Managed fund investors will enter 2013 without adequate protection if current regulation remains too focused on the financial planner, Equity Trustees warns.
Although there have been some moves towards strengthening regulations for responsible entities (REs), more development is needed, the group said.
"The proposed reforms look at tightening the financial requirements of REs but are likely to be cumbersome for compliance, inhibit investor choice and prove inadequate when the next bubble bursts," Equity Trustees' head of corporate and fiduciary services, Harvey Kalman, said.
"There needs to be recognition that a 'one size fits all' RE regulatory approach will have some flaws.
"We also need to recognise that investment products, and financial instruments generally, are now much more complex than they were when REs were introduced in 2000," he said.
Mr Kalman said that two or three levels of regulation are needed for REs, based on the size of the institution behind the fund, the independence of the RE, and the complexity of the assets in which a fund is allowed to invest.
He explained that this approach would reduce the possibility of malpractice and protect investors in the event of fraud.
However, Mr Kalman added that while the proposed regulations would strengthen the RE market, there is a danger they will inhibit start-up managers.
"Today, most funds, regardless of their size, are able to invest in structured financial investments. Those that do so should have a higher level of investor protection requirement than those that offer uncomplicated 'vanilla' products," he said.
"In my view, the regulators need to recognise there are different categories of funds management, and treat them differently."
Each needs different regulatory consideration in a way that does not reduce investor options, but at the same time helps protect them, he explained.
"One simple option is mandated use of independent REs for small funds that use financial instruments. This is an approach that many boutique managers are moving towards anyway because of the administrative and compliance benefits it brings," Mr Kalman said.
"Introducing different regulatory 'tiers', depending on factors such as the fund manager size and type of investment, can be easily instituted under the existing licensing mechanism," he said.
