Unlisted unit trusts are hindered by a lack of uniformity in industry practice. The Australian Custodial Services Association is taking a look.

Custodian and administrators say that while there is strong demand for unlisted unit trusts, lack of standardisation in industry practice can lead to operational inefficiencies and challenge service providers to realise scale benefits.

The number of transactions in unlisted unit trusts was 641,038 as of June 30, 2018, the most recent statistics available via the Australian Custodial Services Association. That number is down 12.4 per cent from December 31, 2017, which showed 731,798 transactions in unlisted unit trusts.

“Growth in the unlisted unit trusts markets compounds the challenge, hence the importance of pushing for innovation and increased market efficiency for the benefit of the market and its participants,” said David Braga, head of BNP Paribas Securities Services Australia & New Zealand.

The ACSA said unlisted unit trusts would be an area of focus in 2019, such as improving the experience around customer onboarding, ‘know your customer (KYC) anti-money laundering efforts, fund data, corporate actions and reporting, orders and transfers, and standards.

The industry points to regulation such as RG 97 and KYC as potential sources of increased cost of compliance. In the July 2018 external review commissioned by ASIC, Darren McShane noted in the report that industry feedback revealed inconsistency in the treatment of listed and unlisted investments.

“A fund that invests in a listed [real estate investment trust] REIT may not need to disclose underlying costs relating to the property held by the REIT, where a fund that invests in property directly or via an unlisted vehicle may have to disclose underlying costs,” the report noted.

Enhanced disclosure and standardisation would lead to better outcomes, Braga said.

“Benefits of enhanced disclosure and standardisation include improved market efficiency, integrity and innovation, leading to better and more efficient outcomes for consumers and industry participants,” he said. “For example, enhanced disclosure requirements such as RG 97 will ensure investors receive standardised and transparent information on fees and costs that assists them to compare investment products and make more informed investment choices.”

Lack of standardisation can lead to operational inefficiencies and challenges to realising scale benefits for service providers, Braga added.

There continue to be other issues as well, such as lack of automation, technological development and innovation that impacts the transaction lifecycles of unlisted unit trusts, which can lead to increased risk and operational inefficiencies.

One area of further exploration and a potential source of lower regulatory barriers to cross-border transactions is the newly launched Asia Region Funds Passport (ARFP) and new Corporate Collective Investment Vehicles (CCIVs).

“These initiatives, underpinned by government policy changes, are aimed at lessening the regulatory barriers to cross-border flows for fund investors,” ACSA stated last year. “ACSA notes that other major fund centres around the world have benefitted from the efficiency and lower operating risks that flow from higher levels of standardisation, simple structures and automation. The full potential of the ARFP and CCIV initiatives will require such efficiency and structural considerations to realise their full potential in Australia.”

A point of concern from the industry is the lack of a centralised exchange or repository for unlisted unit trusts.

“Currently in Australia, there is no centralised exchange or repository for trading and related data, further compounding inefficiencies in the unlisted unit trust market; for example, the lack of real-time trading information can potentially generate performance leakage,” Braga said.

Rachel Alembakis has more than a decade of experience writing about institutional investments, asset owners, custody and administration for a variety of publications.