What is a Responsible Entity and why does it matter?

What is a ‘Responsible Entity’ and why does it matter?

Introduction

This week’s post is topical due to the fact that a former Responsible Entity in Australia called Falcon Capital Limited (‘Falcon’) has been in the news of late.

Falcon, as a previously Australian Financial Services Licensed entity is currently being investigated by the Australian Securities and Investments Commission (‘ASIC’) for ASIC’s alleged concerns about Falcon’s management and the operation of First Guardian Master Fund and the associated risks to investors (cited from ASIC media release 25-055MR “Court orders Falcon Capital and the First Guardian Master Fund to be wound up” 10 April 2025).

What is a Responsible Entity?

A Responsible Entity (‘RE’) is a body corporate that operates a registered managed investment scheme (‘MIS’). An MIS is known as a managed fund, or pooled investment in other jurisdictions. Generally speaking, an MIS that is registered with our regulator in Australia ASIC, is structured by the RE and designed to serve retail, or ‘mum and dad’ type investors.

A registered scheme provides additional protections and disclosure obligations to retail investors versus an unregistered scheme. A registered scheme has a compliance plan in place and the RE is obliged to prepare audited annual financial reports, to inform and protect investors' interests.  

To be an RE, the body corporate must hold an Australian Financial Services Licence (‘AFSL’) which authorises it to operate a registered MIS under the AFSL. From personal experience, ASIC sets a high bar with regards to granting retail AFSLs with the proper authorisation that allow the AFSL holder to operate retail managed funds. Having ethical and experienced Responsible Managers of good character is a critical step to be granted a retail AFSL by ASIC.

The RE is in the ‘trust’ business

The RE acts as both trustee and the manager of investor’s interests in a pooled fund. As noted above, an RE managing a registered scheme mostly serves retail investors, and these retail investors are trusting their investments to be managed by the RE honestly, and for the RE to exercise care and diligence in their management of the scheme.

My personal view is that in financial services, a company is not in the business of ‘selling’ a financial product, rather, the entity is providing a service of ‘trust’ – trust becomes the actual product. For example, a financial product can be superbly structured with compelling underlying assets, however, if the manager is not trustworthy and ethical, the actual product is flawed from the outset. If for example, a manager puts the interests of themselves first above the client, i.e. with regard to fees over financial return outcome, the client will likely receive a poor outcome over the long run.

Retail investors by their nature and background are not sophisticated investors, and retail investors rely on financial experts to generate returns on their investments and to have these investments managed diligently by the RE. If the RE is not ethical, the retail investor’s contract of trust in the manager will eventually be broken through poor investment performance, or in a worst case scenario, fraud and embezzlement.  

Why does trust matter under the law?

Section 601FC of the Corporations Act clearly states the duties of the RE. A summary of the RE’s duties include that the RE must:

1. act honestly;

2. exercise care and diligence;

3. act in the best interests of the members;

4. avoid conflicts of interest - if there is a conflict between the investors' interests and the RE’s own interests, give priority to the investors' interests;

5. treat the members who hold interests of the same class equally (and fairly);

6. not make use of information acquired through being the RE in order to gain an improper advantage for itself or another person, or cause detriment to the members of the fund;

7. comply with the fund's compliance plan;

8. ensure that assets of the fund are clearly identified as fund assets and held separately from assets of the RE and assets of any other scheme managed by the RE.

These duties coexist with the common law and equitable duties imposed on trustees as well as the duties of the directors of the RE. Therefore, the RE has a fiduciary role, meaning they are legally and ethically bound to act in the best interests of the fund members.

Conclusion

Australian financial services laws and our regulator ASIC are very well regarded in international markets. Overall, our laws keep retail investors safe from potential financial predators. However, the best laws and regulators cannot always protect investors from potential bad actors with ill intent.

If you would like to discuss how I can assist your company with enhancing your governance frameworks so that you can better protect your retail investors, please contact me for an obligation free discussion. I can assist your company with:

• Responsible manager;

• Compliance committee;

• Company director;

• Compliance review; and

• Governance committee services.

Together we can comply with s601FC of the Corporations Act and give your investors the best chance of an ethical and sound investment outcome.

https://www.andrewsmcneil.com/