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Dollar Disclosure Regulations

In this article, we summarise the issues and the debate leading up to the making of the Corporations Amendment Regulations 2004 (No 6) 2004 No 149 (otherwise known as the Dollar Disclosure Regulations) and discuss briefly what the new requirements will mean for Australian financial services licensees and their representatives and product issuers.

• Where did it start?
• What happened next?
• The Opposition's reaction
• Further regulations and a Parliamentary Committee inquiry
• A model for fee disclosure
• Further action by the Government
• What are the new regulatory requirements?
• What lies ahead?
• ASIC's proposed policy
• What does it all mean for those affected?
• A summary of the key dates

This article was last updated in August 2004. You may also be interested in some articles we have written reporting on subsequent developments in relation to this issue: the extension of the transitional period (October 2004) and the release of further draft regulations and ASIC's implementation policy (January 2005). For further updates, refer to our Breaking News section.

Where did it start?

One of the main aims of the FSR regime has been to ensure consumers are appropriately and adequately informed about financial services and markets through improved disclosure. The question of how best to achieve proper and meaningful disclosure has been debated periodically both in Parliament and by industry bodies since the start of the FSR regime in March 2002. Over time, the debate has focused more particularly on the level of detail and the manner of disclosure of fees and other amounts and interests that should be included (as applicable) in disclosure documents for products that have an investment component (such as superannuation funds and other managed investments). The relevant documents are statements of advice, product disclosure statements and periodic statements (the Disclosure Documents) ¹.

The Government's initial efforts to deal with this aspect of the fee disclosure issue began in March 2003 when it released draft amending regulations (the Batch 2 Regulations) which included, among other things, proposed new regulations:

… intended to clarify disclosure obligations under the [Corporations Act] where parties are required to provide 'information about' particular items. As drafted the proposed regulations explicitly require items that can be disclosed as amounts under the [Corporations Act] to be displayed in dollar terms in the first instance, where practicable in addition to any other method (such as a percentage) that the regulated person chooses. If it is not practicable to disclose (or calculate) an amount in dollar terms then the responsible person would be required to explain how it is to be determined.

These proposed amendments apply in relation to fees and charges and other items that may be expressed as amounts such as potential end benefits or returns, or remuneration (such as commissions or other benefits payable). These amendments are proposed to apply across the range of disclosure documents, including Statements of Advice …, Product Disclosure Statements and periodic statements. ²

What happened next?

The Batch 2 Regulations (the Corporations Amendment Regulations 2003 (No 3) 2003 No 85) were gazetted on 9 May 2003 but did not include the proposed enhanced disclosure regulations. However, on 26 June 2003, the Government introduced into the House of Representatives the Financial Services Reform Amendment Bill 2003 (the Amendment Bill). Under the Amendment Bill (which was, after much debate, eventually passed in December 2003), reforms were introduced to enable improved disclosure to be made to investors. In November 2003, the Government made new regulations (the Corporations Amendment Regulations 2003 (No 8) 2003 No 282) (the Batch 5 Regulations), which were gazetted on 13 November and were intended to give effect to the disclosure reforms introduced under the Amendment Bill.

The Batch 5 Regulations represented a revision of the proposed regulations included in the release of the draft Batch 2 Regulations³. In general terms, pursuant to schedule 3 of the Batch 5 Regulations, a requirement was imposed that Disclosure Documents must state the amount of remuneration, commission and other benefits as an amount in dollars or, if it were not 'reasonably practicable' for that to be done, set out a description of the remuneration, commission or benefit, or if that were also not reasonably practicable, details of the method for calculating the remuneration, commission or other benefits. To allow time for industry to implement these new requirements, the Batch 5 Regulations were to apply to Disclosure Documents prepared from 1 July 2004.⁴

The Opposition's reaction

The Batch 5 Regulations were disputed by the Opposition parties which, as part of the debate about the Amendment Bill, questioned whether the 'reasonably practicable' test would, in fact, allow product issuers an 'escape route' to avoid disclosure of benefits in dollar terms.⁵

On 4 December 2003, Senator Stephen Conroy, Deputy Leader of the Opposition in the Senate and Shadow Minister for Corporate Governance and Financial Services, gave notice to move a motion in the Senate that schedule 3 of the Batch 5 Regulations be disallowed⁶. At this time, the Amendment Bill was still being debated in Parliament. Also, the Batch 5 Regulations (along with the Amendment Bill and other proposed FSR regulations) were being reviewed by the Senate Economics Legislation Committee.⁷

Eventually, notwithstanding the majority recommendation of the Senate Economics Legislation Committee that the Senate pass the Amendment Bill and the majority view of the Committee that the Batch 5 Regulations were 'appropriate'⁸, the Government, as part of its negotiations with the Opposition parties to pass the Amendment Bill:

• agreed that the Amendment Bill would require disclosure of fees and charges in dollar terms in the Disclosure Documents unless otherwise provided in the Corporations Regulations; and
• committed to changing the wording in the Corporations Regulations (introduced by the Batch 5 Regulations) to require dollar disclosure unless ASIC determines that for compelling reasons it is not possible for disclosure to be made in that way.

Further regulations and a Parliamentary Committee inquiry

Following on from the Government's commitment to amend the Corporations Regulations, the Government released a new set of draft regulations on 7 January 2004 for public consultation (the Batch 8 Regulations) which reflected the Government's agreement on the issue of dollar disclosure with the Opposition parties and which were scheduled to commence on 1 July 2004. Then, on 5 February, the Parliamentary Joint Committee on Corporations and Financial Services resolved to inquire into and report by 11 March (although the reporting date was delayed until 25 March 2004) on some of the FSR regulations, including the draft Batch 8 Regulations (the Joint Committee Report).

A model for fee disclosure

In the Joint Committee Report, the Committee noted that much of the evidence presented to it went beyond the scope of its inquiry into specific regulations and looked at the broader issue of 'effective disclosure with a focus on a fee disclosure model'.⁹ Particular concern was raised about inadequate disclosure and the lack of consistent terminology used in documentation, particularly in the context of superannuation and managed investment products. Various aspects of the debate about development of an effective fee disclosure model were raised, including the ongoing differences between the two major industry bodies (the Investment and Financial Services Association Ltd (IFSA) and the Association of Superannuation Funds of Australia (ASFA)). However, the Committee reported that there was general support in industry for a fee model in which, among other things, amounts are disclosed in dollar terms, fees and charges are presented in a table format and in a way that consumers can compare products, there is a single 'bottom line' figure, standardised terminology is used and the model is consumer tested.

Ultimately, one of the Committee's recommendations was that the proposed wording of the Batch 8 Regulations remain as drafted but that new regulations be put in place to allow ASIC the necessary flexibility to offer relief for cases where the dollar disclosure requirements are inappropriate or inconsistent with the intent of the legislation.

Further action by the Government

On 10 March 2004, the Parliamentary Secretary to the Treasurer (Mr Ross Cameron) announced that in an effort to resolve the problem of simple fee disclosure for investment based financial products (such as superannuation funds) he had asked IFSA and ASFA to come up with an agreed fee disclosure model by 10 April and said that the Government would then prepare regulations by 1 July 2004 to incorporate the proposed model in the relevant disclosure documents. He noted that if they were unable to come to an agreement (which ultimately proved to be the case), the Government would devise an appropriate single figure fee disclosure model based on achieving the best outcome for consumers.

Notwithstanding the release of the Batch 8 Regulations and the Government's announcement on 10 March, Senator Conroy moved the Notice of Disallowance in the Senate on 24 March 2004, noting concern that the relevant items of the Batch 5 Regulations (which contained the 'reasonably practicable' test) had not been withdrawn by the Government. However, on 13 May 2004, the Senate agreed to rescind its disallowance resolution of 24 March. The rescinding motion did not result in the reinstatement of the previously disallowed regulations. It did, however, enable the Government to make new regulations which were the same in substance as the disallowed regulations within the six month statutory prohibition period that would otherwise have applied had the disallowance resolution not been rescinded.

Accordingly, in early June, the Government released a revised version of the Batch 8 Regulations (in effect, a draft version of the Dollar Disclosure Regulations) to implement the dollar disclosure requirements agreed with the Opposition parties. The final version of the Dollar Disclosure Regulations was released on 24 June and they were gazetted on 25 June 2004.

What are the new regulatory requirements?

Under the Dollar Disclosure Regulations, licensees and their representatives and product issuers are obliged to disclose various fees, benefits, costs and interests as amounts in dollars in the Disclosure Documents. However, these items need not be disclosed as amounts in dollars where ASIC makes a determination that, for a compelling reason, dollar disclosure is not possible, would be unreasonably burdensome (including for a specified period of time) or is contrary to client interests. If such a determination is made, the item needs to be disclosed as a percentage or a description instead together with worked dollar examples (unless these are inappropriate). The Dollar Disclosure Regulations also:

• broaden the existing requirement to disclose information about the amount of a 'withdrawal benefit' or other significant benefits (and clarify that such information is subject to the dollar disclosure requirements);
• reinstate periodic statement disclosure obligations that had been disallowed in the Senate on 24 March 2004;
• clarify the requirements of disclosure for amounts paid in respect of a financial product from a common fund; and
• make some transitional and consequential amendments.

The Dollar Disclosure Regulations provide for a six month transitional period (so that, in effect, the obligations commence on 1 January 2005). The provision of transitional relief is consistent with earlier drafts of amending regulations and also in accordance with the recommendations of the Joint Committee's Report. The transitional period is intended to give sufficient time to those affected to be able to meet their new obligations. However, to the extent that licensees and their representatives and product issuers are in a position to comply with the new requirements before 1 January 2005, they are encouraged to do so. ¹⁰

What lies ahead?

Given the transitional period, there is still some uncertainty for industry and consumers as practical application of the Dollar Disclosure Regulations has yet to be tested and there are still more regulations to be made (see below for details). It also remains to be seen how, in practice, the Australian Securities and Investments Commission (ASIC) will make determinations about whether dollar disclosure can be made by a particular licensee or product issuer. However, the Government and ASIC have attempted to alleviate some of the potential uncertainty by providing some guidance both for consumers and financial advisers to supplement the regulatory requirements (particularly in view of the inability of IFSA and ASFA to come up with an agreed fee disclosure model), as follows.

On 15 June, ASIC launched its new superannuation calculator and a user guide to enable consumers to calculate the long-term effects of:

• the most common fees charged by various funds;
• making extra contributions;
• receiving government co-contributions (if applicable);
• breaking or reducing contributions as a result of time out of the workforce;
• switching investment strategy or changing funds.

Following on from this, on 16 June, ASIC released a revised version of the good practice model for fee disclosure in the product disclosure statements of investment products (which updated the initial version released in August 2003)¹¹. The main changes from the earlier version of the model are:

• a single 'see at a glance' table containing a reference to all fees and costs, both direct or indirect and stated in dollars or translated to dollar terms;
• simpler terminology to aid consumer comprehension; and
• clarification of ASIC's expectations for use of the model, including what should be included in the 'Important Additional Information' section following the table.

Then, on 17 June, just prior to gazetting of the Dollar Disclosure Regulations, the Government released details of a package of reforms designed to improve and simplify the disclosure of fees and charges in relation to investment products by requiring additional information to be disclosed in product disclosure statements and periodic statements. The announced package consisted of five complementary measures, as follows.

• Mandating the use of the ASIC fee template (released the previous day) in product disclosure statements.
• Mandating the extension of the ASIC fee template for use in periodic statements (where applicable).
• Requiring a new single figure fee comparison table in product disclosure statements.
• Requiring a new boxed consumer advisory warning in product disclosure statements.
• Facilitating use of the ASIC Superannuation Calculator (announced by ASIC on 15 June).

Further details of the Government's package were set out in an annexure to the Government's media release and the Government also subsequently released an information booklet containing more detailed information on the package. This booklet provides additional guidance in the form of templates and guidelines which are intended to provide consumers with fee information in a 'simple and comparable form in relevant [Disclosure Documents] and through electronic means, to assist them to compare fees and costs across products'.¹²

The Government proposes to make regulations to mandate the new measures contained in its package. It has said that the requirements will be introduced progressively between 1 January 2005 and 1 July 2005 to ensure that industry participants have sufficient time to make necessary changes to their internal processes and disclosure documents.

ASIC's proposed policy

On 25 June, coinciding with gazettal of the Dollar Disclosure Regulations, ASIC issued a media release about the new regulations and its upcoming role. As anticipated in that media release, ASIC subsequently released a policy proposal paper ¹³outlining how it will approach the dollar disclosure obligations as they apply to the Disclosure Documents and how it proposes to use its power to make dollar disclosure determinations. The paper discusses:

• how ASIC will administer the dollar disclosure provisions;
• the situations in which ASIC might consider issuing dollar disclosure determinations on a class basis;
• how applications for determinations will be assessed by ASIC; and
• ASIC's approach to transition.

ASIC considers that fees and benefits covered by the Dollar Disclosure Regulations are:

• product fees (ie, fees and costs associated with the acquisition, disposal or holding of a financial product);
• client benefits (ie, benefits received (or to be received) by clients, as a result of obtaining a financial service or holding a financial product);
• provider benefits (ie, benefits received (or to be received) by providing entities or their associates); and
• provider interests (ie, other interests held or received (or to be received) by providing entities or their associates).¹⁴

ASIC proposes to make some determinations on its own initiative to cater for generic cases. Two situations are identified in ASIC's policy proposal paper ¹⁵, being where dollar disclosure is 'not possible' because:

1. the amount depends on facts not known by and beyond the control of the providing entity or issuer; and
2. the item is an intangible client benefit (eg, product benefits whose value cannot be converted into dollars).

ASIC envisages that these scenarios are more likely to apply in the case of an industry or a group, rather than an individual. Where these class determinations apply, ASIC will permit disclosure in the Disclosure Documents (as applicable) of fees, client benefits and provider benefits as either a percentage or, if percentage disclosure is not possible, a description or narrative of the means by which those fees and benefits can be calculated (and worked dollar examples based on realistic fact scenarios will also be required). ASIC has said that its class determinations will be structured to minimise potential opportunities 'to deliberately and artificially avoid' disclosure in dollar terms and it will retain the power to notify a person that they are no longer entitled to rely on a class determination.

The proposal paper also explains how ASIC will approach applications for a dollar disclosure determination where the applicant believes disclosure in dollars is not possible. It appears that ASIC will require applicants (either individuals or groups) to provide 'compelling reasons' (which may include specific circumstances relating to the type of financial product and any unique or exceptional circumstances applicable to the providing entity, the product issuer and relevant third parties) why compliance with the dollar disclosure provisions is not possible. ASIC has noted that it will generally be more likely to make class determinations under the 'not possible' power (on the basis that if disclosure is not possible in one case, it is likely not to be possible in similar cases).

In section C of its policy proposal paper, ASIC says that it does not propose to make any class determinations on its own initiative under the 'unreasonably burdensome' or 'contrary to clients' interests' powers so that those affected must apply to ASIC for a determination. It notes that these are high standards and that it does not expect to make many determinations under these powers. Again, ASIC is looking for 'compelling' reasons to make such determinations (eg, an 'unreasonable burden' may exist where the burden of compliance is extreme or out of all proportion to the benefits of dollar disclosure, and it may be 'contrary to clients' interests' where compliance is likely to be prohibitively expensive and might affect the clients' investment (although it seems ASIC may require even more cogent arguments on this issue)).

ASIC's policy proposal paper also considers the transitional period. ASIC may be prepared to make a determination that would provide for a short, conditional extension of the transitional period from the commencement of the Dollar Disclosure Regulations (on 1 January 2005) until 28 February 2005 on the basis that some licensees and product issuers have already indicated to ASIC that they will have difficulty complying with the Dollar Disclosure Regulations by the commencement date. In these cases, ASIC is considering requiring those affected to 'self-certify' (at a senior management level) that they have reasonable grounds to believe that:

• it would be unreasonably burdensome for them to comply fully by the commencement date; and
• they will be in a position to comply by 28 February 2005.

ASIC is encouraging consumers and industry to comment on its policy proposal paper (and comments are due by 7 September 2004). It has said it will announce its decision about any determination on transition by the end of September 2004 and expects to publish its final policy statement on dollar disclosure in October or November 2004.

What does it all mean for those affected?

Obviously, the further policy and guidelines issued by ASIC and the Government are intended to provide the financial services industry with some clearer guidance going forward about its obligations in this area. From the consumers' point of view, the Government considers that its package of reforms will make it easier for them to understand the fees and charges they incur and to compare different funds before investing which will, in turn, promote competition in the funds management industry. However, there has been a mixed reaction to the new measures. Some sections of the industry agree that the Government's reforms will assist consumers to make informed investment decisions whereas others, such as ASFA, believe the reforms do not go far enough (for example, ASFA believes that consumers should be provided with information that shows the impact of fees on their investment over a period of time (not just for one year), which is a view supported by Labor). It has also been suggested that the package of reforms should be consumer tested (which is consistent with recommendations in the Joint Committee Report).

Apart from the regulations still to be made and the finalisation of ASIC's policy, the only other unknown factor at this stage is the impending Federal election and what it would mean if a Labor Government were elected. If that were to occur, it is likely that this issue would be revisited but hopefully the major issues have already been settled and any further changes would involve refining the requirements rather than a significant review. That remains to be seen.

A summary of the key dates

The table below sets out a summary of the key dates relating to Dollar Disclosure.

Footnotes

1. FSR requires the disclosure of relevant information to retail clients. Before a person purchases a financial product, they must be provided with a product disclosure statement setting out specific information about the product. Where a person is given personal financial advice, they must be given a statement of advice. Also, financial investment product holders must be given ongoing information about their product in the form of periodic statements.
2. Commentaries on the Draft Corporations Amendment Regulations, released by the Department of Treasury on 12 March 2003. The proposed new regulations were regulations 7.7.13, 7.9.15A and 7.9.75. The draft Batch 2 Regulations also contemplated amendments to regulation 7.9.19 to enhance the existing disclosure requirements in relation to the amount of a withdrawal benefit to which a superannuation fund member is entitled on voluntarily ceasing to be a member of the fund.
3. Commentaries on the Draft Corporations Amendment Regulations, released by the Department of Treasury on 27 August 2003.
4. In drafting the proposed enhanced disclosure regulations, the Government intended that the concept of 'reasonably practicable' would provide some flexibility in the application of these obligations, including giving consideration to any problems that the disclosing entity might have (at least initially) in being able to work out and disclose amounts because of administrative, systems or resource concerns (Explanatory Statement Corporations Amendment Regulations 2003 (No 8) 2003 No 282).
5. Senate, Hansard, 4 December 2003, p19341
6. The Notice of Motion was to take effect on 12 February 2004 but on that day Senator Conroy postponed the Notice of Motion until 8 March 2004 and on 8 March, it was further postponed until 24 March 2004. (The Notice was amended on 23 March 2004 to focus specifically on the regulations relating to disclosure in Disclosure Documents (items [1] – [4], [6], [8] and [9]).)
7. Report of the Senate Economics Legislation Committee on Financial Services Reform Amendment Bill 2003 and certain associated regulations, December 2003
8. Senate Economics Legislation Committee, Financial Services Reform Amendment Bill 2003 and certain associated regulations, December 2003, pp16–17
9. Report of the Parliamentary Joint Committee on Corporations and Financial Services on Corporations Amendment Regulations 2003 (Batch 6),Corporations Amendment Regulations 2003/04 (Batch 7) and Draft Regulations – Corporations Amendment Regulations 2004 (Batch 8), March 2004, pp45 and following
10. Explanatory Statement Corporations Amendment Regulations 2004 (No 6) 2004 No 149
11. In the introduction section of the revised fee disclosure model, ASIC notes that it intends to allow a one year transitional period for product issuers to move to the revised model. However, it is also noted that earlier use is encouraged if a new product disclosure statement is being prepared during the transitional period.
12. The Department of the Treasury, Disclosure of fees and charges for superannuation and managed investment products – Package of disclosure measures, June 2004
13. Dollar disclosure – ASIC policy proposal was released by ASIC on 10 August 2004.
14. Pages 6 and 7 of Dollar disclosure – ASIC policy proposal.
15. Section B of Dollar disclosure – ASIC policy proposal.