Australia’s unique approach to responsible entity (RE) arrangements is leading to both real and perceived conflicts of interest and is preventing Australian funds from remaining competitive globally, argues Equity Trustees.
“A fund manager cannot wear two hats” and act as both the fund manager and the responsible entity without “facing potentially significant challenges”, said Equity Trustees' executive general manager of corporate trustee services, Harvey Kalman.
Mr Kalman noted that the second Johnson Report, Australia as a Financial Centre: Seven Years On, released earlier this year by the Financial Services Council, identified the ability for a single entity to be “both a trustee of the fund and an investment manager” as being a barrier.
“The Australian system that allows these circumstances to exist is not aligned with the other major regulatory systems globally – this has to change,” he said.
The ‘single responsible entity’ arrangement is also “confusing and concerning” to many foreign investors, who see it as a potential conflict of interest, warned Mr Kalman.
The appointment of an internal responsible entity had recently resulted in investors associated with that entity “being excluded from voting on their own investments or the strategic direction of the fund”, he added.
The key to maintaining Australia’s reputation as a “regional centre of excellence in funds management”, Mr Kalman said, was in the appointment of independent, external responsible entities.
“Funds that adopt a model which outsources the responsible entity to an independent fiduciary bypass the possibility that there is a conflict between the rights of unitholders and the investment manager of a fund, with the additional benefit of not having the associated regulatory and compliance costs that come with the RE function,” he said.