Now that the hurly-burly’s done and the battle is lost and won, what is the outcome for fees and costs disclosure?

In November 2019, ASIC issued what was intended to be the final form of the new rules. However, there were a number of technical issues which required attention, then, of course, the COVID-19 pandemic emerged. Thus, ASIC issued on 24 July a number of amendments to both the current and new regimes and the transitional period for Product Disclosure Statements (PDSs) was extended.

The commencement date for periodic statements remains unaltered.


The new rules (2019)

These are detailed in the Corporations Regulations, as amended by ASIC [CO 14/1252]. The rules apply to PDSs and periodic statements issued to retail clients of superannuation and collective investment products. This is set out in ASIC Corporations (Disclosure of Fees and Costs) Instrument 2019/1070 and the ASIC guidance is contained in a new version of RG 97.

In late 2019, ASIC announced that the current regime would be phased out over 2020/2021 and replaced by a new regime, with the lofty goals of enhancing comparability and transparency in fees and costs disclosure. Key elements of this regime include:

Presentation: The fees and costs summary in PDSs is altered so that 'ongoing annual fees and costs' are separated from 'member activity related fees and costs', and various line items will be merged and renamed.

Excluded transaction costs: There is a new 'transaction costs' line item in the fees and costs summary. This is a net figure and importantly excludes borrowing costs, property operating costs, and implicit transaction and market impact costs (other than certain derivative costs). The excluded costs were previously required to be disclosed in some cases or were subject to temporary regulatory relief.

Disclosure of performance fees: 'Performance fees' are defined to include amounts calculated by reference to the performance of the whole or part of an 'interposed vehicle', as well as those calculated by reference to the whole or part of a product or investment option. Under the current rules, it is only the latter item which needs to be disclosed.


The 2020 changes

These are contained in the ASIC Corporations (Amendment and Repeal) Instrument 2020/579 and an updated RG 97. These by and large focus on the new rules. However, there is one important alteration for the current regime, applicable only to collective investment vehicles. This change reflects industry understanding of the position and followed FSC and member representations to ASIC. Relief has been provided such that buy-sell spreads are not required to be disclosed in periodic statements for collective investment vehicles (consistent with the relief for superannuation products). In addition, ASIC has stated that it will not take action for non-compliance from 29 November 2019 to the date of the latest announcement where an issuer has not disclosed buy-sell spreads in periodic statements. This relief does not continue under the new rules.


In terms of the new regime, these are the major changes:

Revised PDS transition arrangements: Given the impact of the COVID-19 pandemic (and as canvasses and then foreshadowed on its website), ASIC has extended the transitional arrangements for PDSs. Thus, the new regime applies to PDSs given on and from 30 September 2022 with an ability for issuers to opt in early for PDSs dated on or after 30 September 2020 (this is the date when the new regime previously was intended to be mandatory). Issuers opting in must make a written record of elections.  However, there have been no changes made to the timing of the periodic statement transitional arrangements. Accordingly, the new rules apply to periodic and exit statements for reporting periods commencing on or after 1 July 2021, with an ability for the product issuer to opt in early for a reporting period that commenced or ended (as relevant) on or after 1 July 2020.

Performance fees disclosure: The performance fee disclosure requirements have been amended so that issuers do not need to separately disclose the performance fees attributable to each interposed vehicle. Rather, an issuer may disclose an aggregated amount that includes the performance fees for each interposed vehicle referable to that product or option or part. This was a change the FSC advocated for given the practical issues of disclosing individual amounts and the commercial sensitivity of relevant amounts.

Significant Event Notices (SENs): Where a PDS is updated in order to comply with the new rules, ASIC has indicated that a SEN is not required. ASIC guidance also indicates that it does not consider a buy-sell spread to be a 'fee or charge' for the purposes of the SEN requirements.  The practical outcome is that it is not obligatory to give members 30 days notice of an increase in a buy-sell spread. Rather, the timing becomes one of as soon as practicable and not more than three months (or in some cases, 12 months) later. This may be beneficial for issuers who need to alter buy-sell spreads because of pandemic impacts on markets.

Issuers of investment life insurance products: The updated RG 97 encourages issuers of investment life insurance products (who are not required to comply with the new regime) to apply the new regime as a matter of good practice, with any necessary adaptions to suit the nature of their products.  It will be of interest to see if any relevant issuers respond to this encouragement

Other amendments: The ASIC changes include a number of other minor matters, including the following:

  • expressly excluding performance fees are expressly excluded from the definition of transaction costs;
  • performance fees should be disclosed as 'nil' or '0' where there is no right to charge a performance fee, and that the calculated average performance fee should be disclosed where there is a right to charge even if the issuer does not believe a performance fee will be charged at the time of issuing the PDS (say, given poor performance or an election not to charge the performance fee);
  • ASIC has indicated that its policy intention was that there be no changes to the identification and calculation of OTC derivatives as part of indirect costs. Unfortunately, the industry’s concern over the rather complex treatment of OTC derivatives remain unaddressed;
  • Correction of cross-references;
  • more closely aligning the examples of annual fees and costs between superannuation and collective investment products (including to make clear to members that fees and costs may be either charged to their account or deducted from their investment).


Going forward

In this brave new world of intended fee and cost comparability and transparency, issuers will need to decide whether or not to opt-in early to the PDS/periodic statement regime. It may be more convenient to opt in to both at the same time-but not always. This may depend also on the contractual obligations of issuers and managers with their investing entities.

Regardless, the policy intention of comparability and transparency of fees and costs is unlikely to be satisfied until all issuers come on stream with the new regime for both PDSs and periodic statements.

OPINION PIECE - by Paul Callaghan, General Counsel & Company Secretary 


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