Parliamentary Joint Committee on Corporations and Financial Services – Submission by One Investment Group

21 June 2013,
Ms Deborah O’Neill MP
Chair to Parliamentary Joint Committee on Corporations and Financial Services


The purpose of this submission is for One Investment Group to comment on the expectation gaps identified in the Parliamentary Joint Committee on Corporations and Financial Services (PJC) report into the collapse of Trio Capital tabled on 16 May 2012 (the Report).  One Investment Group appreciates the invitation to provide this submission and to appear at the PJC Roundtable.

The Report identified what it described as 7 core expectation gaps in relation to the gatekeepers in Australia’s financial services system (Financial Planners/Advisors, Custodians, Research Houses, Auditors and Trustees/Responsible Entities):

i.         Differences in protection afforded to APRA regulated Superannuation Funds and SMSFs;
ii.        Research undertaken by Financial Planners/Advisors;
iii.       Knowledge as to how AFSLs are issued;
iv.      Verification undertaken by financial and compliance plan Auditors;
v.        Safeguarding by Custodians;
vi.      Verification by Research Houses; and
vii.     Disclosure levels for registered managed investment schemes.

Whilst One Investment Group comprises various entities that provide custody, trustee, registry, fund accounting and unit pricing services, we have been asked to comment specifically in relation to our capacity as an independent Responsible Entity, our role as a gatekeeper in the system and our interactions with other gatekeepers.  Given this brief and the limitations on the length of our response, we have decided to focus our submission on those expectation gaps described in paragraphs iii.iv. and v.  above.

Responsible Entities as Gatekeepers – An Independent Responsible Entity’s View

The precursor to the concept of a Responsible Entity was the separate roles and responsibilities of the Manager and the Trustee pursuant to the prescribed interest scheme framework.  A key component for the reform of the prescribed interest scheme was to ensure that each scheme would have a single, clearly identifiable entityresponsible to investors for operating the scheme, that is, the Responsible Entity.

The role of a Responsible Entity today, distinct from other gatekeepers, such as Custodians and Auditors, is to bear the ultimate accountability to investors for a registered scheme.  That is, whilst the Responsible Entity is not prohibited from appointing an agent, the legislation states that the Responsible Entity is taken to have done (or failed to do) anything that the appointed agent has done (or failed to do), even where the agent acted fraudulently or outside the scope of their authority or engagement.  In this regard, we consider the Responsible Entity to be the critical gatekeeper for registered schemes.

We believe that the risk in respect of expectation gaps in relation to the gatekeepers is amplified where the Responsible Entity and Manager of a scheme are related body corporates (i.e. an internal Responsible Entity).  It is noted that such risks are unlikely to be eliminated even with the appointment of an internal Responsible Entity with non-executive independent directors.  In light of such risk, it is our belief that the better and more prudent practice is to engage an independent or external Responsible Entity as opposed to an internal Responsible Entity.  An independent Responsible Entity minimises conflicts of interest and reduces the likelihood of the Responsible Entity acting in a detrimental manner to investors.

Further, an independent Responsible Entity that specialises in providing Responsible Entity services to a range of clients is likely to possess a higher degree of expertise and specialised resources to assist in the operation of a scheme in addition to providing better and truly independent oversight.  Given the economies of scale an independent responsible entity can enjoy, there is no reason an external responsible entity should burden a scheme with additional costs when compared to an internal responsible entity.  Whilst we are not proposing that an independent responsible entity be mandatory, perhaps an “if not, why not” approach similar to the ASX Listing Rules relating to Corporate Governance Principles could be considered.

Knowledge as to how AFSLs are issued

Investors misunderstand who an AFSL can be issued to and why certain individuals are able to operate under an AFSL.

ASIC stated in the Report that their ability to restrict the entry of a participant into the financial services industry is limited due to the low threshold for obtaining an AFSL whilst ASIC’s ability to cancel an AFSL is similarly restricted due to the threshold being set relatively high.

In this respect, we note the following:

  • Section 913B of the Corporations Act 2001 (the Act) extends broad powers to ASIC in relation to the granting of an AFSL and in fact prohibits ASIC from granting an AFSL unless it has no reason to believe that the applicant is likely to contravene obligations under section 912A (the section which imposes key duties and obligations on the licensed entity including the requirements to maintain representatives with appropriate competency levels and to ensure their compliance with the financial services laws);
  • Subsection 913B(3) of the Act states ASIC must be satisfied that there is no reason to believe that any of the responsible officers of an applicant are not of good fame or character; and
    • Subsection 914A(1) of the Act empowers ASIC to vary or revoke conditions of a licence at any time.


In our opinion, these powers appear to contradict ASIC’s statements in relation to issuing and restricting AFSLs and the limitations of the licensing regime focusing on the licensed entity rather than the directors, employees or other representatives.

Accordingly, the expectation of investors in relation to the issuance of an AFSL is justified.  That is, the expectation that undesirable individuals or entities are restricted by ASIC from being involved in the financial services sector is a reasonable and appropriate one.  In this regard, it would appear that ASIC’s interpretation of the Act and specifically the exercise of its powers for issuing and restricting licences falls short of investors’ expectations and arguably the intention of the financial services laws.


The regulators and investors have expressed frustration at financial and compliance plan Auditors, particularly their inability to verify information.

It is undeniable that both compliance and financial Auditors enhance confidence in financial reporting and provide a level of comfort to investors in relation to the position and performance of a scheme.

However, expectations that Auditors are guaranteed to detect fraud and/or provide absolute assurance of financial statements is unrealistic and any attempt to ensure as such would be highly costly if at all possible.

Accordingly, in our view, it is ultimately the directors of the Responsible Entity whom are responsible for the accuracy of financial statements and the proper operation of the scheme.  Furthermore, it is the role of the Responsible Entity to appoint Auditors with sufficient competency.  In this regard, the presence of an external Responsible Entity is more likely to lead to the appointment of Auditor with both competency and integrity.

In light of the above, the expectations of regulators and investors are unreasonable but probably to be expected in the circumstances.  We believe the role of the Auditor is to provide an opinion as to whether the financial statements present a true and fair view and, in fairness to auditors, an expectation that this will guarantee the absence of fraud or error is probably unreasonable.


The public’s expectation in relation to the role of Custodians is to protect and secure the underlying investments of a scheme.

It is our view that the role of a Custodian is to primarily hold assets on behalf of a Responsible Entity and to act on the proper instructions of the Responsible Entity in relation to those assets. Whilst a Custodian may be expected to question suspicious transactions in relation to the assets in a scheme, their role is limited to notifying the Responsible Entity and/or ASIC.

We believe that the expectation of the role of the Custodian in valuing assets is unjustified and note that the obligation to ensure the accuracy of asset values rests with the Responsible Entity.

Further, we believe that merely changing the title of a ‘Custodian’ to ‘manager’s paying agent’ firstly fails to accurately define the role of the Custodian and may consequently result in the weakening of and ambiguity associated with the functions of the Custodian.

As we note in our submission above, the Responsible Entity bears the ultimate responsibility for the scheme and is responsible for the Custodian, who we note is just another contractual agent.  Thus whilst we agree that the Custodian should have obligations to report suspicious transactions, the Responsible Entity is unable to assume that its role in relation to this is fully discharged.  Once again, this highlights potential issues which may arise where a Responsible Entity is not independent, including their ability to select any Custodian and the requirement for a Custodian to act on the Responsible Entity’s instruction.

Accordingly, the expectations of the public are unreasonable.  That is, the primary role of the Custodian is that of holding legal title in and dealing with the assets with the obligation to report suspicious transactions secondary to its primary role.  Ultimately it is the Responsible Entity’s role to ensure the protection and security of a scheme’s investments.

Yours Sincerely,

Justin Epstein
Executive Director,
One Investment Group