ASIC Directs Fund Managers to Correct Product Mislabelling

ASIC has identified 14 funds using the term ‘cash’ in their names in a confusing and inappropriate way, and 3 others with a significant liquidity mismatch.

ASIC (Australian Securities and Investments Commission) has directed fund managers to ensure their products are ‘true to label’ and that their product names align with the underlying assets.

ASIC undertook a targeted surveillance of 37 managed funds operated by 20 responsible entities that collectively hold approximately AUD 21 billion (USD 15 billion) in assets. This followed a warning from the regulator in May about investment advertising that compares fixed-term investment products to bank term deposits.

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.

The surveillance exercise identified two significant concerns:

• Confusing and inappropriate product labels across 14 “cash” funds with under AUD 7 billion in assets, which held assets with significantly higher risk and less liquidity, more akin to a bond or diversified fund. 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.
• Redemption features not matching the liquidity of underlying assets, i.e. the liquidity of the underlying assets did not support the short redemption terms offered to consumers. In particular, a significant mismatch was identified in three funds with under AUD 1 billion in assets.

“It is paramount that consumers are not misled about the level of risk associated with a particular product,” said ASIC Deputy Chair Karen Chester. “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.”

ASIC is concerned that 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. Particularly during periods of market volatility, such inconsistencies exacerbate the liquidity risks faced by the funds and ultimately investors, it says.

“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 says.

The regulator has sought corrective action from 13 responsible entities where significant concerns were identified. Seven of these voluntarily changed or proposed to change the names of their funds to reflect the product composition; one is proposing to change their asset allocation; three are undertaking a review of their funds; and one withdrew misleading promotional materials and subsequently wound up its fund.

ASIC says it will continue to monitor the outcomes and consider appropriate regulatory action, including enforcement action where necessary.

Responsible entities are advised to consult ASIC’s regulatory guide for guidance on labelling and disclosure requirements.