In brief 12 min read
Anyone with even a passing professional interest in superannuation and funds will be familiar with 'RG 97'. For the last five years or so, the industry has been struggling to make sense of what information is required to be disclosed in a PDS and periodic statement for a superannuation fund or managed investment scheme. ASIC promised a 'facilitative approach' to supervision and Darren McShane (an independent expert) was appointed by ASIC to make recommendations to improve the regime.
On 27 November ASIC released ASIC Corporations (Disclosure of Fees and Costs) Instrument 2019/1070; the new RG 97 Disclosing fees and costs in PDSs and periodic statements; Report 637 Response to submissions on CP 308 Review of Regulatory Guide 97; and Report 638 Consumer Testing of the fees and costs tools for superannuation and managed investment schemes.
Mr McShane did not recommend a complete overhaul of the regime, and we do not have one.
This is what ASIC's consumer testing found:
'Overall, the proposed superannuation template was no easier to understand than the current template, though the structure of the proposed template was preferred'. And as to the managed investment scheme template: 'most rated the current template easy to understand and useful ... the proposed template seemed less easy to understand and less useful than the current template'. True.
Instrument 2019/1070 replaces in whole all of Schedule 10 to the Corporations Regulations. Now that was a very good idea. Full marks.
It applies to disclosure of fees and costs in PDSs and periodic statements for superannuation products, including superannuation platforms, managed investment products, foreign passport fund products and IDPS-like schemes. It also applies to disclosure about fees and costs in an IDPS Guide.
The Instrument applies to PDSs issued on or after 30 September 2020, and periodic statements for reporting periods that commence on or after 1 July 2021. CO 14/1252 will apply until then. You cannot opt in early to the PDS regime. You can opt in early for periodic statements for a reporting period that commences on or after 1 July 2020 or for an exit statement where the reporting period ends on or after 1 July 2020.
A few weeks ago ASIC released a joint report with the Dutch Authority for the Financial Markets on Disclosure and it contained a chapter entitled 'A warning about warnings'. The conclusion was that 'we can overlook, misunderstand or misremember warnings. They can have no impact on our behaviour, or event backfire'.
Nevertheless, ASIC has not made any changes to the consumer advisory warning – you will recall that this is the boxed statement in a PDS that explains that small differences in fees can have a substantial impact on long term returns. You will still need to include it in a PDS before the 'fees and costs summary'.
ASIC has not made any changes to the consumer advisory warning … You will still need to include it in a PDS before the 'fees and costs summary'.
The consumer testing identified that consumers preferred the term 'fees and costs summary' to 'fees and cost template'. Who would have thought.
After the summary, and as now, a PDS must include an example of annual fees and costs using an account balance of $50,000 and, for a managed investment scheme, a contribution of $5,000. The recommendation by Mr McShane to show a contribution for superannuation was rejected for introducing too much complexity.
PDSs will now also have to include, for each investment option offered by the fund or scheme, a table headed 'Cost of Product'. For shorter PDSs the tables may be incorporated by reference.
The Cost of Product table must include a single amount showing how ongoing fees and costs affect an investment over a one year period. The amount is calculated in the same way as the example of fees and costs, assuming a balance of $50,000.
Of the 15 people in the consumer testing who were asked to look at the cost of product information, only five said it was useful. Yep.
One person said: 'I am left wondering, how did this get calculated?'
Some were confused by the word 'product' in the name: 'it is as though you are buying it … rather than it being a fee'.
Another did not understand which 'product' was being referred to.
That is understandable, and one would think easily fixed by using the same terms throughout the PDS and even within the fees and costs information. For example, the consumer warning refers to your account balance, the introduction to the fees and costs summary refers to 'your money', the table itself must have the name of the superannuation product and the example either the name of the MySuper product or investment option.
The superannuation product fees and costs template, which is now called a summary, will include some substantial changes. First, there will be a split between the ongoing fees and costs, and activity related fees and costs.
In the ongoing fees and costs section, issuers will have to list administration fees and costs, investment fees and costs and transaction costs. In the member activity related fees and costs, issuers will have to list the buy-sell spread, switching fee and other fees and costs.
There will not be a separate line item for advice fees. Consumers found it confusing.
There will also not be a separate line item for the 'indirect cost ratio'. Consumers also found this confusing and that is hard to argue with, but the alternative doesn't seem well designed to help.
Where issuers have disclosed an investment fee and an administration fee, they will now have to disclose administration fees and costs, and investment fees and costs. This was a recommendation made by Mr McShane because no one understood what indirect costs were – as borne out by ASIC's consumer testing. But just moving the indirect costs into the administration fees and investment fees is likely to mean only that consumers will think they understand something when they do not.
Consistent perhaps with the difficulty that including indirect costs in the fees introduces, the new periodic statement disclosure for superannuation funds and managed investment schemes require the issuer to separately disclose 'fees deducted directly from your account' and 'fees deducted from your investments'. Happily, perhaps, consumers are unlikely to line up their PDS and their annual statement.
Before coming back to the interesting and difficult question of what must be included in these fees and costs, let's have a look at the fees and costs summary for managed investment schemes and notified foreign passport fund products.
Here the template is quite different to the current template, despite consumer testing saying the current template is better. Again, fees and costs will be split into ongoing annual fees and costs, and member activity related fees and costs. Management fees and costs are now the first line item and performance fees have their own line item.
For superannuation products, performance fees will not feature as a separate item. Instead, they must be included as part of the investment fees and costs, supplemented by a footnote. This was initially the proposal for the treatment of performance fees for both superannuation and funds, but ASIC decided that the disclosure of performance fees may be of greater value for consumers deciding on whether to invest in a particular managed investment product than for superannuation consumers. Moreover, their consumer testing showed that information disclosed in a footnote 'would not be sufficiently visible'.
What must be included in the line items is found in the 22 pages of definitions in the Instrument. The best one can say about this is that it is in one place and is probably slightly better than what is required under the current class order.
Administration fees and costs, for a superannuation product, are those that relate to the administration or operation of the fund to which the product relates, and include:
- costs that relate to the administration or operation debited from reserves that exceed amounts credited to the reserves in the relevant period that have been funded from the administration fees and costs;
- distribution costs;
- indirect costs that relate to the administration or operation of the fund; and
- intra-fund advice costs.
What's out? Transaction costs and excluded transaction and operational costs and costs otherwise charged as investment fees and costs and so on.
Investment fees and costs, for a superannuation product, are those that relate to the investment of the assets of the superannuation fund to which the product relates, and include:
- fees in payment for the exercise of care and expertise in investment of those assets (including performance fees);
- costs that relate to the investment of assets that are debited from reserves and that exceed amounts credited to the reserves from investment fees and costs; and
- indirect costs that relate to the investment of assets of the entity.
What's out? Transaction costs and excluded transaction and operational costs and costs otherwise charged as a fee or cost.
Management fees and costs, for a managed investment scheme and foreign passport fund, include:
- amounts payable for administering the scheme;
- distribution costs;
- amounts payable for investing the scheme;
- amounts deducted from a common fund by ways of fees, costs, charges or expenses; and
- indirect costs.
Again, transaction costs and excluded transaction and operational costs and costs otherwise charged as a fee or cost are out.
The PDS for a superannuation product will still need to include the definitions of administration fees and costs and investment fees and costs, but those definitions will reflect the definitions of administration fees and investment fees in the SIS Act fee rules, and not, in fact, the definitions that must be used to determine the fees and costs.
ASIC says it has made decisions based on clarity over transparency – I think it would be more accurate to say ASIC has preferred simplicity to accuracy. And when I say simplicity, I mean for the consumer, not the issuer preparing the disclosure.
Combining fees and indirect costs also means that a single amount must combine the fees that will be charged with the costs that were charged over the previous 12 months.
Indirect costs of a MySuper product or an investment option offered by a superannuation product or managed investment scheme means any amount that is:
- an amount that a responsible person knows, or reasonably ought to know (or may reasonably estimate), has reduced or will reduce the return on the product or option. The reduction can be to the amount or value of the income or property attributable to the product or option itself or to the interposed vehicle that the product or option is invested in (or through, to use ASIC's term); and
- is an amount that has been paid as a cost out of the interposed vehicle which – had the amount been paid from the superannuation entity or scheme – would have been an administration fee or costs, investment fee or cost, transaction cost or management fee or cost.
Indirect costs, therefore, are amounts that have been paid as a cost from the interposed vehicle. Not to make too fine a point, but to go back to the definition of administration fees and costs and investment fees and costs for superannuation products, they are not 'costs incurred by the trustee'.
Costs relating to 'derivative financial products' are included in indirect costs. The present treatment of derivative financial products has been retained.
Similarly, the interposed vehicle provisions work in much the same way as previously, with the intention remaining that a PDS disclose the fees and costs of investing in an underlying entity when it is an interposed vehicle.
Finally, a few other bits. Tax – fees and costs must be disclosed in a PDS and periodic statement on a gross of any tax benefit. Transaction costs exclude borrowing costs, property operating costs and implicit transaction costs or market impact cost. They are excluded because consumers won't understand them and/or they are not costs that are generally and objectively observable. Counterparty spreads are also excluded from transaction costs, despite a recommendation to include them. Finally, performance fees must be determined using the average performance fees that have accrued over the previous 5 years. Where the average is negative, it must be explained in the additional information about fees and costs.
It is easy to criticise, and it is in fact hard to know how to address the tension between properly informing consumers, ensuring that everyone is counting the same things and making the law simple and certain. But I am not convinced this is the right balance. In ASIC's consumer testing a participant said: 'I know what a management fee is … it’s the number one fee that you are expecting to see'. Of course, it is quite unlikely that the consumer does, in fact, know what a management fee is and by including indirect costs in it, it is probably less likely that they will. ASIC would probably say it doesn't matter because the important point is to draw attention to all the fees and costs that reduce the value of the member's or investor's investment. Perhaps.