Reforming the fees and costs disclosure regime for managed investment schemes

February 2019

In this article, associate Kristy McCluskey evaluates ASIC Consultation Paper 308, released in early January 2019, which proposes further reforms to the fees and costs disclosure regime for managed investment schemes.

ASIC Report 581

The paper sets out ASIC's response to the recommendations in ASIC Report 581: an independent review of RG 97 and the fees and costs regime.

The lengthy Report contains 34 recommendations covering matters ranging from technical points about definitions and drafting, to suggestions for improvements to disclosure tools and better support mechanisms for consumers. We previously commented on this Report in September last year.

Key recommendations adopted by ASIC

ASIC addresses each of the recommendations from the Report and categorises them as those it proposes to adopt (and whether amendments to the fees disclosure Schedule 10 of the Corporations Act are required) and those it does not propose to adopt.

Some key recommendations ASIC is proposing to adopt include:

Changing the fees and costs template for managed investment products

Changes include moving management fees and costs to the top of the template and inserting an item for buy-sell spread. It is hoped these changes will assist investors to understand the fees and costs they will be charged.

Simplifying periodic statements

ASIC proposes to simplify periodic statements so they contain the following three lines:

  • Fees deducted from your account.
  • Fees and costs deducted from your investment.
  • Total fees and costs you paid.

The purpose of simplifying the disclosure requirements of periodic statements is to make them easier for investors to understand the fees and costs charged.

Removing property operating costs, borrowing costs and implicit transaction costs

ASIC proposes to—

  • remove the requirement for these costs to be disclosed in PDSs and periodic statements, and
  • require any operational costs that are not property operating costs, explicit transaction costs or counterparty spreads be treated as management costs.

The changes are aimed at striking a balance between providing information to assist investors make informed investment decisions and ensuring fees and costs disclosure is practicable for industry.

Performance fees

ASIC proposes the following changes to performance fees:

  • Remove any distinction between performance fees and performance-related fees – performance fees will include amounts calculated by reference to performance of a product, part of a product, an interposed vehicle or part of an interposed vehicle.

    ASIC hopes these changes may simplify fees and costs disclosure because from an investor perspective, it should not matter whether the performance fee is incurred at the product level or in an underlying investment.
  • Require performance fees to be calculated by reference to the average of the performance fees accrued in the product or interposed vehicle in the lesser of each of the previous five financial years or the number of financial years the product or interposed vehicle has been operating.

    Averaging out performance fees over this period should reduce large differences between disclosed amounts of performance fees and the actual outcome, and to accommodate any negative figures in individual years.

Additional changes to the fees and costs template and additional explanation of fees and costs in PDSs are also proposed to accommodate the above proposed changes to performance fee calculation and disclosure.

Additional proposals

ASIC is also seeking feedback on the following additional proposals:

Removing the indirect cost ratio concept

The indirect cost ratio is used to calculate management costs that are not deducted directly from an investor's investment and is a required input in the example of annual fees and costs.

ASIC proposes to remove the indirect cost ratio concept on the basis indirect costs for managed investment products can be added to other amounts that make up management costs for the purpose of presenting management costs in the fees and costs template, making the indirect cost ratio concept unnecessary.

The treatment of derivative financial products

ASIC proposes to maintain the current requirements for the treatment of costs associated with derivative financial products as indirect costs and include certain costs as transaction costs.

RG 97

A draft updated RG 97 is annexed to the paper. Notably, the draft is restructured to separate guidance for superannuation funds from managed investment products and incorporates the additional guidance previously provided by ASIC as part of the ASIC Q&As, with a view to removing the Q&As. These changes are welcome and will eliminate confusion about the different disclosure requirements for superannuation funds and managed investment products.

Schedule 10

A draft amended Schedule 10 is annexed to the paper. The draft clearly shows the changes proposed by ASIC to facilitate the adoption of the recommendations which arose from the Report.

Next steps?

Consultation on the paper, including the proposed amendments to RG 97 and Schedule 10, closes on 2 April 2019. A response to submissions on the paper is expected to be released in the second half of 2019. We will keep you up to date with further developments.

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