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New RG97 rules will increase disclosed fees

Many fund managers and trustees are struggling to understand how to apply the increased disclosure obligations of Regulatory Guide 97 – Disclosing fees and costs in PDSs and periodic statements (RG 97) to their business models.

ASIC’s RG 97 requires managed investment fund and superannuation product issuers to provide more detailed data about fees and costs, including from underlying investment vehicles. These changes are designed to create a more level playing field, giving customers greater transparency and allowing meaningful comparisons between products.

Product providers struggling, ASIC extends deadline

The new requirements differ between superannuation and managed funds and implementing them is proving a challenge. One-third of industry attendees at a recent EY forum on RG 97 admitted they were still struggling to understand the requirements.

Recognising these concerns, ASIC recently extended the transition period for Product Disclosure Statements (PDSs) until 30 September 2017 (from the original 1 February 2017) but there are no plans to issue further extensions. PDSs must be fully RG 97 compliant by that date, while periodic statements have until 1 January 2018.

Only 2% of attendees at the recent forum said they had completed the new fee disclosures process. So, what exactly should funds be doing to prepare for and implement the changes and what are the likely impacts?

Interpreting the disclosure requirements for implicit costs

Much of the confusion lies in the complexity of how to calculate implicit transaction costs, with some applications requiring several estimates. While the ASIC guidance does not specifically reference 'implicit costs', it categorises these transaction costs as the difference in price between the purchase and immediate sale of an asset. The limited industry guidance for some of the more exotic assets is leading to difficulty in calculating reasonable estimates.

Making reasonable efforts

RG 97 requires a ‘reasonable estimate’ in determining fees and costs where exact amounts are unknown, but the guidance does not specifically define 'materiality'. Issuers will need to consider industry standards and investors’ perspectives and keep clear records on their methodology and results. Estimates should include the information available, relationships with third-party providers and data integrity, absolute and relative size of costs, relevant time periods and causes of change.

There may be circumstances where issuers are aware that future costs may be materially different to disclosures in the PDS, and this will require an explanation. For example, where a change in investment strategy is planned.

Calculating costs of OTC derivatives

The calculation and materiality of OTC derivative transaction costs is more complex and may require professional judgement because transaction costs are often implicit within the price of these derivatives.

These transactional costs must be disclosed as indirect costs except where fund managers use derivatives for hedging purposes, such as hedging currency or interest rate exposures, in which case they should be disclosed as transactional and operational costs. 

Average fee metrics likely to increase

Overwhelmingly, attendees at our forum said they expect the more detailed fee estimation methodology and diagnostics will lead to a significant rise in disclosed fees. Almost a quarter (24%) expect a high impact because of the changes, with fees rising more than 50 basis points (0.50%). 37% expect an increase of between 20 to 50 basis points, and a further 37% expected a 5 to 20 basis points rise. Just 2% of attendees said they were not expecting any material change in fees.

While ASIC is aware that the new requirements could make some products appear more expensive, the regulator believes cost is only one of a range of factors customers consider when evaluating products. Asset allocation, investment strategy and performance also play a part. Greater consistency, transparency and visibility of fee disclosures will allow investors to make better-informed choices.

Issuers will need to consider how an increase in fees will be perceived by consumers and factor that into their plans. The new disclosures will make it easier to benchmark and compare fees across products and providers. A communications strategy that includes clear, timely engagement with customers should be an essential component of each organisation’s implementation process.

 

Darren Handley-Greaves is a Financial Services Partner with Ernst & Young Australia. The views expressed in this article are the views of the author, not Ernst & Young. The article provides general information, does not constitute advice and should not be relied on as such. Professional advice should be sought prior to any action being taken in reliance on any of the information. Liability limited by a scheme approved under Professional Standards Legislation.

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