The Financial Services Council (FSC) has pushed for exemptions for fund managers in the framework in a recent submission to Treasury on the draft Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020.
The changes to the bill have included a new national security test for foreign investors who will be required to seek approval to start or acquire a direct interest in a “sensitive security business” and a power enabling the Treasurer to review acquisitions that raise national security risks.
Treasurer Josh Frydenberg in June stated the reform package would ensure foreign investments would not be contrary to the national interest, while still welcoming incoming money into Australia.
But the FSC is concerned Treasury’s proposed reforms are too broad and will raise the level of compliance burdens for foreign-owned fund managers around daily transactions.
In its submission to Treasury, the council stated the reforms could introduce “uncertainty and the additional burden of time, expense and legal risks”, in turn raising the risk premium of investing in Australia.
Blake Briggs, deputy chief executive and Michael Potter, senior policy manager of economics and tax at the FSC appeared before the parliamentary joint standing committee on trade and investment growth last week.
Mr Potter told the committee that a number of the larger global fund managers in Australia face “significant red tape”.
“Fund managers purchase and sell securities on a daily basis to comply with a fund’s investment objective, as a result, these reforms would have an impact on fund managers’ daily operations,” the FSC’s submission stated to Treasury’s foreign investment division policy framework unit manager James Dreyfus.
“It would not be uncommon for a fund manager to hold positions in a single security in excess of 10 per cent (a ‘direct interest’ under the Foreign Acquisitions and Takeovers Act). The potential monetary and time costs of complying with these reforms are significant and the uncertainty that these reforms create may have a negative impact on the free flow of capital in the Australian economy.”
The body is primarily concerned with implementing exemptions to “facilitate the legitimate activities of fund managers who invest billions of dollars into Australia”, noting that a number of foreign companies manage money on behalf of local retail investors and super funds.
Mr Potter told the trade and investment growth committee that the issue had been raised with the industry body by “some of the largest global fund managers”, without disclosing names.
“We’re basically arguing that fund managers should be able to apply for something like an exemption certificate, which means they don’t have to get approval for each and every transaction that they do,” Mr Potter said.
“They might be buying and selling securities everyday and once they’ve got beyond a certain threshold they might have to apply for every single transaction. So they might be buying and selling the same thing, the same share, multiple times during the year, but they have to apply every single time.”
Trade and investment growth committee chair and Liberal MP George Christensen asked how would fund managers be vetted to ensure they are a low-security risk. Mr Potter responded the checking process would be at the discretion of the government, but the FSC envisages Australia could have relaxed standards with organisations based in countries with robust regulatory regimes, such as the UK.
Treasury has proposed it will release a second tranche of legislation for comment, which may include potential reforms to streamline investments for “low-risk investors”. The FSC has said it is looking forward to the release of the details.
