On 24 July 2018, the Australian Securities and Investments Commission (ASIC) released an external expert report by Darren McShane into the effectiveness of Regulatory Guide 97: Fees and Costs Disclosure (RG 97) in meeting the policy objective behind fees and costs disclosure for managed investment products (MIS) and superannuation products (the Review).
The Review provides a series of recommendations which could see significant legislative and policy changes to fees and costs disclosure for MIS and superannuation products, including those provided through a Platform. In response to the Review, ASIC has expressed its general agreement with changes that align the legislative fees and costs disclosure requirements with the interests of consumers and the industry. It is expected that ASIC will release a consultation paper setting out its proposed response to the issues raised by the Review later this year.
This article provides a brief overview and insight into the key focus areas of the comprehensive Review.
Background and scope of the Review
There have been significant changes to the legislative fees and costs disclosure regime for MISs and superannuation products as well as the guidance issued by ASIC in this regard in recent years, both of which have been met with mixed feedback from industry. In response to this feedback, ASIC appointed an external expert to review the fees and costs disclosure regime for the purposes of ensuring the legislative modifications and guidance issued by ASIC are fit for purpose (that is, it provides greater transparency for consumers in a practical and cost-efficient way).
In doing so, the Review analyses four key areas of the existing fees and costs disclosure regime:
- the value of the information which currently must be provided in PDSs and periodic statements in relation to fees and costs, and whether this assists consumers in making an investment decision (Value of disclosure information);
- the extent to which the current fees and costs disclosure regime results in disclosure which assists consumers in comparing MIS and superannuation products (Comparability of information);
- the practicalities of producing information required for disclosure of fees and costs under RG 97, including the cost to consumers of doing so, as well as whether it might lead to decisions adverse for the long-term interests of consumers (Information practicalities); and
- how the legislative modifications and guidance outlined in RG 97 could be amended to improve clarity and ease of implementation (Recommendations for improvement).
The Review provides an analysis of these key areas by considering existing law and policy settings, business practices in the industry, international experience, as well as the Australian Prudential Regulation Authority's data collection obligations and industry stakeholder concerns.
1. Value of disclosure information
One of the paramount policy objectives of the current fees and costs disclosure regimes is the provision of usable, easy to read and understandable information to consumers that is readily accessible and produced in a manner that assists comparability of products. The subtext is that fees and costs have a substantial economic impact on long-term savings vehicles and as such are critical factors that need to be properly considered and understood by consumers.
Despite the significant legislative and policy reforms that have been made to the fees and costs disclosure regime for MIS and superannuation products in recent years to achieve such policy objectives, PDS-based comparison remains a laborious and time-consuming exercise that most consumers are likely to avoid. The Review considers this to be the result of the complexity of the comparison task and the fact that fees and costs are just one of a number of multiple variables and their relevance varies from decision to decision. This finding links in with the second key area of focus of the Review: the ability of consumers to compare information about an MIS or superannuation product under the current fees and costs disclosure regime.
2. Comparability of information
To increase the value derived by consumer from the information included in PDSs for MIS and superannuation products, the Review suggests that consumers should be able to compare products not only based on the fees and costs of a particular product, but also on a number of non-product based factors. This is because consumer choices relating to MIS and superannuation products are based on a number of varied circumstances, can arise at different points in time and be made simultaneously. The Review considers that the current PDS disclosure regime is less helpful for non-product based decision-making, such as comprehensive provider level cost comparison (for example, where a consumer wishes to compare cost efficiency of a provider across its product range, rather than simply based on an individual product or investment option), and does not facilitate decision-making post the product acquisition stage.
This finding echoes the concern raised by some product issuers who report competitive issues from the sole focus on fees and costs as part of product comparison under the current regulatory regime. The Review recognised that expectations about investment returns and risks, services levels and other factors are important and should be factors which are inputted into decision-making, but does not provide a recommendation on how they should be incorporated into product comparison tools under the current PDS disclosure regime. This is likely attributable to their highly unpredictable or subjective nature, which could produce unreliable information.
As part of the review of product comparability under the current regulatory regime, the Review considered the effectiveness of the comparative tools (ie. the Fees Template, Fee Example, Consumer Advisory Warning and Additional Explanation of Fees and Costs (AEFC) explanation) in assisting consumers to compare between MIS and superannuation products. The findings with respect to the Fees Template are considered further below.
Fee Templates for MIS and superannuation products
The current fees and costs disclosure regime places Fee Templates at the crux of product comparability and is intended to provide an "at-a-glance" summary of significant fees of a particular product or investment option. While the Fee Template is a substantial improvement to the way that fees and costs were disclosed before its introduction in 2005 in terms of consistency of layout, terminology and readability, the Review considers that it does not provide consumers with a usable basis for simple comparison of information about fees and costs. Part of the reason for the lack of a means by which consumers are able to compare between products in a simple and effective manner is considered to be the number of prescribed differences in the required presentation and disclosure for MIS and superannuation products.
Because of the complexity of the comparison task (and noting that fees are only one of a number of variables that may be relevant to a consumer's choice), the effort involved and the cognitive limitations of many consumers, the Review considers that fee information should be presented in an unqualified, simple and directly comparable manner.
One of the limitations to comparability between MIS and superannuation products relates to the definition of certain fees and costs with respect to each. For example, unlike the superannuation Fee Template (which requires disclosure of investment fees, administration fees and the Indirect Cost Ratio), the MIS template is split into three headings:
- fees when your money moves in or out of the MIS;
- management costs; and
- service fees.
The Review suggests that the differences between the first and third of these fee items are negligible and as such, the Fee Template should align the presentation of these fees and costs consistently. In addition, "management costs" for MIS products is a single fee item, whereas it is split into "investment fees" and "administration fees" in the superannuation Fee Template.
Further, requiring consumers to add multiple dollar or percentage figures is considered to be a major source of complexity and lack of comparability. Combined with other variables, such as different calculation bases, ranges, discounts or other qualifications, it becomes unlikely that the differences between products or investment options would be understood by even those consumers who are financially sophisticated. As such, the Review recommends that, in line with previous research in support of dollar-based disclosure, a single dollar figure would be the "ultimate" simplified comparison tool. In the absence of the ability to produce a dollar figure, a single percentage-based figure is seen as the next best alternative.
Fee Templates for platforms
The Review also highlights a number of concerns relating to disclosure of fees and costs for "Platforms" (which include superannuation platforms and Investor Directed Portfolio Services). In particular, non-Platform providers raised the concern that consumers could be, and are being, enticed to join Platforms without a proper understanding of their complex cost implications. These complexities arise from the double layer fee disclosure which creates difficulties in comparing the fees and costs of Platform and non-Platform products.
On the other hand, Platform providers argued that it was unreasonable to require Platform providers to provide examples of the cumulative effect of the fees and costs of the Platform plus investment for each investment option on the investment list, given that for MIS and superannuation products only a single investment option must be provided.
To address these concerns, the Review recommends several additional enhancements to disclosure requirements for each of MIS and superannuation products and products offered through a Platform, including the extension of the Fee Example to all investment options in a table format and through the disclosure of a "cost of product" figure for all investment options. To address some of the concerns regarding consumers' understanding of the cost implication of Platform products, the Review suggests:
- the inclusion of the key fees and costs of all investment options available under a particular Platform in a tabular format;
- the inclusion of certain standardised warnings statements for the PDS Fee Template for Platforms; and
- the introduction of specific obligations regarding the disclosure of fees and costs of all investment options available through a Platform in Schedule 10 of the Corporations Act.
3. Information practicalities
The Review points out that the regulatory arrangements put in place by Schedule 10 (as amended) and RG 97 are technically complex and difficult to understand. Many industry participants reported misunderstanding the requirements of the fees and costs disclosure regime. While there were a number of reasons contributing to this confusion, one of the most significant of those was the concern regarding the data elements that are to be included into the specific fees and costs that are required to be disclosed as part of the Fee Template.
Rather than considering each technical question, the Review recommends the implementation of a decision-making framework for considering such technical and data-related issues. This framework was developed taking into account both Australian and overseas disclosure regimes, and the suggestions and concerns of stakeholders raised during the course of the Review. Broadly, the suggested approach is based on layering the pre-existing disclosure requirements into several categories, having regard to how the disclosure supports consumers in making product comparison decisions. These include:
Category 1: Items that should be disclosed in the Fee Template and Fee Example
Items which form part of this category would have the following characteristics:
- they are significant fees which can be "gleaned at-a-glance";
- they are forward looking and enhance reliability;
- they are objectively certain and determined using limited estimation and discretion;
- they are consistent with the types of items that consumers would expect to take into account when comparing product cost impacts;
- they do not distort the overall figure (for example, the aggregation of a significant individual item into a single comparative figure, which could create the effect of overwhelming other potentially more relevant items);
- they do not require constant updating (which would create administrative challenges and indicates that the data lacks reliability as a predictor of future fees and costs);
- their inclusion in this category would not distort the investment behaviours of consumers or the practices of providers; and
- they do not require extensive textual explanation and would fit comfortably within the Fee Template.
Category 2: Items required to be in the PDS / period statement but which do not satisfy Category 1 criteria
Items which form part of Category 2 are those which do not readily feed into the comparative assessment for any number of reasons, including that they are not generally a fee for the particular type of product, or they require some detailed explanation. These items should be disclosed in the AEFC section only. Further, the AEFC section should not include any items already included in Category 1 so as to avoid confusion and double counting.
Category 3: Items that do not belong in the PDS regime
Category 3 items include cost impacts that do not belong in the PDS regime because of limited interest or relevance to consumers, even if the information may be relevant to other stakeholders, such as investment professional, superannuation trustees, responsible entities and financial or policy analysts. Such items could be included in other explanatory documents, the provider's website or product performance materials.
Category 4: Disproportionately burdensome items
The items which would be included in Category 4 are those that are disproportionality burdensome to identify, produce and / or maintain, having regard to their relevance to assisting consumers to understand the cost of a product or enhance their ability to compare products.
4. Recommendations for improvement
While we have considered some of the more significant Recommendations for Improvement in this article, the comprehensive Review contains a lengthy list of 34 recommendations which can be accessed through ASIC's website.
The recommendations for amendments to the fees and costs disclosure regime are accompanied by recommendations on the availability of informative and educational material for consumers. These materials are aimed at providing consumers with an understanding that decision-making with respect to financial products should not merely focus on selecting the least expensive option. The Review recommends that consumers should also receive an explanation of the nature and composition of the fees and costs that are disclosed, including where the fees and costs are being paid out of.
As a result of the Review, it is expected that future regulatory and policy changes are likely to focus on enhancing presentation and usability of information, adjusting the point of comparison for consumers and reducing the differences between the fees and costs disclosure for different products.
What's next for fees disclosure?
ASIC has announced that it will release a consultation paper in response to the issues and recommendations identified in the Review later this year. This paper should set out ASIC's proposed response to the issues raised in the Review and seek feedback from industry stakeholders on its proposals.
In the interim, you should consider how the issues and recommendations identified in the Review impact your fees and costs disclosure obligations and consider whether these would warrant a submission to ASIC in due course.