Further updates to fees and costs disclosure – what you need to know

By Stephanie Malon, Katerina Dandanis
ASIC Financial Services

In brief 9 min read

If we can cast our minds back to a time just before the COVID-19 pandemic, we might remember when fees and costs disclosure was the topic on everyone's lips (well, at least for those in the super and funds sectors). It was November 2019 and after expert recommendations, consumer testing and industry consultation, ASIC released the 'update to end all updates' to the fees and costs disclosure regime – at least for a while. Except that of course it wasn't. 

The great Australian history of fees and costs disclosure would not be complete without some further twists in the road. And so, on 24 July 2020, ASIC announced a small number of notable amendments (and other tidy-ups) to both the current fees and costs disclosure regime and the new regime that will soon replace it.

While these amendments are generally helpful, and the deadline for implementing the new regime has now been extended for product disclosure statements (PDSs), product issuers shouldn't rest on their laurels. The start date of the new regime for periodic statements has not been deferred, and there are some significant changes in the new regime to prepare for.

A brief reminder on current status

The current fees and costs disclosure regime for PDSs and periodic statements issued to retail clients of superannuation and collective investment products in Australia is set out in the Corporations Regulations, as amended by ASIC [CO 14/1252]. The applicable ASIC guidance is set out in a 'transitional' version of Regulatory Guide 97 Disclosing Fees and Costs in PDSs and Periodic Statements (RG 97). This regime had previously been revised multiple times, including in response to industry concerns with complexity, compliance burden and distortionary impact on investment decisions.

In late 2019, ASIC announced that the current regime would be phased out over 2020/2021 and replaced by a new regime, with the lofty goals of enhancing comparability and transparency in fees and costs disclosure.

The new regime is set out in ASIC Corporations (Disclosure of Fees and Costs) Instrument 2019/1070 and the applicable ASIC guidance is contained in a new iteration of RG 97.

To recap, key differences between the new regime and the current regime include:1 

  • Presentational changes: There are significant changes to the presentation of fees and costs disclosure. Notably, the fees and costs summary in PDSs will be changed so that 'ongoing annual fees and costs' are separated from 'member activity related fees and costs', and various line items will be merged and rebadged.
  • Excluded transaction costs: There will be a new 'transaction costs' line item in the fees and costs summary. This is a net figure, which excludes borrowing costs, property operating costs, and implicit transaction and market impact costs (other than certain derivative costs). These excluded costs were previously required to be disclosed in some cases, or were subject to temporary regulatory relief.
  • Enhanced disclosure of performance fees: 'Performance fees' will be defined to include amounts calculated by reference to the performance of the whole or part of an 'interposed vehicle', as well as those calculated by reference to the whole or part of a product or investment option (under the current regime, they are limited to the latter). These fees will generally need to be disclosed based on an average over the previous five years.

What are the latest changes?

ASIC's latest changes are set out in ASIC Corporations (Amendment and Repeal) Instrument 2020/579 and an updated RG 97.

The changes primarily focus on the new regime – but there is one change of note for the current regime and it is good news for collective investment vehicles. ASIC has reinstated relief so that buy-sell spreads do not need to be disclosed in a periodic statement for collective investment products (which aligns with the relief for superannuation products). ASIC has indicated it doesn't intend to take action for non-compliance from 29 November 2019 (ie if issuers hadn't disclosed buy-sell spreads between then and ASIC's latest announcement). This relief will not continue under the new regime.

For the new regime, ASIC's latest changes of note include:

  • Extended PDS transition arrangements: In light of the impact of the COVID-19 pandemic (and as foreshadowed on its website), ASIC has extended the transitional arrangements for PDSs so that the new regime applies to PDSs given on and from 30 September 2022 with an ability for issuers to opt in early for PDSs dated on or after 30 September 2020 (when the new regime was previously meant to become mandatory). Issuers will need to make a written record of elections. No changes have been made to the timing of the periodic statement transitional arrangements – this means the new regime applies to periodic and exit statements for reporting periods commencing on or after 1 July 2021, with an ability for the product issuer to opt in early for a reporting period that commenced or ended (as relevant) on or after 1 July 2020.
  • Disclosure of performance fees: ASIC has amended the performance fee disclosure requirements so that issuers do not need to separately disclose the performance fees attributable to each individual interposed vehicle (and can instead disclose a single aggregate amount that includes the performance fees for each interposed vehicle referable to that product or option or part). We expect this to come as a very welcome relief to industry, given the commercial sensitivity and impracticality of disclosing performance fees on a per interposed vehicle basis.
  • Exemption and guidance on significant event notices: ASIC has provided an exemption to make clear that there is no need to provide a significant event notice (SEN) simply because a PDS is updated to comply with the new regime. Perhaps of more interest, ASIC has also provided guidance that it does not consider a buy-sell spread to be a 'fee or charge' for the purposes of the SEN requirements. This means that ASIC considers there is no need to provide members with 30 days' advance notice for an increase in a buy-sell spread. Instead, the required timing is as soon as practicable and not more than three months (or in some circumstances, 12 months) later. This guidance will be of interest to issuers who may look to quickly change buy-sell spreads in light of pandemic-related market conditions.
  • Encouragement for issuers of investment life insurance products: ASIC's updated RG 97 encourages issuers of investment life insurance products to apply the new regime as a matter of good practice, with any necessary adaptions to suit the nature of their products (although such issuers are not required to comply with these requirements). Given the substantial amount of work involved in implementing the new regime and its complexities, it will be interesting to see how many product issuers take on the new regime voluntarily.
  • Other minor tidy-ups: Lastly, ASIC's amendments to the new fees and costs regime included a number of minor tidy-ups – these include:
    • expressly excluding performance fees from the definition of transaction costs;
    • clarifying ASIC's expectation that performance fees be disclosed as 'nil' or '0' where there is no right to charge a performance fee, and that the calculated average performance fee be disclosed where there is a right to charge even if the product issuer does not believe a performance fee will be charged at the time of issuing the PDS (eg due to poor performance or an election not to charge the performance fee);
    • confirming ASIC's policy intent that there be no changes to the identification and calculation of OTC derivatives as part of indirect costs – this means that industry's concerns over the (complex) treatment of OTC derivatives under the current regime remain unresolved, at least for the time being;
    • correcting cross-references (including to ensure that the consumer-facing definitions of fees are used or incorporated in PDSs for superannuation products); and
    • more closely aligning the examples of annual fees and costs between superannuation and collective investment products (including to make clear to members that fees and costs may be either charged to their account or deducted from their investment).

Looking forward: preparing for the new regime

First things first, product issuers will need to decide when and whether to opt in early to the new regime as it applies to PDSs and/or periodic statements. For some issuers, it may be more manageable from an administrative perspective to seek to align the implementation of the new regime for both PDSs and periodic statements so that they make a single switch to start collecting information in accordance with the new regime's disclosure requirements. This may involve opting in early to one regime, but not the other.

We also wonder whether another factor that might (at least subconsciously) influence issuers is whether disclosure looks more favourable under the current or new regime. Issuers should be mindful that any elections to opt in early cannot be withdrawn and are taken to cover any subsequent PDS or periodic statement (as relevant) for the particular product to which the election relates.

Regardless of the opt-in date, product issuers will need to ensure they're prepared for the new regime once it applies to them. This may involve updating compliance systems and data collection forms, and checking that service providers and investee entities have the obligations (and practical understanding) to provide the required information. Investee entities should also ensure they can comply with any contractual obligations to provide information in line with the new regime.

If previous iterations of the fees and costs regime are anything to go by (and regardless of the virtues of focusing on net returns rather than fees and costs figures), it's also possible that issuers and investee entities may also look at recalibrating investments, given the new regime may make certain types of investments or structures look relatively more expensive. For example, the new regime highlights the disclosure of 'transactional and operational' costs in the upfront fees and costs summary for collective investment vehicles, whereas such costs were previously only included back in the 'additional explanation of fees and costs'.

That said, over the next couple of years – where there's going to be a mix of PDSs and periodic statements applying two rather different regimes – it's going to be tricky for anyone trying to compare fees and costs.