Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 197

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.

RELATED ARTICLES

ASIC creates a level playing field on fees

Is DDO change to hybrids a drawback for investors?

D’oh! DDO rules turn some funds into a punching bag

banner

Most viewed in recent weeks

How to enjoy your retirement

Amid thousands of comments, tips include developing interests to keep occupied, planning in advance to have enough money, staying connected with friends and communities ... should you defer retirement or just do it?

Results from our retirement experiences survey

Retirement is a good experience if you plan for it and manage your time, but freedom from money worries is key. Many retirees enjoy managing their money but SMSFs are not for everyone. Each retirement is different.

A tonic for turbulent times: my nine tips for investing

Investing is often portrayed as unapproachably complex. Can it be distilled into nine tips? An economist with 35 years of experience through numerous market cycles and events has given it a shot.

Rival standard for savings and incomes in retirement

A new standard argues the majority of Australians will never achieve the ASFA 'comfortable' level of retirement savings and it amounts to 'fearmongering' by vested interests. If comfortable is aspirational, so be it.

Dalio v Marks is common sense v uncommon sense

Billionaire fund manager standoff: Ray Dalio thinks investing is common sense and markets are simple, while Howard Marks says complex and convoluted 'second-level' thinking is needed for superior returns.

Fear is good if you are not part of the herd

If you feel fear when the market loses its head, you become part of the herd. Develop habits to embrace the fear. Identify the cause, decide if you need to take action and own the result without looking back. 

Latest Updates

Economy

The paradox of investment cycles

Now we're captivated by inflation and higher rates but only a year ago, investors were certain of the supremacy of US companies, the benign nature of inflation and the remoteness of tighter monetary policy.

Shares

Reporting Season will show cost control and pricing power

Companies have been slow to update guidance and we have yet to see the impact of inflation expectations in earnings and outlooks. Companies need to insulate costs from inflation while enjoying an uptick in revenue.

Shares

The early signals for August company earnings

Weaker share prices may have already discounted some bad news, but cost inflation is creating wide divergences inside and across sectors. Early results show some companies are strong enough to resist sector falls.

Property

The compelling 20-year flight of SYD into private hands

In 2002, the share price of the company that became Sydney Airport (SYD) hit 80 cents from the $2 IPO price. After 20 years of astute investment driving revenue increases, it sold to private hands for $8.75 in 2022.

Investment strategies

Ethical investing responding to some short-term challenges

There are significant differences in the sector weightings of an ethical fund versus an index, and while this has caused some short-term headwinds recently, the tailwinds are expected to blow over the long term.

Investment strategies

If you are new to investing, avoid these 10 common mistakes

Many new investors make common mistakes while learning about markets. Losses are inevitable. Newbies should read more and develop a long-term focus while avoiding big mistakes and not aiming to be brilliant.

Investment strategies

RMBS today: rising rate-linked income with capital preservation

Lenders use Residential Mortgage-Backed Securities to finance mortgages and RMBS are available to retail investors through fund structures. They come with many layers of protection beyond movements in house prices. 

Sponsors

Alliances

© 2022 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.