The Financial Services Council (FSC) has introduced the Internal Governance and Asset Stewardship Standard (the code) to 'encourage the adoption of high standards that are consistent with other leading capital markets'. The code is 'essentially a disclosure based standard which requires FSC Members to bring together or disclose in a single concise place, their approach to internal governance and asset stewardship' and is intended to operate in addition to other FSC Standards: FSC Standard 1: Code of Ethics and Code of Conduct, FSC Standard 13: Voting Policy, Voting Records and Disclosure and FSC Standard 20: Superannuation Governance Policy.

According to the text of the code, unlike stewardship codes in other jurisdictions which focus on asset stewardship and conflicts of interest, the FSC Standard takes a 'broader view' and also includes the internal governance of the asset manager because 'our members believe that the careful and responsible management of clients' assets requires foundations built on good practices and robust internal governance'.

Compliance with the new code is mandatory for FSC asset managers from 1 July 2017.

Key points

• Application: In this code, 'Asset Manager' (also known as Investment Managers or Fund Managers) is a term used to describe an institution which has responsibility for managing, or overseeing the management of assets of clients. This code applies to any FSC Member who is an Asset Manager or undertakes asset management activities.
• Development: the code was developed in order to encourage higher standards of internal governance and stewardship practices; provide better information for clients and other stakeholders; and raise the quality and standing of Australia’s financial services internationally.
• Purpose: to provide guidance to FSC members who undertake the role of asset managers in setting and achieving best practice in fulfilling their fiduciary responsibility as custodians of one of the largest pools of managed funds in the world.
• Commencement: the code commences from 1 January 2018 with a 6 month transition period. The standard is mandatory for FSC Full members from 1 July 2018. Accordingly FSC Full Members must provide sign off on compliance with the Standard for the FSC compliance year 1 July 2018 to 30 June 2019 (sign off due September 2019). Earlier compliance is encouraged.

Approach to disclosure

• Principles based approach to disclosure: Rather than adopting a prescriptive disclosure approach the code requires a principles-based disclosure for best practice ie rather than dictate the way in which asset managers should discharge their stewardship obligations, the code instead sets out 'markers of good practice': 'By making these disclosures public we believe good practice will develop organically and change over time as the market evolves'.
• Comply or explain rationale: Asset managers will, where relevant within their business practices, be required under the code to either describe the policy underlying their practices or explain why they are not relevant to them.
• Broad approach consistent with leading capital markets: Stewardship codes exist in other jurisdictions including the Netherlands, Switzerland, South Africa, Singapore, Japan and across Europe as articulated in the EFAMA Code for External Governance. As well, a number of other markets outside Australia are formulating their own codes. The FSC code was designed to encourage the adoption of high standards that are consistent with other leading capital markets. However, unlike other stewardship codes which focus on asset stewardship and conflicts of interest, the FSC code takes a broader view and also includes the internal governance of the Asset Manager. This code is therefore split into the following sections: organisational and investment approach; internal governance; and asset stewardship.

Disclosure requirements: Organisational and Investment approach

Appropriate disclosure should include, but is not limited to:

• a description of the distinguishing features of the Asset Manager and how these features are directed towards achieving client objectives;
• an explanation of how the Asset Manager aligns its purpose and values with its duty to clients;
• an overview of the ownership, management and governance structures of the organisation;
• an overview of the key management and investment personnel within the organisation;
• explanation of how the Asset Manager ensures client assets are managed in accordance with their investment strategies and how conflicts of interest are managed;
• an overview of the key management and investment personnel within the organisation; and
• an explanation of how the Asset Manager ensures client assets are managed in accordance with their investment strategies and how conflicts of interest are managed.

Disclosure requirements: Internal Governance

Appropriate disclosure should include, but not be limited to:

1. ethical conduct and professional practice;
2. personal trading;
3. management of conflicts of interest to ensure client interests take priority (including gifts and entertainment);
4. risk management and compliance;
5. error correction policy;
6. brokerage and commissions;
7. equitable asset valuation and pricing;
8. best execution and trade allocation;
9. remuneration policy;
10. whistle-blower protection policy;
11. training and development; and
12. complaints and dispute resolution.

Disclosure Requirements: Asset stewardship

Appropriate disclosure should include the Asset Manager’s approach where relevant to the following stewardship activities and the governance and oversight associated with each one:

1. monitoring of company performance on financial and non-financial matters;
2. engagement with company management and the board (as appropriate) and escalation of issues in instances where initial engagements have not been adequately responded to;
3. approach to considering Environmental, Social and Governance factors (risks and opportunities) and whether these considerations influence investment decision-making and company engagement;
4. proxy voting;
5. collaborative engagement with other investors including involvement with industry groups and associations;
6. principles used for policy advocacy including participation with industry groups and associations; and
7. the approach to client engagement, education and communication regarding asset stewardship.

State Street Global Advisors head of Asia Pacific reportedly welcomed the code

According to Money Management, State Street Global Advisors head of Asia-Pacific, Lochiel Crafter commented on the new Standard at a recent media briefing as follows:

• Many asset managers will already be compliant with the standards.
• There is nothing controversial in the standard and 'none of these policies that we’ve outlined in terms of internal governance would have anyone thinking "that’s going to be onerous to comply with"'.
• From an investor perspective the standard 'provides transparency on what they should expect to see. This is not due diligence but if your asset manager is not able to articulate policy or appropriate wording around these activities then investors have a right to ask why…In the past, it’s been a lot of about act in the best interest of investors and now we’ve been more explicit about what that means. That helps investors understand what does it actually looks like, "what should I expect to see inside my asset manager, what conduct or policies around conduct should I expect to see."'

Investment Magazine writes that the code will apply to 'about 50 funds management firms which together manager the lion's share of the roughly $2.8tn in funder under management in Australia.' The article adds that the introduction of the code is of significance as it is Australia’s first compulsory asset stewardship code for fund managers and that until now Australia was one of the only major economies – and the only signatory to the Asia Region Funds Passport – without such a standard.