Originally published by Cuffelinks
The countdown is on. From February 2017, managed investments and superannuation products must adhere to ASIC’s new fee disclosure guidelines. The changes create a level playing field across products, leaving little doubt that any fees or costs reducing the ultimate investment return must be disclosed. But for products that have avoided indirect (or ‘look-through’) cost calculations up until now, the changes are far reaching and require considerable thought and preparation. ASIC has indicated that the deadline will not be extended.
ASIC has tried to even things up such that consumers can make meaningful and consistent comparisons between products.
The amended Regulatory Guide 97—Disclosing fees and costs in PDSs and periodic statements (RG 97) was released in November 2015 and ASIC consider 18 months is ample time for product providers to ready themselves for the changes. The changes are extensive. The regulatory guide has increased by 45 pages with the main change relating to indirect costs.
Clarifying disclosure of indirect costs
Previously, the disclosure of indirect costs was open to interpretation, but this guide makes it crystal clear that product providers should look-through all the way to the actual investment providing the return and count any amount which will directly or indirectly reduce this investment return. This means, for example, with an investment in a hedge fund or private equity ‘fund of funds’ with multiple underlying vehicles – which ASIC has termed ‘interposed vehicles’ – the product provider needs to count all the fees and costs of those underlying structures.
ASIC has also applied this concept of interposed vehicles to over-the-counter (OTC) derivatives. That is, if there are any fees and costs embedded in an OTC that are intended to remunerate the counterparty for managing or creating the derivative, these too should count towards total indirect costs. An example might be a swap specifically designed by an investment bank to replicate the return of a standard commodity index. This product needs to be tailored by the investment bank and they seldom do anything for free. There is normally a cost embedded in the swap, but not typically called a ‘fee’, that goes to the investment bank for their work. A fund that purchases this swap will need to firstly be able to calculate this embedded cost, and then ensure that it is captured and disclosed to comply with ASIC’s new rules.
What are ‘income-sharing’ arrangements?
Another interesting inclusion is the section dedicated to ‘Reducing costs through income-sharing arrangements’. RG97 specifies that any income or benefit derived from the fund’s assets that is retained by the product provider should be recorded as a fee or indirect cost. This captures circumstances where a service provider’s fee is reduced because they are earning revenue from the use of the assets of the fund. The classic example is a favourable custody fee whereby the custodian reduces its headline fee as it’s using the assets of the fund to generate revenue through a securities lending programme. This illusory ‘discount’ will need to be included in the indirect costs under the new arrangements.
Stretching across 68 pages, there are several other changes for product providers to consider and it will be interesting to see the change in fee levels disclosed from early next year. There’s no doubt there’ll be some innovative interpretations of the new legislation from product providers. But ASIC has tried to even things up such that consumers can make meaningful and consistent comparisons between products.