As many in the superannuation and managed investments industries are well aware, there has been a number of significant changes to the manner in which 'indirect costs' will need to be calculated and disclosed in PDSs that are on issue after 1 January 2016.
While parts of the industry are continuing to discuss with ASIC some of the problems under the revised regime, it is now clear that core aspects of the new rules are here to stay. Accordingly, the attention of trustees will now turn to the practical steps they will need to take to put themselves in a position to comply with the new rules, come 1 January 2016.
A refresher on the changes
ASIC Class Order 14/1252 (issued in December 2014) and Regulatory Guide 97: Disclosing fees and costs in PDSs and periodic statements (currently in draft form) detail a number of important changes to the manner in which the 'indirect costs' are to be calculated.
The key changes include:
- confirmation (were confirmation needed) that trustees are often required to 'look through' investment structures and take into account underlying fees and costs (this is achieved through the introduction of a new 'interposed vehicle' concept);
- where trustees do not know (and, indeed, could not reasonably be expected to know) underlying fees and costs, the idea that they may nevertheless 'reasonably estimate' those fees and costs; and
- buy/sell spreads on OTC derivatives being counted in 'indirect costs'.¶
What might happen from here – will the rules be changed?
A number of industry participants have made submissions on the form of the Class Order and on RG 97. Neither document could be called a model of clarity. We certainly hope the final version of RG 97 contains an expanded range of examples and that they are internally consistent.
Nonetheless, it is important to bear in mind that the Class Order itself is no longer in draft.
Accordingly, while it is possible that there might be some changes to ASIC's guidance when we see the final version of RG 97, we believe that trustees should start the work now of collating the information needed to populate the 'indirect cost' figure in PDSs that will be on issue after 1 January 2016.
What should superannuation trustees be doing to prepare?
So, what should trustees be doing to ready themselves for the changes?
We believe there are three key tasks (each of which would ideally form part of a written trustee process), which trustees should already be thinking about:
- Analyse investment structures: First, trustees should undertake an analysis of their current investment structures (including where investments are made through third-party fund products) to form a view as to which entities are (and are not) 'interposed vehicles'. In many cases, this might be harder to do than it sounds, and might require discussions with advisers and fund managers to seek to apply the 'interposed vehicle' test consistently across investment structures and asset classes.
- Obtain information: Once that analysis has been done, trustees should commence the process of taking all reasonable steps to ascertain actual fee and cost information (including performance fee data) for each of those interposed and other vehicles for the most recently completed financial year of the fund. Given the historical nature of the 'indirect cost' concept (ie it is intended to be an actual figure for the previously completed financial year), for many funds it won't make sense to seek this information until after the end of the financial year ended 30 June 2015 (being the most common financial year end for superannuation funds). Nonetheless, trustees should equally give themselves sufficient time to collate the necessary information, given the inevitability that some third-party fund managers may be reluctant to (or unable to quickly and easily) provide the necessary information at the first time of asking.
- Determine approach to 'reasonable estimates': Finally, we believe that trustees should formulate (ideally, in a formally documented procedure) a suitable approach to when and how they will make a 'reasonable estimate' of the fees and costs of an interposed vehicle where, for whatever reason, they are not able to ascertain actual fee and cost data for that vehicle. This will include determining when the need will arise to determine an estimate for a particular interposed vehicle, as well as the process by which the trustee will determine the estimate when required. This may include taking into account the general principles set out in ASIC Regulatory Guide 170: Prospective financial information, as well as the trustee's knowledge of the particular investment and the relevant investment market.