ASIC warns against mislabelling of financial products
ASIC has recently conducted surveillance activity which identified two significant concerns in the labelling of financial products by managed funds. The first of which was confusing and inappropriate product labels across over half of the fund selected, meaning that some cash funds had asset holdings which were more similar to a bond or a diversified fund offering. The second significant concern related to redemption features not matching the liquidity of underlying assets, which occurred in a smaller number of funds, but were nonetheless troubling.
In a bid to protect consumers that invest in managed funds, ASIC recently undertook targeted surveillance of some 37 managed funds operated by 20 responsible entities holding approximately $21bn in assets. The products were selected from more than 350 funds of various strategies (ie cash, fixed-income, mortgage and property) with over $65bn in assets following data analysis. In analysing publicly available information as well as further information from the funds regarding asset allocation, liquidity, maturity profile and resilience, ASIC identified concerns with labelling practices of 16 funds from 13 responsible entities.
“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.” – ASIC Deputy Chair Karen Chester
While ASIC notes that during times of market volatility, consumers may be looking for alternative investment options offering higher returns, fund managers must also ensure that the product name aligns with the underlying assets as consumers use the product labels as a guide to what they are investing in.
Funds reviewed in the fixed-income, mortgage and property sectors were all appropriately labelled, but the cash products were a different kettle of fish. Out of the 22 managed funds (with $15bn in funds under management) that used the term cash in their labelling, 14 funds had confusing or inappropriate labels. According to ASIC, some funds that were labelled as cash funds had asset holdings which were more similar to a bond or a diversified fund offering, and this was more pronounced in funds that used the terms “cash enhanced” or “cash plus”.
The analysis showed that on average, “cash plus” and “cash enhanced” funds had more than 50% and 70% of their respective assets invested in other than cash or cash equivalents such as fixed-income securities and mortgages. Further, a significant mismatch between redemption features and asset liquidity were found in a small number of funds, meaning that the liquidity of the underlying assets did not support the short redemption terms offered to consumers.
ASIC says that responsible entities of running these funds have a legal obligation to investors, particularly during times of market volatility. Therefore, funds should not be using terms such as “cash” or “cash enhanced” unless its assets are predominantly in cash and cash equivalents. It is also important to remember that managed investment products are not prudentially regulated or government-guaranteed, so being misled about the level of risk associated with a particular product could really hit the hip pocket of consumers.
ASIC has already taken corrective action against the funds identified as a result of the analysis and is continuing to engage with responsible entities and monitor the outcomes. It notes that where appropriate, it will consider regulatory action, including enforcement. Consumers that have exited a managed fund and believe that they have suffered a financial loss as a result of inappropriate or confusing labelling may be able to make a complaint to the Australian Financial Complaints Authority (AFCA).
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