In the case of Mayfair, the fund targeted wholesale rather than retail investors, but the evidence is that most lacked sufficient knowledge of financial investments and are now facing the grim prospect of significant losses.
Labelling matters just as much for financial products as it does for free range eggs, where much regulatory endeavour was spent ensuring true to label.
— Karen Chester, ASIC deputy chairman
“Our regulatory focus as it relates to consumer protection is meant to be looking after the retail investor,” Ms Chester said.
“But we cannot ignore the plight of unsophisticated wholesale investors, especially in the here and now with market uncertainty and volatility.”
True to label crusade
ASIC has undertaken several reviews in the funds management sector this year with the intention of ensuring products are true to label.
“If a fund is claiming they’re lower risk but higher yield than everybody else that should be sounding alarm bells, but it is not,” Ms Chester said.
ASIC had closely analysed 37 funds operated by 20 responsible entities that manage over $21 billion of assets. That followed an initial review of 350 funds with over $65 billion of assets.
As part of the review, the regulator had in June singled out 13 unnamed investment firms overseen by seven REs that it said may have misled investors about the risks of capital loss and the ease in which they could access funds on short notice.
Freedom of Information documents obtained by the Financial Review revealed three of the seven REs that had all responded promptly to amend marketing material and fund documents.
Ms Chester said correct labelling was crucial.
“Labelling matters just as much for financial products as it does for free range eggs, where much regulatory endeavour was spent ensuring true to label. All consumers when they shop around need to be able to trust labels.”
“There is nothing inherently wrong with a product that is higher risk or less liquid, but the labelling has to be true.”
Cash fund concerns
While the concerns may have been sparked by the marketing efforts of smaller challengers, ASIC has identified problems with some of the largest names in funds management, which have been forced to take corrective action.
ASIC said that while most fixed income and mortgage funds were appropriately labelled, it had concerns with so-called cash funds that had significant holdings of corporate debt.
Of the 22 managed funds with over $15 billion in funds under management that had used the term in their labelling, 14 had “confusing and inappropriate labels” and at $7 billion accounted for just under half of the funds in the sector.
“Some funds that were labelled as ‘cash funds’ had asset holdings more akin to a bond or diversified fund, which have significantly higher risk and less liquidity compared to a traditional cash fund,” ASIC said in a statement released on Tuesday.
“This was especially prominent in funds that use words such as ‘cash enhanced’ and ‘cash plus’ in their labelling.”
Ms Chester also pointed out in the ASIC statement that unlike term deposits, investment products are not “prudentially regulated or government-guaranteed”.
“So it is paramount that consumers are not misled about the level of risk associated with a particular product.”
ASIC said its mislabelling concerns related to 13 REs of which seven agreed to change the names of their funds, one proposed to change the asset allocation, three committed to review their funds while one withdrew materials and wound down the fund.
It said the engagement is continuing and appropriate regulatory action, “including enforcement action” may be taken.
Ms Chester said ASIC’s interest extended beyond the marketing collateral to include the role of responsible entities, or REs, that are appointed to retail funds to safeguard the interests of investors.
“This is not just about product advertising,” she said.
“We are also looking at what the REs are claiming these funds can deliver in terms of access to money and risk profile. ASIC’s ‘true to label’ project goes beyond ‘is the quick grab label of cash plus true’.”
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