ASIC releases updated RG 97 regarding fees and costs disclosure requirements for superannuation products and collective investment products
In this article, we outline briefly changes to fees and costs disclosure requirements for superannuation products and collective investment products implemented by ASIC Corporations (Disclosure of Fees and Costs) Instrument 2019/1070 (Instrument 2019/1070) and as explained under a revised new Regulatory Guide 97 Disclosing fees and costs in PDSs and periodic statements (RG 97).
Key points
- ASIC’s changes to the fees and costs disclosure regime for superannuation products and collective investment products (ie managed investment products and notified foreign passport fund products) in Instrument 2019/1070 and RG 97 largely implement ASIC’s proposals under its earlier consultation.
- The changes relate to the presentation of fees and costs in Product Disclosure Statements (PDSs) and periodic statements, and the inclusion and exclusion of certain items in the calculations of fees and costs.
- The new fees and costs disclosure requirements apply to a PDS issued on or after 30 September 2020 and a periodic statement for a reporting period commencing on or after 1 July 2021.
- Issuers may ‘opt-in’ early to the new requirements for periodic statements, but not in relation to PDSs.
Background
On 28 November 2017, ASIC appointed an external expert to undertake a review of fees and costs disclosure issues in the Australian regulatory framework. Following the publication of the expert’s recommendations and observations set out in Report 581 Review of ASIC Regulatory Guide 97 Disclosing fees and costs in PDSs and periodic statements (REP 581), on 8 January 2019 ASIC released its response to REP 581 in Consultation Paper 308 Review of RG 97 Disclosing fees and costs in PDSs and periodic statements (CP 308) – which had an accompanying draft updated Regulatory Guide 97 – along with proposed amendments to Schedule 10 to the Corporations Regulations 2001 (Cth) (Draft Legislative Amendments). The consultation period ended on 2 April 2019.
ASIC also stated that, concurrently with the industry consultation, it would undertake consumer testing of some of its then proposals and would share the conclusions from this testing.
See our earlier article for a summary and analysis of those proposals.
New package of documents
Following the consultation, on 29 November 2019, ASIC:
- registered Instrument 2019/1070;
- registered ASIC Corporations (Amendment) Instrument 2019/1071 (Instrument 2019/1071);
- re-issued an updated RG 97;
- released Report 637 Response to submissions on CP 308 Review of Regulatory Guide 97 (REP 637); and
- released Report 638 Consumer testing of the fees and costs tools for superannuation and managed investment schemes (REP 638).
Instrument 2019/1071 makes changes to ASIC Class Order [CO 14/1252] to specify dates and periods to which that class order no longer applies so that it aligns with the new regime under Instrument 2019/1070.
REP 638 was commissioned by ASIC and was produced by Susan Bell Research. The report was finalised in May 2019, but was released only with these other documents. REP 638 states that a ‘key issue’ is that consumers and investors may be unfamiliar with fees and costs that ASIC and others believe they should become aware of, and that the ‘clear lesson’ from the research is that any new or unfamiliar fees introduced on a fees and costs template need to be explained in non-technical, plain language. A ‘second important point’ is that some consumers ask for transparency because they have learned to be suspicious of financial services organisations ‘hiding’ fees, and therefore it is important that changes made to the fees and costs template are not misjudged as ‘hiding fees’.
We describe below the main features of Instrument 2019/1070 and aspects of REP 637.
New fees and disclosures requirements
Regulatory changes
Appendix 2 to REP 637 summarises ASIC’s response to the feedback received and to the consumer testing, including whether ASIC:
- followed the REP 581 recommendations;
- implemented the CP 308 proposals – in full, in part or with amendments; or
- implemented additional changes that were not consulted on in CP 308 in response to feedback received.
Set out below is a summary of the changes to the fees and costs requirements set out in Instrument 2019/1070.
| Product | What will change? |
|---|---|
| Superannuation products and collective investment products | ‘Fees and costs templates’ are now called ‘Fees and costs summaries’. |
| Any distinction between performance fees and performance-related fees is removed. | |
| Performance fees are to be calculated as the average of performance fees in the previous five financial years. Where the performance fee is calculated as a negative value, there must be a cross-reference to an explanation in the ‘Additional explanation of fees and costs’. | |
| A number of other changes have also been made to how performance fees must be presented in the ‘Additional explanation of fees and costs’ (as described after this table). | |
| The ‘Cost of product information’ for each MySuper product and investment option (in relation to superannuation products) and for each investment option (in relation to collective investment products) should be included in the calculations in the ‘Example of annual fees and costs’. | |
| Property operating costs, borrowing costs, implicit transaction costs and market impact costs do not need to be disclosed in PDSs or periodic statements. | |
| A separate line item for explicit transaction costs is introduced (‘Transaction costs’). These costs must be shown net of any amounts recovered by the buy-sell spread charged by the superannuation entity or responsible entity, and the gross amounts must be set out in the ‘Additional explanation of fees and costs’. Explicit transaction costs must also be included in calculating the ‘Cost of product information’. | |
The following three line items are to be included in periodic statements:
| |
| Fees and costs in a PDS must be disclosed on a gross tax basis. | |
| Superannuation products | Modified the ‘Fees and costs template’ (since renamed ‘Fees and costs summary’) for superannuation products to:
|
| ‘Advice fees’ (intrafund advice costs) are removed as a separate line item and are to be included within ‘administration fees’. | |
| The ongoing costs from member-initiated elements are to be grouped separately as ‘Member activity related fees and costs’, separately from ‘Ongoing annual fees and costs’. | |
| An additional footnote referring to performance fees must be included in the ‘Fees and costs summary’. | |
| Changes have been made to clarify that costs paid out of reserves are captured by the fees and costs disclosure requirements, with amendments to ASIC’s initial proposal in response to industry concern that the changes would lead to double counting. | |
| Collective investment products | ‘Management costs’ is renamed ‘Management fees and costs’. |
| A new line item for ‘Buy-sell spread’ is introduced in the ‘Fees and costs summary'. | |
| A new line item for performance fees must be included in the ‘Fees and costs summary’ and ‘Example of annual fees and costs’. |
Other changes
Other changes to the requirements include:
- minor amendments to Schedule 10 of the Corporations Regulations 2001 (Cth) to improve the clarity of fees and disclosure requirements, and to remove cross-references in definitions to section 29V of the Superannuation Industry (Supervision) Act 1993 (Cth) so they are standalone; and
- amendments to RG 97 to:
- further explain why fees and costs must be disclosed;
- improve consistency in how fees and cost information is presented out in the ‘Fees and costs summary’;
- in the ‘Additional explanation of fees and costs’, allow issuers to:
- set out related performance information; and
- further explanations if the issuer believes the average performance fee figure based on the previous five financial years is not representative for the coming period;
- clarify treatment about amounts paid by third parties or offset against other amounts;
- amend guidance on periodic statements for defined benefit superannuation entities, so the guidance applies to any defined benefit member in a superannuation entity, instead of only to superannuation entities where all the members are defined benefit members;
- incorporate ASIC’s Q&As (so the Q&As can be removed from ASIC’s website);
- generally to improve clarity of disclosure.
In relation to platforms, ASIC states in RG 97 that it expects platform operators to include a prominent statement in their ‘Fees and costs summary’ to the effect that fees and costs charged by the platform relate only to accessing the financial products, and do not include fees and costs that may be charged by the issuers of those financial products.
Proposals that were not implemented and new changes that were implemented
Following the consultation on CP 308, ASIC decided not to implement certain proposals, and to implement certain proposals in an amended form.
We have included the amended proposals in the table above, but we explain the changes that ASIC has made to the original proposal in this table.
| Proposals | Details |
|---|---|
| These proposals from CP 308 were not implemented. | ASIC initially proposed to include ‘counterparty spreads’ as a separate line item in the ‘Fees and costs summary’ and ‘Example of annual fees and costs’, and in the calculation of the ‘Cost of product information’. This was not implemented as ASIC reported that there currently lacks an industry-wide methodology or enforceable definition of counterparty spreads. |
| ASIC initially proposed to incorporate a $5,000 contribution into the ‘Cost of product information’ and ‘Example of annual fees and costs’ for superannuation products. This was not implemented as industry feedback considered that consumers may find this confusing. | |
| Some proposals were implemented in a form different to their original formulation in CP 308. | ASIC initially proposed to represent performance fee values as ‘zero’ or ‘nil’ or 0 when performance fee calculations produce a negative value. This was not implemented as industry feedback considered that consumers may find this confusing. Instead, where performance fees are calculated to be a negative value, superannuation entities and responsible entities must include a cross-reference in the ‘Fees and costs summary’ to the ‘Additional explanation of fees and costs section’. |
| ASIC initially proposed the insertion of an additional footnote to the ‘Fees and costs summary’ to refer to performance fees. This was implemented for superannuation products. For collective investment products, ASIC implemented an amended proposal which instead requires a new line item for performance fees in the ‘Fees and costs summary’ and inclusion of performance fees in the ‘Example of annual fees and costs’. | |
| ASIC’s initial proposal did not exclude ‘market impact costs’ from transaction costs. This was added in Instrument 2019/1070. | |
| ASIC’s initial proposal to clarify that costs paid out of reserves are captured by the fees and costs disclosure requirements did not account for double counting. ASIC’s implementation of this proposal accounts for double counting. |
Transition period
The new fees and costs disclosure requirements – in Instrument 2019/1070 and (the updated) RG 97 – will apply to:
- PDSs issued on or after 30 September 2020; and
- periodic statements (ongoing or on exit) for a reporting period that commences on or after 1 July 2021.
Issuers may ‘opt-in’ to the new fees and costs disclosure requirements for periodic statements early by issuing periodic statements that meet the new requirements. However, to ensure consistent and comparable fees and costs disclosure in PDSs, issuers will not be able to ‘opt-in’ early to the new requirements for PDSs.
General observations
In releasing the package of reforms, ASIC stated in its media release that it will:
- undertake focussed work on fees and costs disclosure on platform arrangements in 2020;
- work with industry bodies to clarify how financial advisers should use fees and costs information when giving advice; and
- monitor fees and costs disclosure going forward and consider taking action where it finds misconduct.
The above points suggest that there are outstanding issues for the industry, and ASIC expects misconduct in the industry. The short transition period for compliance also suggests that ASIC is keen for the industry to move to the new regime as soon as practicable.
It will remain to be seen whether these changes will better enable consumers to make informed, value-for-money decisions about their investments, as ASIC asserts. The utility of these new requirements is curious given that ASIC has recently ‘call[ed] time’ on the efficacy of disclosure as a consumer protection tool, as we reported recently in our recent article.
Having a consolidated Schedule 10 as part of Instrument 2019/1070 will prove to be helpful to industry participants and their legal advisers.
If you are a superannuation trustee, responsible entity, notified foreign passport fund operator, or platform operator, it is important to take action now to ensure that you become compliant with the new requirements once they commence, noting that the commencement date is not too far away. We would be pleased to assist you with responding to these changes.