In brief
Today, ASIC released a report outlining the shortcomings in the disclosure of fees and costs for superannuation and managed investment products. While everyone may not like what it says (and for some it may be too little too late), the more detailed discussion of what the law requires may be helpful. Despite ASIC's statements that it will adopt a facilitative approach to compliance with fees and costs disclosure requirements until 1 July 2015, the report also indicates that ASIC plans to focus on fees and costs disclosure in its future surveillance of disclosure practices. Partner Michelle Levy, Associate Rosie Thomas and Lawyer Patrick Boyle look at some of the important aspects of the report.
Disclosing fees and costs in underlying investments
In its Report 398 Fees and Costs disclosure: Superannuation and managed investment products, ASIC acknowledges that there is inconsistency in the industry in the disclosure of management costs for managed investment products and the indirect cost ratio for superannuation, noting that 'some funds do not look beyond the first layer of fees in the underlying investment vehicle they invest through'.
In relation to management costs, ASIC refers to its previous guidance in RG 97 and says that management cost information should include costs of direct investments and the costs of investments made by any underlying entities, to the extent those costs are known to the product issuer. ASIC does not accept the view that the definition of management costs only relates to amounts incurred by the issuer for its investments in the immediate underlying investment vehicle.
For indirect costs in the superannuation context, ASIC expands on its guidance in Information Sheet 197 (read our Focus on that guidance) and provides its first clue as how to far superannuation trustees need to 'look through' when determining its indirect costs. ASIC says: 'We consider that trustees must disclose indirect costs on a "look though" basis to ensure the inclusion of costs and fees incurred by the underlying investment vehicle.' Later the report states:
The level of information that a trustee needs to have to be able to provide fee data to APRA on a 'look-through' basis may be relevant in determining what information a trustee ought to know for the purpose of calculating indirect costs.
As ASIC notes, APRA's reporting standards require only 'looking through' to the first non-connected entity. But then ASIC seems to back-track, suggesting that APRA encourages trustees to obtain 'information' about investments beyond the first non-connected entity and where they have that information they should report it. It is hard to get a great deal of comfort or certainty from this.
ASIC indicates that after consulting with industry it intends to issue a class order to 'clarify' the definitions of 'management costs' and 'indirect costs'. There's sure to be more fun when drafts of this class order are released.
Mischaracterisation of transaction costs
In Report 398, ASIC expresses concern that product issuers may be misleading investors by mischaracterising certain management costs or indirect costs as transaction costs.
ASIC provides certain examples and indicates its expectation that 'the costs of maintaining exposure to an asset or a particular investment' should be captured in either the management or indirect costs, regardless of the method by which that exposure is obtained. As a consequence, in ASIC's view the transaction costs of maintaining a derivative position or a SWAP contract should be included in the management cost calculation.
More prescription may be one response. ASIC suggests that industry could develop its own standards. We are reminded of evidence provided to the Senate Economics References Committee into ASIC's performance that 'regulation to enhance disclosure can inhibit it'.
Performance fees
ASIC also repeats its concerns regarding the common industry practice of showing the previous year’s performance fees as a reflection of what will occur in the current year. (This issue was also considered in our previous Focus article). However, in the report, ASIC does recognise that past performance fees can be used as an estimate of future years' performance fees 'if the assessment is based on "reasonable assumptions" consistent with RG 170.'
Other issues
The report also discusses other issues in relation to fees and costs disclosure:
- Data quality: ASIC considers an issuer's control over the quality of data provided to it by investment managers and APRA's views regarding a superannuation trustee's duties in relation to obtaining this information from unrelated parties. ASIC calls for a 'best endeavour' approach to obtaining this information and the development of industry standards to improved consistency.
- Tax: ASIC once again confirms that fees and costs in a PDS must be shown gross of income tax and net of any applicable reduced income tax credits, but including GST and any stamp duty.
- Insurance: ASIC also signals that disclosure of insurance information (including premiums) is an area of concern but notes that this is beyond the scope of the report. ASIC indicates that it will consult with industry on ways to improve insurance disclosure.