Allens

Funds Management

Focus: The new Australian Consumer Law and funds management

11 January 2010

In brief: Partner Susan Burns and Lawyer David Marcus consider how the proposed Australian Consumer Law will affect managed fund products.

How does it affect you?

  • There is no general exemption from the Australian Consumer Law for financial services or managed fund products.  Accordingly, the need for compliance systems to manage the new regime may be greater than first thought. 
  • There are also some unresolved issues about the scope of the regime that could potentially affect fund managers and related service providers. 

Background

The Australian Consumer Law1  will regulate standard form contracts for the supply of goods or services for personal or domestic use.  Among other things, terms of standard contracts can be made void because they are unfair or prohibited. 

The legislation for the Australian Consumer Law was introduced into the House of Representatives on 24 June 2009.  The Bill is still being considered by the Senate.  While it is uncertain when debate will resume, the Bill may be passed early this year.

For an overview of the legislation as it affects financial services providers generally, see Focus: Bill for Commonwealth regulation of unfair contract terms introduced. 

(For a more general overview, see our Focus: Australian Consumer Law Bill and for an overview of the law's impact on the insurance industry see Focus: Impact of national consumer law on the insurance industry).

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Application to managed fund products

The Australian Consumer Law provides no general exception for financial services contracts.  Therefore, the legislation will apply to any financial service provided under a standard form contract to a person using the service 'wholly or predominantly for personal, domestic or household use'.  This definition and scope of use will not sit easily with managed fund service providers.  However, it is intended to apply widely.  

Examples of managed fund products or services likely to be caught under the legislation include investor-directed portfolio services, managed discretionary account services and custody services. 

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Current areas of uncertainty 

National guidelines on the new Australian Consumer Law will be issued by the Australian Competition and Consumer Commission and the Australian Securities and Investments Commission, as well as state and territory consumer agencies.  Guidance on the new provisions will be made publicly available before they come into effect, and after a process of consultation.2  Nevertheless, there are currently three main areas of contention regarding how the regime will apply to managed fund products and services. 

Unit trusts and other managed investment schemes

There is a specific exemption for constitutions of managed investment schemes.  This suggests that the regime is not intended to apply to unit trusts and other products that have constitutions and fall within the Corporations Act 2001 (Cth) definition of 'managed investment scheme'.3

However, the drafting of this exception is not as clear as it could be.  For example, it is not clear whether superannuation funds are covered (it is presumably intended that they are).

The Investment and Financial Service Association's (IFSA) submissions to the Senate Economics Legislation Committee queried whether a product disclosure statement (PDS) for a managed investment scheme is a contract for the purposes of the legislation.4 

Based on the 2009 Supreme Court of Queensland decision in Macquarie Capital Advisers Ltd v. Brisconnections Management Co Ltd,5 a PDS is not 'in the nature of a contractual document' and the contents of a PDS should not generally represent contractual terms between the responsible entity and the applicant.  However, Basis Capital Funds Management v. BT Portfolio [2008] NSWSC 766 suggests that a completed application form and a confirmation letter from the fund manager is a binding contract to issue units.  There is, therefore, at least doubt about whether the exception as currently drafted is broad enough.

Contingency fees

Some aspects of a standard form contract cannot be challenged under the regime.  Terms which define the main subject matter of the contract and terms which set the upfront price6 payable are examples.7 It seems to be the case that any fee with an element of contingency is not protected from challenge.  Therefore, performance fees would come under the scope of the legislation.  It is arguable that any fee that refers to a movement in asset value is also not exempt.  Also, it is not clear whether increases in fees, even if permitted by the contract or constitution, have the benefit of the safe harbour.  

Wholesale clients

Finally, unlike the Corporations Act, the new regime makes no distinction between wholesale and retail clients.  As a result, some wholesale clients (for Corporations Act purposes) may still have the benefit of the protections under the Australian Consumer Law.8

While at first this may seem reasonable, it is likely to present compliance and risk issues when developing and marketing products. This poses some important questions like:

  • is there a risk the Australian Consumer Law provisions will apply?;
  • do we have to limit to whom we market this product in order to avoid that risk?; and
  • what do we do if a term is successfully challenged – do we distinguish between all those clients who might also have a right and those who won't?

Ideally, the legislation would exclude from its ambit anyone who is a wholesale client under the Corporations Act. 

Footnotes
  1. The Trade Practices Amending Act (Australian Consumer Law) Bill 2009. It also amends the Australian Securities Investments Commission Act 2001 (Cth).
  2. Second Reading Speech, Dr Craig Emerson MP,  24 June 2009, at 4 (House of Representatives, Hansard, no. 10, 2009). 
  3. This exception is not limited to managed investment schemes registered under the Corporations Act. 
  4. IFSA, Submission 39, dated 31 July 2009, p3.
  5. [2009] QSC 82.
  6. 'Upfront price' is defined as (a) the consideration that: is provided, or is to be provided, for the supply under the contract; and (b) is disclosed at or before the time the contract is entered into; but does not include any other consideration that is contingent on the occurrence or non-occurrence of a particular event (new proposed Section 12BI of the ASIC Act).
  7. New proposed section 12BI of the ASIC Act.
  8. New proposed section 12BF of the ASIC Act.

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