Proxy advisers are grappling with the implications of reforms announced last month, saying that the changes will introduce operational risks and could force a rethink of how they provide services.
Beginning 7 February, all proxy advisers must hold a new type of Australian Financial Services License (AFSL) financial services license and will be required to share their recommendations on a company with the company on the same day it provides that advice to institutional clients.
Beginning 1 July, proxy advisers will need to be independent of their institutional clients, with regards to ownership structure, personnel arrangements and "capacity to influence decision-making."
Also beginning in July, superannuation funds will be "required to disclose more detailed information on their voting records in a way that is consistent across the industry," according to a joint announcement from Treasurer Josh Frydenberg and Minister for Superannuation, Financial Services and the Digital Economy Jane Hume.
The changes to regulations via the Treasury Laws Amendment (Greater Transparency of Proxy Advice) Regulations 2021 was announced in December without consultation to stakeholders including the impacted proxy advisory firms, giving proxy advisers less than two months over the summer holidays to submit application to ASIC.
The Australian Council of Superannuation Investors (ACSI) is one of four organisations that provides proxy advice to members. It is owned by the super fund members it advises, which would not meet the standard of criteria for independence under the new regulations.
"It is an unprecedented interference into the market, seeking to regulate how advisers should be owned and governed, with no international precedent or justification," said ACSI CEO Louise Davidson. "No harm has been identified to justify increased regulation of proxy advice. It seems these regulations were implemented in order to avoid scrutiny and parliamentary debate.
"Ensuring that companies continue to deliver shareholder value is more critical now than it has ever been. These changes are not in the financial interests of superannuation fund members."
According to ACSI's 2021 annual report, voting alert subscription fees represented $1.35 million in revenue for ACSI, out of total revenue of $5.96 million.
FS Sustainability understands that ACSI is still reviewing how the regulations will impact its proxy advice business.
"Every proxy adviser in Australia has an unrestricted AFSL to provide general advice only for wholesale investors," said Dean Paatsch, director and co-founder of Ownership Matters. "What the new regulations require is for them to get effectively a sublicense for proxy advice if they're proposing to continue to provide that advice after 7 February."
Ownership Matters submitted its application for the new sublicense on 23 December, Paatsch confirmed.
Vas Kolesnikoff, head of Australia and New Zealand research at Institutional Shareholder Services confirmed that ISS is applying for the new AFSL license as well.
Paatsch called the new ASFL licencing process for proxy advisers "an extraordinary thing."
"The AFSL regime was conceived for the protection of investors - there is no detriment to an investor whatsoever if a proxy adviser doesn't send an email copy of the report on the same day to the issuer," he noted.
Paatsch also raised concerns about provisions in the new regulations that say that if verbal proxy advice is given to a client, that advice must also be committed to writing and sent the same day.
ISS and Ownership Matters already provide reports to companies on the day that the reports are published, so the new regulations will not change business as usual for either of those firms from that perspective.
However, proxy advisers will have to make sure that they have at least one email address for each company that they cover. Kolesnikoff noted that the ISS covers the ASX300 from the company's Sydney offices and he personally meets with "around 200" companies per year.
"What about the companies in the ASX300 with whom we do not engage? I'll meet with about 200 companies a year, but even then, their details might change," he said. "There might be a different person, the email might be out of date."
Paatsch pointed out that there is no onus on companies to uniformly and publicly provide contact details to the ASX or via annual reporting, which will complicate how proxy advisory reports are provided.
He also pointed out that the new regulations introduce new operational risks for proxy advisers.
"For example, if we have a failure in our email system, and reports aren't delivered, we won't have given the report to the company at all, whatsoever," he said. "Operationally, it will make dealing with the dispatch of reports riskier. It introduces an uninsurable operational risk to our business with no reciprocal benefit for the market."
ISS is also taking advice as to which reports must be provided to companies. In addition to the benchmark report on each company in the ASX300 that provides proxy voting advice, ISS also provides reports tailored to clients' specific proxy voting policies, which can be on a specific theme.
"Does that mean that every report that is a specialty report that an individual client has requested, such as on a specific theme like sustainability, has to go to a company," Kolesnikoff said. There could be up to six specialty reports per company if a client purchases them - does that mean we have to provide those to each company also?"
Note: ISS owns Rainmaker Group, publisher of FS Sustainability