Do You Need an AFSL to Offer a Managed Investment Scheme? Understanding What it Means

Introduction to Managed Investment Schemes and AFSL Requirements

In Australia, if your business involves offering services related to a managed investment scheme, you will generally need to hold an Australian Financial Services (AFS) licence. A managed investment scheme is defined under the Corporations Act 2001 (Cth) as a scheme where investors contribute money or money’s worth to a common venture or investment, which is then managed to produce financial benefits. Therefore, understanding the definition of “managed investment scheme” is critical for anyone operating a financial services business in Australia.

This guide aims to clarify what constitutes a managed investment scheme and why an Australian Financial Services Licence (AFSL) is typically required to operate one. Whether a managed investment scheme is registered or unregistered, operating such a scheme is usually considered providing a financial service related to a financial product, specifically an interest in a managed investment, thus necessitating an AFS licence.

Defining a Managed Investment Scheme (MIS)

Pooling of Investor Contributions

A managed investment scheme is characterised by the pooling of funds or assets from a group of investors. This pooling allows a diverse range of individuals to participate in investment opportunities that might otherwise be beyond their reach individually.

These schemes are often referred to as “schemes” or “pooled investments,” terms that emphasise the collaborative nature of the contributions. This collective approach enables the creation of shared ventures, making investment opportunities more accessible.

Collective Investment and Common Enterprise

Once pooled, the contributions are strategically allocated to a common enterprise. This enterprise is managed by a responsible entity that acts on behalf of all investors in the scheme.

The primary goal of this collective investment is to deliver financial benefits to investors, either in the form of monetary returns or as rights and interests in property. Importantly, these shared benefits are derived directly from the pooled funds, creating a unified investment outcome for all participants.

Lack of Day-to-Day Investor Control

A defining feature of managed investment schemes is that investors typically play no role in its daily operations. Instead, all operational and investment decisions are overseen by a responsible entity, often referred to as a fund manager.

Investors place their trust in the expertise of this fund manager, who is tasked with managing the pooled funds and ensuring the effective operation of the common enterprise. While investors relinquish control over day-to-day decisions, they do retain important rights, such as the right to receive financial returns. In some cases, they also hold voting rights on significant matters affecting the scheme.

Examples of Managed Investment Schemes

Common Types of MIS

Managed investment schemes encompass a diverse array of arrangements and investments. These schemes are designed to pool investor funds into various asset classes and strategies. Managed investment schemes include a wide variety of arrangements, and some examples of common types of MIS are:

• Property schemes: These schemes invest in real estate, which can include commercial, residential, or industrial properties. Property schemes aim to generate income and capital growth from property investments.
• Equity schemes: These schemes invest in company shares, either in Australia or internationally. Equity schemes seek to provide capital growth and potentially dividend income to investors.
• Cash management trusts: These trusts invest in short-term money market instruments and aim to provide investors with a return similar to money market interest rates, while offering high liquidity.
• Mortgage schemes: These schemes invest in mortgages, providing investors with income from interest payments on mortgage loans.
• Agricultural schemes: These schemes invest in agricultural assets such as horticulture, aquaculture, and horse breeding. Agricultural schemes aim to generate returns from farming and agricultural activities.
• Time-sharing schemes: These schemes allow multiple investors to have rights to use a property for specified periods.
• Serviced strata schemes: These schemes involve properties that offer services to residents, often combining property investment with service provisions.
• Exchange Traded Funds (ETFs): These are investment funds traded on stock exchanges, holding a basket of assets such as shares or bonds, and designed to track a specific index or investment strategy.

Investments NOT Considered MIS

While managed investment schemes cover a broad range of collective investments, certain types of investments are explicitly excluded from this classification. Generally, only investments that are ‘collective’ are considered managed investment schemes, meaning that investments that are not ‘collective’ are not managed investment schemes. Examples of investments typically not classified as managed investment schemes include:

• Debentures issued by a body corporate: These are debt instruments issued by companies to raise capital and are generally not considered managed investment schemes.
• Franchises: These are business arrangements where individuals operate a business under a recognised brand and system, which are not classified as managed investment schemes.
• Direct purchases of shares or other equities: When investors directly buy shares or equities in companies, without pooling funds, this is not considered a managed investment scheme.
• Barter schemes: These are arrangements where goods or services are exchanged directly without money, and they do not fall under the definition of managed investment schemes.
• Schemes operated by an Australian bank in the ordinary course of banking business (e.g. term deposits): Traditional banking products offered by Australian banks, such as term deposits, are typically excluded from being classified as managed investment schemes.
• Superannuation products: Regulated superannuation funds and approved deposit funds are specifically excluded from the definition of managed investment schemes.

The Critical Role of an AFSL for MIS Operations

AFSL Requirement for Financial Service Providers

To lawfully provide financial services connected to a managed investment scheme, a business is generally required to hold an AFSL. This is a fundamental legal obligation in Australia, designed to ensure that entities involved in managed investment schemes are appropriately regulated. While it is generally the manager or operator of the scheme who must hold the AFSL, it is more precise to state that the entity providing financial services in connection with the MIS, which includes operating the scheme, must hold an AFSL or be an authorised representative of an AFSL holder, unless a specific exemption applies.

• Legal Obligation: Businesses must generally hold an AFSL to lawfully provide financial services related to managed investment schemes.
• Financial Products: Interests in managed investment schemes are classified as financial products under the Corporations Act 2001, necessitating regulatory oversight.
• Manager and Authorised Representative: Operation of managed investment schemes requires an AFSL holder as the manager, or for the operator to be an authorised representative of an AFSL holder, acknowledging possible exemptions under specific circumstances.

Operating a Registered MIS Deemed a Financial Service

Operating a registered managed investment scheme is indeed automatically deemed a financial service under the Corporations Act 2001. This automatic classification is crucial as it directly subjects the operators to the full suite of legal and compliance obligations stipulated for financial service providers. These obligations are extensive, encompassing disclosure, design and distribution, and reporting and record-keeping responsibilities to the Australian Securities and Investments Commission (ASIC), all reinforcing the critical nature of AFSL compliance.

• Automatic Classification: Under the Corporations Act 2001, operating a registered MIS is legally and automatically considered the provision of a financial service.
• Legal Obligations: Entities operating registered MIS are therefore subject to comprehensive legal obligations, including disclosure, design and distribution, and ASIC reporting and record-keeping.
• ASIC Oversight: The Australian Securities and Investments Commission (ASIC) plays a vital role in overseeing these operations, including rigorous assessment of AFSL applications to ensure adherence to regulatory standards and to protect investors effectively.

Registered vs. Unregistered Managed Investment Schemes and AFSL

Registration Requirements for MIS

For investor protection, particularly for retail clients, the Corporations Act 2001 mandates the registration of certain managed investment schemes with ASIC. A managed investment scheme must be registered if it meets any of the following criteria:

• The scheme has 20 or more investors, encompassing both retail and wholesale clients.
• The scheme is promoted by a person, or an associate of a person, who is in the business of promoting managed investment schemes.
• ASIC has made a determination that a number of managed investment schemes are closely related and must be registered when the total number of investors across all schemes exceeds 20.

It is important to note that navigating whether a venture even constitutes a managed investment scheme can be complex and often necessitates legal advice to accurately determine if the definition under the Corporations Act 2001 is indeed met.

However, an overriding condition exists where registration is not required, even if the above criteria are met. This occurs if all offers of interests in the scheme would not have required a Product Disclosure Statement (PDS) had the scheme been registered at the time of issue. This typically applies in scenarios where:

• All members of the scheme are wholesale clients, who are considered to have sufficient wealth and investment experience to not require the same level of regulatory protection as retail clients.
• The scheme issues financial products to no more than 20 people within a 12-month period and raises no more than $2 million, limiting its scale and potential impact on a broader range of investors.

AFSL Obligations for Both Registered and Unregistered MIS

Whether a managed investment scheme is registered or not, the entity operating the scheme is generally required to hold an AFSL, unless a specific exemption applies under the Corporations Act 2001. This is because the operation of a managed investment scheme is legally defined as providing a financial service, especially when the interests in the scheme are considered financial products.

This AFSL requirement is fundamental and applies irrespective of the scheme’s registration status. It is crucial to understand that unregistered managed investment schemes, while not subject to the additional regulatory oversight of Chapter 5C of the Corporations Act 2001 that registered schemes face, are still subject to the AFSL licensing regime if they are providing financial services. Therefore, businesses operating managed investment schemes must ensure they either hold an appropriate AFSL or operate under an exemption, to legally provide these financial services in Australia.

Conclusion

Understanding whether your venture qualifies as a managed investment scheme and the subsequent AFSL obligations can be intricate. As highlighted, a managed investment scheme involves specific criteria concerning pooled investor contributions, collective investment, and limited investor control. Whether a scheme must be registered with ASIC or can operate as an unregistered managed investment scheme further influences the regulatory landscape and the necessity to hold an AFS licence.

Navigating this complex regulatory framework requires careful consideration and expert guidance. For businesses seeking to confidently operate within the managed investment scheme sector and ensure full Corporations Act 2001 compliance, contact AFSL House today. Our team offers unparalleled expertise in assisting businesses to understand their AFSL requirements and navigate the application process, ensuring your business is well-positioned to provide financial services lawfully and effectively in Australia.

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