Following a review of industry practices, the report identifies 6 key areas of inconsistent approaches and practices which have led to significant variation in fees and costs disclosure across the industry. ASIC considers that these inconsistent approaches and practices mean that investors cannot meaningfully compare different products, thereby limiting their ability to make informed decisions about their investments and potentially reducing confidence in the superannuation and managed investments industry.
ASIC’s 6 key focus areas for fees & costs disclosure
- Reporting of fees in underlying investments. ASIC has identified that some funds do not look beyond the fees paid at the first underlying investment vehicle. Others limit disclosure to the fees and costs of the underlying manager rather than also considering the fees and costs associated with the underlying fund itself. According to ASIC, “under-reporting of fees and costs associated with interposing entities is potentially the largest contributor to the under-reporting of fees and cost”.
- Quality of data available used for calculating fees and costs. In particular obtained from investment managers or underlying fund managers. Ensuring consistent quality of data will improve comparability of different products.
- Incorrect treatment of management costs as transaction costs, which are then not reflected in the indirect cost ratio, which ASIC considers to be a key disclosure element designed to enable investors to compare investments. For example, in ASIC’s view, the cost of maintaining a derivatives position should be treated as a management cost or an indirect cost, rather than a transaction cost.
- Performance Fees. ASIC has identified varying approaches within the industry in relation to performance fee disclosure, including in relation to estimated performance fees, treatment of clawbacks and the impact of timing for payment.
- Tax treatment of fees and costs. To meaningfully compare products, ASIC’s view is that issuers must apply the same tax treatment for fees and costs.
- Insurance costs disclosure for super funds offering insurance varies significantly, impacting the investors’ ability to compare coverage and premium payments across super funds.
What is ASIC proposing to do?
ASIC acknowledges that further guidance is required. It has committed to:
- consult with industry on the definition of “indirect costs” for superannuation funds and “management costs” for managed investment products. ASIC proposes to issue a Class Order to clarify these definitions following industry consultation;
- update RG 97 Disclosing fees and costs in PDSs and periodic statements this financial year, following industry consultation;
- review the key fee and cost disclosure requirements in the Corporations Regulations 2001 to clarify requirements and improve consistency, and consult with industry to the extent required; and
- consult with industry on ways in which disclosure of insurance offered through superannuation funds can be improved.
In addition to the above, ASIC is encouraging industry to develop industry standards to ensure consistency and common interpretations on fee and cost disclosure.
Extension of “facilitative approach” period
ASIC has indicated that fee and cost disclosure requirements will be one of its key considerations when conducting surveillance of disclosure practices. However, for the period to 30 June 2015, it has agreed to take a facilitative approach to compliance with the fee and cost disclosure requirements for both superannuation funds and managed investment products. It will take a measured approach in the case of inadvertent breaches or where systems changes are undertaken, provided industry participants make reasonable efforts to comply with such requirements.
A copy of ASIC Media Release14-158MR “ASIC reports on fee disclosure practices for super and management investments” can be accessed here (the page also has a link to Report 398: Fee and cost disclosure: Superannuation and managed investment products).