Our insights - Henry Davis York

Foreign Investment Managers impacted by new ASIC risk management guidance

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Many non-Australian investment and asset managers and their advisors have established investment funds in Australia using the services of an outsourced responsible entity/trustee (RE). Others are appointed by an Australian RE to manage investments of a fund the RE owns and operates.

On 21st July 2016 the regulator, the Australian Securities and Investments Commission (ASIC) released its report (in consultation paper CP 263) setting out its proposals for providing guidance to responsible entities in relation to risk management systems.

As the "owner" of the product (or as the delegated investment manager), you should understand what your RE does (and is required to do) in performing its role, as it fundamentally affects your product, your business and your reputation.

So, what is changing?

ASIC has found, after reviewing more than 100 responsible entities, that improvements could be made to the ways in which RE's meet their obligations to have adequate risk management systems in place.

As part of its ongoing review, ASIC is seeking industry feedback (by 1 September 2016) on its draft guidelines which will be set out in a regulatory guide.

ASIC discusses "stress testing" and "scenario analysis" which should be undertaken by the RE for the range of identified risks which are within focus at the fund level. These include strategic risk, governance risk, operational risk, market and investment risk and liquidity risk. Market and investment risk and liquidity risk are clearly two primary matters which would be within the domain of the investment manager appointed by the RE to manage the investments of the fund.

Impact on you

As the investment manager appointed by the RE to invest the assets of the fund and often to take responsibility to manage certain facets relating to the operation of the fund, the RE will need to ensure that certain of their obligations are made known to you and will be subject to your doing what is required to ensure the RE does not breach the guidelines. Areas of particular interest likely to be discussed with you by the RE are liquidity risk management provisions (which, as investment managers are probably aware, is a key focus area currently for both the EU and the US regulators), as well as clarifying the particular risks relevant to the fund (especially where the fund is considered to be of the more "complex" variety).

An outcome of the proposals is that, where the RE relies on external service providers (in this case the non-Australian investment manager), the RE must maintain a strong monitoring process for outsourcing of investment management and various other functions.  

These proposals and guidelines do not change the existing legal requirements and are designed to identify and enhance compliance ensuring that adequate risk management systems and processes are put in place. In many cases well established REs may not have to change very much.

Investment managers of Australian managed investment schemes can therefore expect increased monitoring and assessment of the services you provide (even if it is, commercially, their product!). Remember the responsible entity is ultimately responsible for the operation of the fund and will be looking to the investment manager to ensure the responsible entity does not breach its legal obligations or ASIC's guidelines.

Liquidity risk

The key risk that arises relevant to non-Australian investment managers is the "liquidity risk management process" which the RE has as part of its risk management system. ASIC has indicates that this process should include measures to ensure there are adequate financial resources to meet the financial obligations and needs of the responsible entity and the schemes operate. This means having liquidity available to meet investor redemptions.

Global environment

On 22 June 2016 the Financial Stability Board (the global body charged with assessing and addressing systemic risk in the financial services sector) published a consultation paper called Proposed Policy Recommendations to Address Structural Vulnerabilities from Asset Management Activities. One of the "financial stability risks" identified in that paper is "liquidity mismatch between fund investments and redemption terms and conditions for fund units".

Non-Australian investment managers may already be aware of the similar IOSCO Principles of Liquidity Management for Collective Investment Schemes.

Other risks identified are leverage, operational risk and securities lending activities. No doubt these are typical risks which an RE would also have to pay attention to in formulating and documenting its risk management process in Australia.

It seems that ASIC's CP and associated activity in this area is in line with and a response to the IOSCO and country regulators', as well to the FSB's, focus in these areas.

Due diligence practices in capital raising

As part of a separate review ASIC released a report (Report 484) dealing with due diligence provisions in initial public offerings ( and accordingly with the contents of the prospectuses for those IPO's). Some of the findings will have relevance to capital raisings under collective investment schemes which issue a product disclosure statement (PDS) facilitating investment in those schemes. This may well be another area in which REs pay attention to the due diligence requirements and obligations which they have so as to ensure that in PDS preparation and verification, greater stringency is applied to statements and representations made, including seeking appropriate certifications from the investment managers for those products and funds.

Further information

This summary was prepared by Stephen Etkind of the Henry Davis York Investments Team. For further information please contact a member of our Investment Team.

Nikki Bentley


61 422 004 806

61 2 9947 6245


Stephen Etkind


61 412 769 209

61 2 9947 6472


Jon Ireland


61 414 290 163

61 2 9947 6091


Sue Everingham


61 423 288 857

61 2 9947 6319


Matthew Farnsworth

Special Counsel

61 2 9947 6799


Vinod Kumar

Senior Associate

61 412 032 553

61 2 9947 6254