In brief
Written by Partner Geoff Sanders, Senior Associate Stephanie Malon and Lawyer Katerina Dandanis
It's been a long five years or so of amendments to, and consultation on, the fees and costs disclosure regime for superannuation and managed investments products. And industry might be forgiven for feeling a sense of déjà vu, with the release earlier this year of ASIC's consultation paper on the regime.
ASIC has, no doubt, been cognisant of industry fatigue on this matter, and has presented a detailed consultation paper, complete with draft amendments to Schedule 10 of the Corporations Regulations 2001 (Cth) (by way of revised Class Order 14/1252) and a draft replacement Regulatory Guide 97 (RG 97). This at least gives the impression that we are not too far away from (finally) having a settled regime.
If ASIC's proposals are adopted, we're likely to see on at least a superficial level a very different presentation of fees and costs in disclosure documents. However, with a few important exceptions, the inputs into the figures will not be radically different from the current regime. Further, although it would be simplified to some extent, the regime would still be complex for issuers to navigate. However, this is not a criticism of ASIC – as ASIC is at pains to note, it is constrained by the existing legislative framework.
Overview
In Unravelled: Expert review into fees and costs disclosure – further changes ahead, we discussed how the recommendations and observations in Darren McShane's expert report on the regime last year were a mixed bag for industry.
ASIC proposes to adopt an approach consistent with many of these recommendations and observations. Notably, this includes:
- some recommendations that will generally be (very) popular with industry, such as the proposal to remove requirements to disclose property operating costs, borrowing costs and implicit costs;
- some recommendations that are likely to be less popular with some issuers, such as requiring managed investment products to include transaction fees in their fee templates; and
- other recommendations on matters that haven't been a focus of industry concern to date, such as presentational matters.
Also consistent with Mr McShane's expert report in many respects, ASIC's proposed approach sidesteps a few of the trickier issues that industry has been grappling with, such as the interposed vehicle test. Similarly, it does ask industry for feedback on the treatment of OTC derivative costs, but doesn't propose to substantially change the current requirements.
However, ASIC has (at least for now) rejected other recommendations from the expert report – notably, for enhanced disclosure by platforms and a feasibility study into a consumer comparison tool. It has also come up with a few proposals of its own – such as restructuring RG97.
Below is a summary of ASIC's key proposals, tracking them against the expert report recommendations and observations.
ASIC's responses to expert recommendations (and observations) for data inputs
Methodology for data inputs and observations on the tricky issues
Transactional and operational costs
ASIC has taken note of Mr McShane's observations on these matters, and has proposed:
- that explicit transaction costs and counterparty spreads be included as a separate line item in the fee summary (ie the fee template) for both superannuation and managed investment products net of any amounts recovered by the buy-sell spread;
- not to require the disclosure of property operating costs, borrowing costs and implicit transaction costs in PDSs and periodic statements;
- that any operational costs that do not fall within the above be treated as part of the administration fees and costs (for superannuation products) or management fees and costs (for managed investment products).
ASIC has, however, left industry to answer some of Mr McShane's difficult questions, including how to define counterparty spreads (notwithstanding ASIC's acceptance that counterparty spreads be included in disclosed transaction costs).
Performance (and performance-related) fees
ASIC also agreed with Mr McShane's observations in relation to performance fees and has proposed to:
- remove any distinction between performance fees incurred directly and performance-related fees incurred by interposed vehicles (ie such that all performance-based fees, whether paid directly or in an interposed vehicle, would be grouped together and reported);
- require that performance fees are calculated by reference to the five-year average of accrued performance fees in the fund or interposed vehicle; and
- enhance the requirements for disclosure of performance fees, so consumers can better understand how they impact on their investment, including requiring disclosure of the five-year average for each performance fee that forms part of the total performance fee.
Interposed vehicle test
ASIC has not proposed any changes to the definition of 'interposed vehicle', steering clear of this issue on the basis that it was not subject to any specific recommendations by Mr McShane.
OTC derivatives
Similarly, ASIC has not proposed any substantial changes to the (complex) treatment of OTC derivatives . It has, however, asked industry for feedback on the approach. Mr McShane had suggested that the treatment of OTC derivatives would need to be considered in light of the other recommended changes, but had also sidestepped making any express recommendations on this point.
Payments by third parties
In line with Mr McShane's call for clarity, ASIC has proposed refreshed guidance in RG97 regarding the treatment of fees and costs and other amounts paid by third parties. Put simply, the fact that a fee or cost has been paid by a third party does not alter the requirement to disclose it. This may be confusing for issuers and consumers alike, given amounts that are not passed on (directly or indirectly) to consumers will need to be disclosed.
ASIC's responses to expert recommendations for the disclosure toolkit
Feasibility study
While supporting the concept of a consumer comparison tool, ASIC says it has held off on undertaking a feasibility study, in light of the Productivity Commission's Superannuation, Assessing Efficiency and Competitiveness Inquiry (and any future government response and reform). We think this makes sense, given the Productivity Commission's recommendations to enable consumers to more readily make comparisons between products, including:
- providing a 'best in show' shortlist of products for superannuation members that are new to the system to select from; and
- publication of product dashboards on a centralised website hosted by the ATO.
Restructure and standardise disclosure in PDSs (and then periodic statements)
In line with Mr McShane's focus on presentational issues, ASIC proposes to amend Schedule 10 or RG 97 (as relevant) to give effect to a number of his recommendations, such as:
- merging certain fees and costs for superannuation products into single line items – eg administration fees and advice fees (if any) and, separately, investment fees and indirect costs (removing the need for the concept of indirect cost ratio). However, we suspect the latter may be impeded by the recent passing of the 'Protecting Your Superannuation Package' laws and, if made in their draft form, related regulations, which would prescribe certain indirect costs as falling within the new capped fees and costs applicable to low balance superannuation accounts;
- requiring that costs paid out of reserves are included (as relevant) in disclosed investment or administration fees and costs;
- grouping ongoing fees and costs separate from those dependent on member-initiated transactions or activities for superannuation products;
- including a line item for buy-sell spread for managed investment products;
- rearranging management fees and costs to appear at the top of the summary for managed investment products, given their relevance to consumers;
- extending the fee example to all investment options, by way of abbreviated disclosure; and
- amending disclosure requirements for periodic statements, to reduce the number of data points and emphasis on amounts deducted from investments, and to be easier to understand.
Notwithstanding these proposals, ASIC considers that improved consistency in incorporating fees and costs information by reference would, at this stage, be more effectively achieved through industry standards or guidelines (as opposed to legal requirements or further guidance in RG 97). In our view, any further guidance would most suitably be provided in RG 97, even if only to eliminate the hassle of referring to a separate standard or guideline.
Platforms
Another contentious issue that ASIC has sidestepped, at least for now, is Mr McShane's recommendations for enhanced disclosure requirements for platforms. This suggests that significant change remains on the (possibly distant) horizon for platforms.
The compromise seems to be ASIC's proposal to include (and retain) guidance in RG 97, to make clear to consumers that platform operators only charge fees and costs to allow them to gain access to accessible financial products, but that consumers will separately (and additionally) incur fees from the issuers of the accessible financial products.
ASIC's responses to other recommendations
Enforcement
ASIC accepts Mr McShane's recommendation for the development and implementation of a surveillance strategy on compliance with fees and costs disclosure requirements – but notes this would follow the finalisation of changes to the regime.
Drafting edits
ASIC has taken a mixed approach to Mr McShane's requested drafting clarifications in its proposed updated RG 97 and draft amendments to Schedule 10 – yet, it is positive to see that ASIC has undertaken a review and at least tried to clarify the drafting.
Industry will be relieved to know that ASIC proposes to ensure the Schedule 10 disclosure requirements are (finally) presented in one place, by amending Class Order 14/1252 to repeal and replace Schedule 10 in its entirety.
Next steps
ASIC has invited industry to provide feedback on its consultation paper – submissions are due by 2 April 2019. In line with its commitment to providing consumers with 'transparent and useable' information, ASIC is concurrently undertaking consumer testing of proposed presentational changes.
The revised Class Order 14/1252 and updated RG 97 are scheduled for release in the second half of 2019, with the commencement date to be advised. In the meantime, ASIC has indicated it will continue to adopt a facilitative compliance approach to the regime in its current form (see our Client Update: ASIC extends transition period for fees and costs disclosures, and delays consultation paper to January 2019).