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Client Update: Developers and management rights schemes: meeting the AFS requirements

21 July 2010

In brief: Recently, Allens Arthur Robinson obtained for a client an ASIC exemption from the need to hold an Australian financial services licence for management rights schemes at an apartment complex. Partner Tony Davies (view CV) and Senior Associate Bill Burton report on the exemption, which is thought to be the first of its kind.

Background

Letting pool arrangements for serviced apartment complexes, hotels or resorts are often referred to as a 'management rights scheme' or an MRS. These schemes often fall within the definition of a 'managed investment scheme' under the Corporations Act 2001 (Cth).

Developers should be aware of the potential requirements under the Corporations Act for them to hold an Australian financial services (AFS) licence for an MRS. The Australian Securities & Investments Commission (ASIC) has provided class order relief from some of these requirements. However, a significant gap remains in this relief regarding the provision of information about a MRS that constitutes 'financial product advice'.

Importantly, this means that acts such as providing a recommendation to an apartment buyer about their participation in a MRS can fall outside the scope of the existing class order relief. We think that developers may unintentionally be making such recommendations.

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Key issues

Because an MRS will often be a 'managed investment scheme', interests in it will usually be financial products for the purposes of the Corporations Act.

Generally, a person needs to hold an AFS licence to operate a financial services business. A failure to comply with the AFS licensing requirements can result in significant civil and criminal penalties.

The main financial services provided for an MRS are often 'dealing' and providing 'financial product advice'. 'Dealing' could include the issue of interests in an MRS and financial product advice can include giving suggestions or recommendations to potential apartment buyers about their participation in an MRS.

Developers may currently rely on ASIC's Class Order 02/305 for relief from the need to hold an AFS licence when dealing in interests in an MRS. However, the existing licensing relief does not extend to the provision of financial product advice about a MRS.

In May 2007, ASIC issued its Consultation Paper 81 Management Rights Schemes, which identified several reasons why licensing relief should be granted to a developer or operator. They include where either the developer or operator is licensed as a real estate agent, conveyancing agent, business agent or property developer under state or territory laws or is registered as a representative of one of these licensees. The reasons specified by ASIC why relief should be issued included that:

  • the real property industry is regulated under a different regime to the financial services industry;
  • the context in which advice is given on interests in management rights schemes is in circumstances where the substantial aspect of the transaction generally concerns the purchase of real estate rather than a financial product; and
  • there is already consumer protection provided under state and territory licensing regimes for real estate agents, conveyancing agents, business agents and property developers.

Despite releasing this consultation paper in 2007, ASIC has not yet provided any broader relief regarding the provision of financial product advice in relation to an MRS. However, developers can apply to ASIC under section 911A(2)(l) of the Corporations Act for their own specific exemption from the licensing regime.

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The next steps

Property developers involved in the sale or management of opportunities for short-term letting should carefully check to ensure they are not breaching AFS licensing provisions under the Corporations Act. ASIC class orders may not provide the necessary protection from the licensing provisions.

Developers should also review their sales and marketing procedures to determine whether or not they are providing financial product advice for the purposes of the Corporations Act. If such advice is being provided (and we think that in many cases it may be for the sale of off-the-plan product intended to be made available for short-term letting), to avoid the risk of breaching the Corporations Act, they should consider applying to ASIC for specific relief to be granted from the licensing regime.

For further information, please contact:

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