The NSW Office of Local Government (OLG) recently reported it was intending to work with NSW Treasury and TCorp to review the Ministerial Investment Order for NSW councils and a consultation process in which interested parties can provide feedback would be announced.
The last communication from the OLG regarding the Investment Order and Guidelines was believed to have been made in 2017 (No. 17-29) when the OLG granted a waiver to TCorp to provide investment advice to councils even though they were also a product distributor offering councils the option of placing money in TCorp managed funds. The OLG stated in this circular that “The waiver applies only to TCorp” and that “Section 5 of the OLG’s Policy Guidelines requires councils…to obtain written confirmation that no actual or potential conflicts of interest exist, and to undertake separate reference checks of advisors”.
However since then the OLG has raised issues with several councils who have appointed as independent advisors entities that also operate trading platforms given there is an obvious conflict of interest in that as an advisor these entities benefit from recommending investments offered on their trading platforms where they obtain a brokerage or platform fee related to the volume and value of investments purchased via the platform.
While the OLG has expressed the view that it hopes councils will follow its guidelines, regulation does not currently force councils to separate the roles of “independent advisor” and “product provider” even though it was one of the eight explicit recommendations of the 2008 Cole Report, it appears not to be enforcing its own guidelines.
However, actual legislation requires councils to have an investment policy and adhere to the terms of this policy. Many councils have adopted the OLG’s guidelines in the formulating of their investment policies and so most investment policies prevent councils from appointing firms with obvious conflicts of interest as investment advisors when these firms can and do derive fees from the distribution of products for third parties to their clients which they recommend to their advisory clients.
It is hoped the review of the Minister’s Orders will bring into line the guidelines with the legislation to provide clarity in the market. Since Michael Cole’s recommendations in his report of 2008 were announced, the broader investment market beyond local government has moved in a similar direction moving to a fee for service model for financial advice and away from commission based remuneration as per recommendations before and after the Hayne Banking Royal Commission. It would therefore seem unlikely any review of the Minister’s Orders will reverse Michael Cole’s 2008 recommendations and is more likely to strengthen them.