In brief
ASIC has released for industry comment a draft Class Order which would amend the fees and costs disclosure requirements that apply to superannuation and managed investment products. The key proposed amendments relate to the way in which indirect costs must be disclosed. Senior Associate Simun Soljo and Senior Regulatory Counsel Michael Mathieson report.
Background
Schedule 10 of the Corporations Regulations 2001 (Cth) specifies the content and manner of presentation of the fees and costs information required to be included in product disclosure statements and periodic statements for superannuation products and managed investment products.
The proposed amendments contained in the draft Class Order follow the release by ASIC recently of its report on fees and costs disclosure (Report 398) in which it flagged the need for amendments to provide greater 'clarity' concerning the operation of the fees and costs disclosure rules and to give effect to their 'intent'. ASIC discussed a previous version of the draft Class Order with some industry participants and has now made it available for wider industry consultation.
The draft is accompanied by a background paper setting out ASIC's rationale for the amendments.
The key amendments contained in the draft Class Order are:
- the replacement of the definition of 'indirect costs' and extension of the indirect costs disclosure requirement to managed investment products;
- changes to the definition of switching fees for superannuation products; and
- a change to the Consumer Advisory Warning.
Indirect costs
Under existing rules, superannuation trustees must disclose the 'indirect cost ratio' of the superannuation product. This turns on 'indirect costs' as defined in clause 101 of Schedule 10.
The fee disclosure for managed investment products must include the 'management costs', the definition of which does not currently turn on the concept of 'indirect costs'.
The draft Class Order would replace the existing definition of 'indirect cost' and include that concept within the 'management costs' to be disclosed for managed investment products.
The proposed new definition of 'indirect cost' is based on the existing definition in section 101, which was introduced as part of the Stronger Super reforms, but with some key changes. The changes are intended to address ASIC's concerns about the perceived under-reporting of indirect costs. They would also align the indirect costs disclosure for managed investment products with those for superannuation.
The new definition of 'indirect cost' would mean 'any amount' that:
- a trustee of the superannuation fund or responsible entity of the managed investment scheme knows, or reasonably ought to know or, where this is not the case, may reasonably estimate, will directly or indirectly reduce the return on the product or investment option that is paid from or reduces the amount or value of:
- the income of or the property attributable to the product or option; or
- the income of or property attributable to an 'interposed vehicle' in or through which the property attributable to the product or investment option is invested; and
- is not charged to a member as a fee; and
- is not a fee under section 29V of the Superannuation Industry (Supervision) Act 1993 (Cth).
The key changes from the existing definition of 'indirect cost' are:
- Where the issuer does not know or ought reasonably to know the amount, it will be required to disclose a reasonable estimate of the amount, if one is possible. This would have the effect of significantly broadening the scope of the defined term.
- The definition of indirect costs would specifically include amounts paid from, or which reduce the amount or value of, the income or property of an 'interposed vehicle' in the investment structure. The proposed definition of 'interposed vehicle' is somewhat convoluted. It includes 'a body, trust or partnership', but excludes some exchange traded funds. While this will serve to put beyond doubt that an issuer needs to look through the investment vehicle in which it is directly invested, the amendment is unnecessary. What it will do is make an already difficult concept even more difficult to apply.
- The third element of the definition of 'indirect cost' is new. It is meant to prevent 'double counting'. However, it does not seem to meet that objective.
Switching fees for superannuation products
The existing definition of switching fee refers to the MySuper fee definitions, which defines a switching fee as 'a fee to recover the costs of switching all or part of a member's interest in a superannuation entity from one class of beneficial interest in the entity to another'. The difficulty with this definition is that, for superannuation products other than MySuper products, switching between investment options or products will not necessarily involve a switch between classes of beneficial interest in the fund. The definition is therefore proposed to be amended to provide that, for a superannuation product other than a MySuper product, a switching fee means 'a fee to recover the costs of switching all or part of a member's interest in the superannuation entity from one investment option or product in the entity to another'.
Consumer advisory warning
The draft Class Order inserts a separate Consumer Advisory Warning to be used in product disclosure statements for managed investment products. The only difference is the replacement in the managed investments version of the words 'Your employer may be able to negotiate to pay lower administration fees' with the words 'You may be able to negotiate to pay lower contribution fees and management costs where applicable'.
Commencement and next steps
ASIC proposes that the changes contained in the draft Class Order would apply from 1 July 2015. Despite industry requests for a transitional period, ASIC's preference is that this be a 'hard date' for commencement, so that all disclosure documents on issue at that date must comply with the new requirements.
ASIC is seeking comments on the proposed amendments by 17 October 2014.