Expert review into fees and costs disclosure - further changes ahead

By Geoff Sanders
Financial Services Funds Risk & Compliance

In brief

Written by Partner Geoff Sanders, Senior Associate Stephanie Malon and Lawyer Katerina Dandanis

  • ASIC has recently published Darren McShane's much anticipated expert review into fees and costs disclosure for product disclosure statements and periodic statements.
  • The expert review is likely to result in a number of changes to the fees and costs disclosure regime. ASIC intends to release a consultation paper in response by December 2018.
  • In the meantime, issuers must continue to comply with the current regime. ASIC will continue its facilitative compliance approach until it has considered the review's recommendations.


Many of you will be familiar with the long and tortured history of fees and costs disclosure regulation in Australia. The most recent set of issues can be traced back to 2014, when ASIC tried to address what it considered to be gaps in and inconsistent application of the former regime. This led to Class Order 14/1252, updated Regulatory Guide 97 Disclosing fees and costs in PDSs and periodic statements and FAQs on ASIC's website – and various iterations of each.

Despite ASIC's best efforts to address concerns, industry has continued to grapple with the complexity and compliance burden of the regime. In response, ASIC appointed Darren McShane in November 2017 to conduct a fulsome expert review of the regime.


Mr McShane's 232 page review does not make for light reading. It is perhaps ironic that industry concerns about a complex and time-consuming regime has led to a complex and time-consuming report. But this is hardly surprising considering the current state of the regime and the task before Mr McShane.

A few observations before we get into the detail of the recommendations:

  • No complete overhaul: Mr McShane has made clear that his focus was on working with the current regime rather than suggesting a complete overhaul – and was relatively sympathetic to the work done by ASIC to date.
  • Not a more principles-based approach: In line with the above, Mr McShane's report is consistent with ASIC's approach to date that the fees and costs disclosure regime should be very detailed rather than principles-based. We appreciate that it would be difficult for Mr McShane to suggest a different track (given how far down the road we've already come on this approach), but do wonder whether this represents a lost opportunity to step back from the complexity of the current regime.
  • Surprising focus on presentational issues: Given that stakeholder concerns largely focused on data inputs, it is surprising that the vast majority of Mr McShane's recommendations (21 of 34) are focused on the presentation of fees and costs disclosure.
  • ASIC has further work to do: Mr McShane makes it clear that he thinks ASIC has more work to do, and has shied away from making definitive recommendations on some of the more controversial issues, particularly around data inputs – thereby leaving these issues in ASIC's hands.
  • Recommendations should be taken as a package: Finally, Mr McShane makes clear that his recommendations should be taken as a package, warning that the status quo may be preferable to cherry-picking individual recommendations.

Detailed recommendations

At risk of falling foul of Mr McShane's warning against cherry-picking, we have summarised below what we consider to be some of the key recommendations and observations from the review. These can broadly be divided into three categories – data inputs, disclosure toolkit and a 'miscellaneous' bucket.

Recommendations (and some observations) for data inputs

Methodology for considering commonly raised data issues

Mr McShane has recommended a framework to be adopted by ASIC to consider commonly raised data issues (and those that may arise in future). This framework appears to be a reasonably sensible method of allocating particular fees and costs to categories, with the categories in turn determining where (and if) they should be disclosed.

For example, Mr McShane recommends the most significant items that assist in comparing products be attributed to 'Category 1', meaning they are disclosed in the headline tools (being the fee template and fee example in PDSs). Other items, depending on matters such as significance and compliance burden, would be attributed to lower categories.

The particular category would then determine whether the item should be disclosed elsewhere in PDSs and periodic statements, somewhere outside these documents (eg on a website) – or not at all.

The tricky issues – observations only

Mr McShane did not provide definitive recommendations on some of the trickier issues raised by stakeholders. However, he did provide specific 'observations' or suggestions that ASIC may wish to consider, including the following:

Transactional and operational costs

  • Explicit transactional costs and counterparty spreads should be included as a separate line item in the fee template for both superannuation and managed investment products.
  • Property operating costs, borrowing costs and implicit transactional costs (other than counterparty spreads) should not need to be disclosed in PDSs.
  • Any operational costs that do not fall within the above be treated as part of the administration fees (for superannuation products) or management costs (for managed investment products).

Performance (and performance-related) fees

  • Fees related to performance (whether in relation to the whole or any part of an investment option or fund) should be calculated by reference to the five-year average of accrued performance fees in the fund or interposed vehicle. Transitional arrangements should be considered for new products.

Interposed vehicle test

  • The interposed vehicle test should not be changed for the time being, but could be reconsidered in due course. While the test does have some problematic aspects, there is no obvious simpler alternative.

OTC derivatives

  • Treatment of OTC derivatives will need to be further considered in light of other changes.

Payment by third parties

Mr McShane has recommended that ASIC should clarify in RG 97 the principles relating to fees and costs and other amounts paid by third parties.

Recommendations for the disclosure toolkit

Feasibility study – databases and comparison figures

Mr McShane recommended ASIC undertake a feasibility study into whether it (or another government body) could develop (1) an online database of fee and cost information from PDSs for consumers and/or (2) data about average product costs that can be included in PDS fee examples as reference figures.

He also recommended the feasibility study should consider providing consumers with aggregated product or provider cost data beyond PDSs and periodic statements to assist with informed decision-making.

Restructure and standardise disclosure in PDSs (and then periodic statements)

Numerous recommendations focussed on the fee template and fee example – eg:

  • Certain items should be merged (eg investment fees and indirect costs for superannuation products should be moved into a single line item). Consumer testing for merging other line items could be considered.
  • Ongoing fees and costs should be separated from those dependent on member-initiated transactions or activities for superannuation products.
  • Managed investment products should be required to include a line for buy-sell spread in the fee template.
  • The fee example should be extended to all investment options by way of abbreviated disclosure.
  • Differences in fees and costs disclosure requirements for managed investment and superannuation products be reduced (or eliminated).

Mr McShane also recommended that consequential changes to periodic statements be considered once PDS disclosure is settled.

Platforms – more disclosure and consequential changes

Mr McShane recommended several enhancements to disclosure requirements for platforms to improve consistency of approach and assist consumer comparison. These included mandating disclosure in periodic statements of the cost impacts of investments accessible from the Platform.

Mr McShane also recommended that ASIC further review Platform disclosure once other recommended changes have been implemented.



Mr McShane recommended ASIC develop and implement a surveillance strategy on compliance with Schedule 10 disclosure requirements.

Drafting edits

Finally, a number of specific drafting amendments to RG 97 and Schedule 10 (as modified) were recommended.

Our view

Our view is that the above recommendations and observations will be a mixed bag for industry. One of the more welcome aspects is probably the suggestion that most implicit costs (ie costs embedded in the price paid for an asset) should be excluded from the definition of transactional and operational costs. The burden and complexity of these calculations has been a key point of concern for industry. In this regard, of particular interest to property fund managers will be the welcome recommendation that property operating costs and borrowing costs should not need to be disclosed in PDSs.

However, as noted earlier, we think that the report does represent a missed opportunity to more fully address the complexity of the regime – eg by adopting a more principles-based approach.

Additionally, undoubtedly a few recommendations will be less than welcome, at least for some parts of the industry. One example is the suggestion that managed investment product disclosure be aligned with that for superannuation products. This would bring disclosure of transactional and operational costs front and centre into the fee template for managed investment products – to date, issuers of these products have been required to disclose these figures back in the additional explanation of fees and costs.

Next steps

It seems almost certain that there will be changes to the fees and costs disclosure regime arising from the review. ASIC has released a statement on its website that it 'agrees that changes ... are in the interests of consumers and industry'.

What is less certain is the nature of the changes that will be made – and indeed when they will be made. Even if ASIC decides to adopt all of the recommendations in Mr McShane's review, it will still need to do a lot of further work in determining how exactly it will implement them. And if we've learnt anything from the past four years of fees and costs disclosure history, it's that the devil is certainly in the detail.

In the meantime, issuers must continue to comply with the current regime. It's good news that ASIC's facilitative compliance approach will continue for the time being, but the current message from ASIC is that this will only continue until ASIC has released its consultation paper on the review – due for release at any time before the end of this year. It is also unclear whether the temporary relief from certain provisions in CO 14/1252 which are due to expire next year will be extended.

We can only hope that ASIC will adopt a practical approach and provide as much clarity as possible as it considers and implements any further changes to the regime. Industry would be forgiven for expecting little else at this stage.