Over the past few years various investment schemes have been developed
which promise a significant return for investors. The great majority
of these schemes are well-managed by reputable persons and do
not cause problems.
Unfortunately, like anything successful, the schemes have attracted
some people who do the reputation of the industry no good at all.
As a result, the Federal Government has introduced the Managed
Investments Act 1998 (to amend the Corporations Law) with a view
to controlling these schemes.
The schemes which are promoted include arrangements to purchase
real estate and also schemes for investors to contribute funds
to mortgages.
The A.S.I.C. has now published a policy paper, within the framework
of the legislation, on specialised mortgage investment schemes
- commonly ran by solicitors and finance brokers. Anyone wishing
to view the policy statement can download it direct from the A.S.I.C.'s
web site (www.asic.gov.au.) The proposals centre around the registration
of such schemes and, hence, their regulation. It is intended to
provide for exemptions for some schemes.
It is intended to require registration for any scheme where there
are more than 20 investors, or if the manager is in the business
of promoting mortgage investment schemes. A manager will be required
to have a licence authorising the operation of a managed investment
scheme. With loans for property development, the manager is intended
to be required to demonstrate that he has relevant project management
experience and competency.
This is an area which is still in the process of policy formulation
so those in the industry will need to watch developments carefully
over the next few months, in case their individual positions become
affected. It is intended that whatever decision is made will apply
from 1 April 1999.
The practical effect of this is that all mortgage investment schemes
offered or entered into after that date will have to comply with
Chapter 5C of the Corporations Law (as inserted by the Managed
Investments Act 1998) and the prospectus provisions in Division
2.
So what happens if a purchaser, in the excitement of the moment,
signs up at a seminar to take part in a scheme - only to discover
later in the cool light of day that the investment is not what
it appears to be? Under the new legislation an investor will be
able to pursue action against the manager if the prospectus is
shown to be false and misleading. A person promoting such a scheme
could also face sanctions by the A.S.I.C. as well as a possible
loss of licence, thereby preventing participation in future promotions.
'Cooling-off' provisions (such as those applying in domestic real
estate transactions in N.S.W.) will only be applicable where the
investment consists of the purchase of an identifiable parcel
of domestic real estate.
A prudent purchaser, however, would not merely rely on the legislative
protection of Chapter 5C. After all, if there is no money left
to distribute to disgruntled investors, being right is of little
succour. A prudent purchaser would ask an appropriate professional
adviser to investigate the investment scheme as far as is practicable.
Such checks would include confirmation that Chapter 5C has been
complied with, that any real estate involved in an investment
is available and has the value attributed to it, and that the
return on the investment is secure as far as one can be secured.
Even under the proposals on mortgage investments it is possible
that some promoters will escape the legislative net. So, notwithstanding
the new legislation, the old adage of 'caveat emptor' (or buyer
beware) still applies.
A wise investor will not rely merely on the promises of promoters
and a possible legislative safety net. A wise investor will still
carefully review and consider a proposal before making a decision.
