THE Australian Securities and Investments Commission has issued two guidance notes on the quality of investment research and the competency standards for self-managed super fund auditors and informed large super funds of their advertising disclosure obligations.
The guidance notes on improving the quality and reliability of investment research update an old document. Whether they will produce a better result is debatable.
One of the main contributors to large investment losses in the past four years has been the collapse of managed funds that were rated highly by research providers and rating agencies. This was a worldwide problem.
A major cause was the conflict of interest of research houses that not only rate new investment products but also the fund managers that invested in these products. This resulted in both the sellers of financial products and the fund managers that invested in them paying large fees to research houses to have them rated.
A example of this was the favourable rating given to collateralised debt obligations designed by large investment banks. A similar favourable investment rating was also given to the managed funds that invested in them. In many cases the CDOs were made up of mortgages sold to people who could not afford them, which were packaged together by investment banks and sold to fund managers as an investment product, and which turned out to be worthless.
The guidance notes cover issues that contributed to the incorrect rating of investment products and include the management of conflicts of interest, the quality and thoroughness of the research process, details of the way products are selected for research and the transparency of the research process.
The letter on advertising sent to industry and commercial public offer funds highlighted issues ASIC identified as being possible problems. ASIC is concerned that because of the commercial pressures being placed on superannuation funds as a result of the introduction of the stronger super reforms and MySuper, some funds could resort to advertising that did not consider the needs of consumers.
These concerns include:
Statements that do not give a balanced message about returns, benefits and risks associated with an interest in a super fund.
Inadequate disclosure of warnings, disclaimers and qualifications and unrealistic expectations about the overall effect of fees.
The costs that a member is likely to pay.
Documents containing comparisons between products that mislead consumers.
The guidance notes on the competency standards for approved SMSF auditors were issued after input from various professional groups associated with SMSFs. Unfortunately the competency standards appear to be those that relate to the competency of all auditors and how all audits must be conducted - with a few additions relating to superannuation funds - and are not SMSF-specific.
It had been hoped that these auditing standards would be more tailored to the unique situation of SMSFs.
As a result of this one-size-fits-all approach, many SMSF specialist auditors believe they are forced to conduct tests that provide no benefit to the members of the fund but adds an extra layer of cost.
An example of this was the requirement for SMSF auditors to understand internal control procedures. These are put in place to try to detect fraud committed by those who manage and account for the finances of an organisation. Given that the trustees of an SMSF are managing their own money, internal procedures to detect fraud seem pointless.