New requirements make MDAs difficult for small operators

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Last week ASIC announced it was reviewing its guidance and regulations around Managed Discretionary Accounts (MDAs). In response to FoFA, many advisers have considered adopting MDAs, but ASIC guidance had not been updated since 2004.

Tim Wedd, executive director of Crystal Wealth Partners, specialises in managed accounts and says the guidance is welcome, but that some of the proposed requirements will make things more difficult for smaller providers – in particular, a net tangible assets (NTA) requirement similar to the requirements of responsible entities.

“Introducing NTA requirements for MDA operators will make it more onerous for smaller providers to become ‘operators’,” says Wedd. “This could encourage larger operators to simply badge services for MDA advisers, where it appears such higher NTA requirements don’t apply for a MDA adviser.”

Advisers should still need to be specifically authorised to be MDA advisers under their licence but with no additional capital requirements, says Wedd.

The Institute of Managed Account Providers (IMAP) has mentioned the same concerns about the new requirements.

In order to meet the NTA requirements ASIC says:

MDA operators that do not provide custodial and depository services must hold at all times minimum NTA of the greater of:

  1. $150,000;
  2. 0.5% of the average value of all of the client’s portfolio assets of the MDAs you operate up to $5 million NTA; or
  3. 10% of your average MDA operator revenue with no maximum NTA.

MDA operators that provide custodial and depository services must hold at all times minimum NTA of the greater of:

  1. $10 million;
  2. 10% of your average MDA operator revenue with no maximum NTA.

Wedd says the new NTA requirements appear to apply to all MDA operators – irrespective of any external outsourcing arrangements used to deliver the MDA service to the client.

“This means new NTA requirements appear to apply to all MDA operators – the NTA requirements for MDA operators is greater than that proposed for incidental custodians, which seems overly onerous.

“We agree operators should have necessary experience and qualifications to run such schemes but this is different to the NTA issue. Consideration should be given to excluding client assets and associated revenue from the NTA calculations where other licensed entities (with the appropriate capital backing) provide MDA administration support services to the MDA operator.”

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