Fee disclosure
The Corporations Regulations 2001 have been amended to standardise the method of disclosure of fees and charges for superannuation and managed investment products. Below is a summary of the main requirements and a brief consideration of whether the outstanding issues in the fee disclosure debate have finally been resolved.
- The reason for new regulations
- A summary of the main requirements
- When do the new obligations take effect?
- Is the fee disclosure debate finally settled?
Last updated 19 May 2005.
The reason for new regulations
The Corporations Amendment Regulations (No 1) 2005 1 (pdf) (the regulations) were made to give effect to the Government's package of disclosure initiatives announced on 16 June 2004. They supplement the dollar disclosure requirements contained in the Corporations Amendment Regulations 2004 (No 6) (see Allens Focus: Funds Management, September 2004). They are also intended to support the superannuation choice of fund reforms which come into effect from 1 July 2005 (see Allens Focus: Superannuation, April 2005).
Prior to the regulations being made, the legislative and regulatory framework governing fee disclosure did not require the information to be described and presented in a standardised way. This allowed financial product issuers to decide how to present details of their fees and costs to consumers, which effectively made it difficult for consumers to compare different financial product charges.
The regulations, which are very prescriptive, are intended to address this issue by:
- enabling consumers to compare financial products more effectively;
- providing investors with a better understanding of the effect of fees and costs on their investments; and
- making consumers more aware of the need to consider 'value for money' when selecting investments.2
A summary of the main requirements
The regulations make changes to the presentation, structure and format requirements for the disclosure of fees and costs in product disclosure statements (PDS) and periodic statements (including exit statements) for superannuation funds and managed investment products. New definitions and concepts have been introduced to give effect to these disclosure requirements; it is intended that the use of standardised definitions will help to provide more consistency across different products and also enable better comparability between PDS and periodic statements.
Requirements for PDS
The regulations require PDS for superannuation (other than exempt superannuation products3) and managed investment products to include the following components in relation to the disclosure of fees and other costs of the product.
A consumer advisory warning box
Its purpose is to alert consumers to the importance of considering 'value for money' when investing and to illustrate the compounding value of fees and costs and their impact over time on investments. It is required to refer (or, in the case of electronic versions, provide a link) to superannuation and managed investment calculators on the Australian and Securities Investment Commission's (ASIC) website to help consumers work out different options based on their own circumstances. It also encourages consumers to try to negotiate lower fees and costs with their fund or financial adviser.
A fees and costs template
This is designed to show in a simple format the most significant fees and costs that may be incurred in relation to investments, including information about amounts, how they are charged, frequency and timing of payment and whether they are negotiable. Two templates are prescribed – one for products with a multiple fee structure and one for a single fee structure. The template format is intended to enable comparisons between different products and the regulations contain detailed instructions on how to complete it to ensure consistency. The regulations also allow product providers to disclose multiple investment options in a single template rather than needing to complete a separate template for each investment option4. Where applicable, information in this template must be cross–referenced to the 'additional explanation of fees and costs section' of the PDS (discussed below).
The presentation of fees and costs in the template is also subject to the dollar disclosure regulations (see above), which include ASIC's power to determine that an amount can be disclosed in percentage terms or as a description with worked dollar examples instead of in dollar amounts. In applicable circumstances, the regulations also specifically allow for some fees and costs to be presented as a range and in percentage terms.
An additional explanation of fees and costs section
This is linked to, but separate from, the standardised fees and costs template, so that the simple format and presentation of the template is preserved. This section includes other important information about fees and costs, such as worked examples (where appropriate) and details of adviser remuneration, transaction costs, how to negotiate fees and details of changes to fees (eg, where the product issuer can change fees (with or without notice), if indexation applies etc). The level of detail required is meant to be consistent with the importance of the fee or cost being disclosed (ie, more detail should be included for significant fees or costs).5
An example of annual fees and costs table6
Its purpose is to enable consumers to compare the fees and costs of different investments over a 12–month period, based on an example investment with a $50,000 account balance and an annual contribution of $5,000, and relating to a 'balanced investment option' (defined in the regulations). (Other requirements apply if the fund or managed investment product does not offer a balanced investment option, does not allow additional contributions to be made or has a minimum entry requirement exceeding $50,000.)
The regulations set out the format of the example table and specify how to calculate the fees and costs illustrated in the table. The fees and costs are disclosed under the headings of 'contribution fees' and 'management fees' (both defined in the regulations). Management costs are defined broadly to try and capture all the relevant costs involved in managing the fund and deriving an investment return for members or product holders. The definition also specifically excludes some fees and costs (eg, those that are discretionary in nature) that are not intended to be captured by the wide definition. Management costs that are not deducted directly from a member or product holder's account must be calculated using the 'indirect cost ratio' (ICR) for the fund. This is a new term7 and is calculated by dividing these other management costs for the relevant period by average net assets over the period8. The ICR enables these other management costs to be apportioned consistently between members or product holders. For a PDS, the relevant period for the calculation is the financial year before the PDS was issued9.
The fees and costs in the example must also be the typical ongoing fees that apply to the product (ie, 'honeymoon rates', meaning more favourable rates which might apply only during the early years of the investment, may not be used) so that proper comparisons can be made.
Fees and costs in a PDS must be shown gross of income tax (but inclusive of GST and stamp duty, if applicable) and net of any applicable reduced input tax credits.
Requirements for periodic statements
Prior to the regulations, product providers were already required to include reporting on fees and costs. However, the requirements were ambiguous. The regulations have now made these reporting obligations more explicit in a way that is consistent with the description and calculation method for fees and costs in PDS. Where relevant, transactions must be itemised and described to enable consumers to understand better the transactions that have affected their investment. The regulations also allow for transactions of the same kind to be described together in a single item in applicable circumstances.
Under the regulations, periodic statements for superannuation and managed investment products will be required to include the following.
Other management costs
This item (presented as a single total amount in dollars) shows the approximate amount of management costs that were not paid directly out of a member's or product holder's account. It is calculated by using the ICR for the applicable fund investment option by the member's or holder's average account balance over the relevant reporting period. The ICR for a periodic statement is to be determined over the latest reporting period. Given the amount is only an estimate (as it is determined on the basis of an individual's average account balance), it is to be included after the section of the statement that itemises transactions during the reporting period so that the integrity of the itemised section is preserved.
Total fees you paid
This item (showing a single dollar amount) includes the total fees that a member or product holder paid but excludes transactional and operational costs for the relevant period. Again, this item must appear at the end of the part of the periodic statement that itemises transactions during the relevant reporting period, or in a summary part of the periodic statement.
Additional explanation of fees and charges
This is a separate section which allows for disclosure of other fees and costs that the consumer has incurred but that have not been disclosed elsewhere in the periodic statement.
Transactions fees and costs are required to be shown net of income tax and GST and, if applicable, stamp duty so that consumers are aware of the amount they have paid in fees and costs.
When do the new obligations take effect?
The regulations commenced on 11 March 2005 but the commencement of the fee disclosure requirements is delayed. For superannuation products, the new requirements apply to PDS issued and periodic statements (other than exit statements) in relation to reporting periods commencing from 1 July 2005. The fee disclosure provisions apply from 1 July 2006 to PDS and other statements issued for managed investment products and also to superannuation exit statements. (The enhanced fee disclosure regulations should not be confused with the dollar disclosure provisions for PDS, statements of advice and periodic statements that take effect from 1 July 2005.)
While there has been some discussion about the meaning of 'issued', it seems that it is intended that the new requirements will apply where a PDS is required to be 'given' any time from the applicable commencement date. Therefore, from 1 July 2005, all PDS for superannuation products must contain the information required under the regulations. Obviously, any new PDS issued after the relevant commencement date will need to comply with the new requirements. However, where a new PDS is not issued after the commencement date, the product provider will need to issue a supplementary PDS that contains the required information to ensure compliance with the new requirements.10
Is the fee disclosure debate finally settled?
After a series of legislative and regulatory reforms and the finalisation of ASIC's policy on how it will administer the dollar disclosure requirements (see Allens Focus: Funds Management – January 2005), are these regulations the final chapter in the disclosure debate? Possibly not.
Achievement of objectives
Given the new requirements are yet to be tested in practice, only time will tell if they achieve their intended aims adequately; ie, are product providers able to comply in all cases and do consumers understand better the information with which they are provided and are they able to make informed comparisons between products? The answers to these questions may vary depending on the type and complexity of a financial product. The application of the regulations will undoubtedly present challenges in relation to more complicated products, which may, in some cases, require product providers to consider whether their fee structures can be simplified. There is also likely to be ongoing consumer testing to analyse whether the intended consumer benefits exist in relation to some aspects.
Also, while the regulations are very prescriptive in many areas, there is still room for interpretation in their application on some issues (eg, as noted above, what should be included in 'management costs' etc) which may result in the need for further Government or regulatory guidance. It is expected that industry bodies will work with the Government to address any anomalies or implementation problems that become apparent.
Outstanding issues?
There are also other indications that things are not completely settled. It is clear that industry bodies, while supportive of the Government's initiatives on fee disclosure and the intention of the regulations, believe there are still some outstanding issues. For example, the Association of Superannuation Funds of Australia has argued that information about fees and charges should show their impact over time and that the regulations do not specifically achieve this (although, as noted above, the ASIC calculator to which consumers are referred in the Consumer Advisory Warning Box in a PDS and the requirement to include a worked fees and costs example deal with this aspect in a limited way).
Also, the Investment & Financial Services Association is concerned that the regulations do not cover common fund requirements for periodic statements and PDS for managed investment schemes, with the result that they do not get the benefit of the deferred commencement dates for complying with the new disclosure requirements that otherwise apply to PDS and periodic statements for financial products (as outlined above). It seems the Government proposes to make further regulations to address this issue11.
Practical issues
The success of the regulations will also depend on the ability of product providers to implement them. For many product providers, the new requirements will necessitate significant upgrades or changes to information technology systems. As noted above, in some cases, product providers might be forced to rethink fee and costs structures to enable full compliance. The Government is aware of, and sympathetic to, such practical concerns. The Explanatory Statement12 says that the Government's intention is to rely on ASIC using its general exemption and modification powers under section 1020F of the Corporations Act 2001 to deal with individual applications for relief from the regulations. This is seen as particularly relevant for 'legacy products' (ie, products that are no longer issued to new members and which are supported by old systems). Also, some product providers may need to apply for relief from the periodic statement requirements in cases where the regulations impose an unreasonable burden on a provider in making reports comply with the requirements, possibly also resulting in detriment to fund members.
It will be interesting to see how things continue to unfold.
Footnotes
- In addition to the disclosure requirements, the regulations also contain amendments affecting other FSR–related matters.
- Regulation Impact Statement – Disclosure of fees and costs (Division 4C and regulation 7.9.60B).
- The fee disclosure provisions in the regulations do not apply to some superannuation–related products (see regulation 7.9.16J).
- This is subject to the proviso that if the inclusion of multiple investment options in a single template is likely to confuse or mislead consumers because of the amount of information presented, the template must contain a cross–reference to a separate part of the PDS in which the fees and costs for each investment option are disclosed (consistent with the template requirements).
- Explanatory Statement, Select Legislative Instrument 2005 No 31, p11.
- This requirement does not apply to defined benefit funds.
- The Explanatory Statement notes that the ICR is equivalent to the 'Total Expense Ratio' concept referred to in the Government's package of disclosure initiatives (referred to above) but the ICR term was adopted to avoid confusion about the composition of the ratio and any possible misrepresentation to consumers. (p 9)
- The Explanatory Statement notes that complying with the ICR methodology satisfies the requirements in relation to disclosure of common fund amounts under section 1013D(iii) of the Corporations Act 2001 and regulation 7.9.75 of the Corporations Regulations 2001.
- The Explanatory Statement says that if more up–to–date information is available, the more recent information should be used to ensure consumers are provided with the most current information. However, this is not specifically required by the regulations. (p 8)
- Refer to regulation 7.9.16K and p 9 of the Explanatory Statement.
- On 19 May 2005, the Government released draft regulations aimed at
aligning the timeframe for 'common fund' disclosure with the fee disclosure
requirements imposed under the regulations. Specifically, the proposed
regulations seek to:
- provide temporary relief from the requirement to disclose 'common fund' expenses in PDS for non-superannuation products until 1 July 2006 to align with the relevant commencement date of the regulations; and
- align the timing for the requirement to disclose 'common fund' expenses attributable to individual investors in periodic statements to the relevant commencement date set out in the regulations.
The proposed regulations also delay the requirement for 'investment life insurance products' to disclose transactions in exit statements until 1 July 2006. (Note that the proposed regulations do not affect the regulatory requirements relating to disclosure in superannuation PDSs.) The Government is inviting submissions on the proposed regulations, which must be submitted to Treasury by 1 June 2005.
- See p 5.
