your own and other parties’ interests.

You must disclose all material conflicts of interest prior to entering into an MDA contract with your client.

See RG179.219 – RG179.223 for details.

It must be clear to your client what the MDA arrangements are and who is responsible for the delivery of each MDA service.

Ensure you clearly disclose your function in the provision of the MDA service, as well as those of the MDA provider and external MDA custodian (if relevant).

When you provide personal advice to a client about MDAs including preparing or reviewing a client’s investment program, you must provide an FSG to your client (if you have not previously done so).

When you give personal advice about investing in an MDA you must provide your client with an SOA and include the additional information set out at RG179.139 and Section F of RG179. This includes when you prepare the investment program and an annual review of the investment program.

Include clear, unambiguous reasons for your advice:

• Advantages for your particular client of investing in an MDA over other investment options
• Consideration of alternative investment options
• Range of investments in the MDA and appropriateness for your client
• Total fees and costs associated with the MDA, including for:
  • your advice
  • the MDA service
  • investments to be acquired through the MDA
• Tax implications
• Remuneration and benefits you and your associates may receive, and other interests you or they may have that may influence you in providing the advice (conflicts of interest and your control measures)
• Risks of investing through an MDA
• Implications for leaving the MDA in the future

Clearly state:

• that your client must first enter into an MDA contract, with you for the MDA advice and an MDA provider for the MDA service, before an MDA can be provided
• the MDA contract will include an investment program
• the division of responsibilities between the MDA provider, and you as the external MDA adviser.

Providing an investment program is giving personal advice. An investment program for inclusion in the MDA contract must therefore also meet the best interest obligations and contain certain information that is required in a SOA.

You may meet these obligations by either:

• Providing two separate documents – an investment program and an SOA for the MDA advice, or
• Including the required SOA information in the investment program – to be included:
  • Statement of Advice clearly stated on the cover of the investment program
  • remuneration and benefits, other interests etc (s947B(d), (e) and (f))
  • additional requirements when advice recommends replacement of one product with another (s947D)

Importantly, the investment program must be:

• Clearly identifiable and entitled ‘Investment program’
• worded in a clear concise and effective manner

It must also contain:

• The basis on which you consider the MDA contract and investment program to be suitable for your client
• An investment strategy containing sufficient detail to make a decision, as a retail client, on whether the investment program is suitable for them
• Warnings about the suitability of the investment program:
  • if your client has provided inaccurate or incomplete information about their relevant circumstance, or
  • if your client’s relevant circumstances change

See RG179.135-RG179.139 and RG179.213 – RG179.214 for detailed requirements.

If you recommend your client MDA portfolio include non-limited recourse products you must

• seek prior written consent from your client
• provide risk warnings about investing in non-limited recourse products in your investment program / SOA
• Clients are not given a PDS for the underlying products and so may not appreciate the risks involved when you recommend they invest in highly leveraged products. You are required to outline the key risks of the MDA in the investment program.
• you must give your client personal advice, at least once every 13 months, about whether the non-limited recourse product is suitable in light of your client’s relevant circumstances.

Your client must be provided with personal advice about the MDA contract, including a review of the investment program, at least once every 13 months.

This service may be provided by the external MDA adviser who provided the original advice, or a different external MDA adviser.

You must comply with your best interest and advice obligations when providing personal advice on the MDA contract and conducting the investment program annual review.

You must:

• make reasonable enquiries to update your client’s relevant circumstances to ensure they are complete and accurate, before reviewing the investment program
• include your basis for the continued suitability of the investment program for your client’s circumstances
• clearly state any necessary changes to the MDA contract (including its termination) and investment program due to the changes in your client’s circumstances, and the timing of those necessary changes

An SOA may not need to be provided in the case of further advice if you:

• have provided previous advice to your client
• given your client an SOA setting out their relevant circumstances in relation to the previous advice
• your client’s relevant circumstances are not significantly different to those in the previous advice, and
• the basis for your further advice is not significantly different to the basis for your previous advice.
• you will need to keep an appropriate record of the advice.

If you have not provided previous advice to your client, you must provide an SOA with your annual review of your client’s MDA contract and investment program.

ASIC considers MDA services and the MDA contract constitutes an ongoing fee arrangement. You must include MDA fee disclosure in your annual FDS.

The FDS information must be separate and clear to ensure that your client can ascertain whether the services (including the MDA service) they are receiving are commensurate with the ongoing fees they are paying:

• Where the product fees charged by product issuers, in relation to products acquired through an MDA, and the fees for running the MDA itself (e.g. investment management, administration, account-keeping fees and transaction fees) are bundled together with other fees (e.g. advice fees), you need to determine to what extent the fees are product fees and disclose all other fees.
• To the extent that you cannot identify the breakdown of fees, good practice would be to disclose the whole amount of the fees.

The fee and services information required in the FDS should not be integrated into another document, such as an SOA.

If you provided an MDA on a regulated platform under the 2004 ASIC no-action letter before 1 October 2016, you may continue operating under the conditions/relief of that letter until 1 October 2018. You may opt-in to the new regime prior to that date.

This means you do not have to meet the new licensing or disclosure (ie MDA contract, FSG, investment program disclosure etc) requirements during the transition period – until 1 October 2018 or earlier if you opt-in.

By 1 October 2018 you must:

• hold the appropriate AFSL authorisations
• meet experience requirements for all products and services covered by the licensing authorisations, including the products covered by the regulated platform in relation to the MDA services you offer, and the issuing of a financial product.**
• Comply with the new disclosure requirements set out in the Instrument and RG179

(**Consideration will be given to experience gained under the no-action letter for regulated platform MDAs.)

The new licensing authorisation requirements for those operating an MDA on a regulated platform are the same as the licensing requirements for MDA providers who offer a range of MDA services and functions including offering and trading in financial products, operating a custodial or depository service, and giving personal advice.

If you choose to offer your clients MDAs on a regulated platform, from 1 October 2018 (or earlier) you will be required to meet the same regulatory requirements as MDA providers and you should seek legal advice regarding your obligations.