A recent ASIC surveillance has found that fund managers must do more to ensure their products are ‘true to label’ – that the product name aligns with the underlying assets.
ASIC undertook a targeted surveillance of 37 managed funds operated by 20 responsible entities that collectively hold approximately $21 billion in assets. This followed ASIC concerns with product labelling practices (refer 20-107MR). These funds were identified after data analysis and an initial assessment of the product names and labelling practices of more than 350 funds in the cash, fixed-income, mortgage and property sectors across funds collectively holding more than $65 billion in assets (refer Background).
ASIC recognises that during times of market volatility, consumers may be looking for alternate investment options offering regular or higher returns, and financial product labels are used as a guide for consumers about what they are investing in.
ASIC examined the appropriateness of the product labels used by the 37 managed funds and assessed whether the funds were described and promoted in a manner that reflects the underlying assets in terms of risk and liquidity.
ASIC Deputy Chair Karen Chester said, ‘Our surveillance identified two significant concerns. First, confusing and inappropriate product labels across 14 “cash” funds with under $7 billion in assets. And second, redemption features not matching the liquidity of underlying assets, with a significant mismatch in three funds with under $1 billion in assets.’
Confusing or inappropriate ‘cash’ product labels:
- While most of the funds reviewed in the fixed-income, mortgage and property sectors were appropriately labelled, ASIC identified concerns with the labelling of some cash funds.
- Out of the 22 managed funds, with over $15 billion in funds under management, that used the term ‘cash’ in their labelling, 14 funds had confusing or inappropriate labels.
- 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. This was especially prominent in funds that use words such as ‘cash enhanced’ and ‘cash plus’ in their labelling.
- On average, funds labelled as ‘cash plus’ and ‘cash enhanced’ had more than 50% and 70% of their respective assets invested in assets other than cash or cash equivalents such as fixed-income securities and mortgages.
Mismatch between redemption features offered and the liquidity of underlying assets:
- Generally, the redemption features offered by the funds reviewed in the fixed-income and property sectors were satisfactorily matched to the liquidity of the underlying assets.
- In a small number of funds, there was a significant mismatch between redemption features and asset liquidity, i.e. the liquidity of the underlying assets did not support the short redemption terms offered to consumers.
ASIC’s expectations – ‘cash’ labelling
Ms Chester said, ‘Managed 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.’
‘Responsible entities must ensure their products are “true to label” and the redemption terms offered to investors are supported by and consistent with the underlying liquidity of the fund’s assets.
‘Funds should be “true to label”. This is not a nice-to-have. It’s a must-have for responsible entities in meeting their legal obligations to their investors, especially in times of market volatility. Inappropriate labelling of a fund can mislead investors into believing that the fund is much safer or more liquid than it actually is. Put simply, a fund should not use terms such as “cash” or “cash enhanced”unless its assets are predominantly in cash and cash equivalents.
‘Being “true to label” is also fundamental for a competitive marketplace. If consumers cannot rely on product labels, then it is difficult for funds to compete on a fair basis – disadvantaging both compliant fund managers and end-consumers,’ Ms Chester said.
If the underlying liquidity of a fund is inconsistent with its redemption promises, investors may not be able to redeem their investments when they anticipated they would be able to do so. In periods of market volatility, especially during COVID-19, this exacerbates the liquidity risks faced by the funds and ultimately investors.
Where there is a mismatch between a fund’s redemption terms and the underlying assets, responsible entities need to take proactive steps to revise the redemption terms or move to less frequent redemptions if appropriate.
ASIC’s corrective action
Following the review, ASIC sought corrective action from 13 responsible entities where significant concerns were identified. As a result, to date:
- seven responsible entities have voluntarily changed or proposed to change the names of their funds (nine in total) to reflect the product composition;
- one responsible entity is proposing to change the asset allocation of the fund to reflect its name;
- three responsible entities have undertaken or committed to undertake a review of their funds, and
- one responsible entity withdrew misleading promotional materials on their website and subsequently wound up its fund.
ASIC’s engagement with some responsible entities is continuing. ASIC will continue to monitor the outcomes and consider appropriate regulatory action, including enforcement action where necessary.
Responsible entities should consult ASIC’s Regulatory Guide 168 Product Disclosure Statements (and other disclosure obligations) for guidanceon labelling and disclosure requirements.
Investors who have exited a managed fund but believe they have suffered financial loss as result of inappropriate or confusing labelling, should contact their fund’s responsible entity in the first instance. They can also seek recourse by making a complaint to Australian Financial Complaints Authority (AFCA), which offers fair, free and independent dispute resolution.
ASIC began the surveillance by shortlisting products from more than 350 funds with over $65 billion in assets following data analysis. Initially, ASIC looked at product disclosure statements, financial matrices and other public disclosure by the funds. ASIC sought further information on asset allocation, liquidity, maturity profile and resilience from 20 responsible entities through notices. Concerns were identified with the labelling practices of 16 funds from 13 responsible entities.