As the insurance industry eagerly awaits the Federal Treasury position on how DOFIs will be regulated, the question of how discretionary mutual funds (DMFs) will be treated is also in limbo.

DMFs have a competitive advantage over insurers due to exemptions from regulation and insurance taxes, says Allianz Australia Group General Counsel Mathew Kaley.

Speaking at the Insurance Council of Australia regulatory seminar in Sydney last week, Mr Kaley said the Government is proposing to exempt DMFs from regulation where they carry no contingent risk. However, it is unclear how this “contingent risk” will be defined and whether changes to tax advantages will be introduced.

“The ‘discretionary’ element is what ultimately distinguishes [DMFs] from DOFIs, and the majority of the focus is always on whether there is capital adequacy,” he said.

Mr Kaley believes there should be “fit and proper” benchmarks for DMFs and a stronger focus on the risk management aspect, apart from just capital adequacy.

“If exemptions are put in place, DMFs will grow in number.”