Australia: Counting the Costs – nine points of preparation for the amended fee and cost disclosure requirements

Late last year the Australian Securities and Investments Commission (ASIC) released ASIC Instrument 2015/876. This amended the original ASIC Class Order [CO 14/1252] (Amended Class Order) and some of the fee and cost disclosure requirements for the Product Disclosure Statements (PDS) and periodic statements of managed investment and superannuation products and investment options.

However, with most of these changes starting to take effect in approximately nine months' time, we thought it would be timely to highlight some points concerning the Amended Class Order's changes, to assist superannuation trustees and fund managers (as applicable) in their preparation for the impending changes.

1. Indirect costs – the definition of indirect costs under the original ASIC Class Order [CO 14/1252] has been changed under the Amended Class Order. One of the stand-out changes to this definition is in clause 101A(3), where there are much more specific provisions concerning the calculation of indirect costs in relation to derivatives for superannuation (including MySuper) and managed investment scheme products or investment options.
2. Interposed vehicles – the original ASIC Class Order [CO 14/1252] was the source of concern for a number of participants in the superannuation and managed investment scheme industry due to the "complexity of some of the drafting in [CO 14/1252]", which included the drafting of the interposed vehicle definition¹. In an attempt to clarify some of these complexities, ASIC inserted a new definition of interposed vehicle which, in short, defines an interposed vehicle as a body, trust or partnership that satisfies the assets test or the PDS test, but does not satisfy the platform test². In summary, these tests and the applicable criteria are as follows:
3. • Assets test – to satisfy this test, the property attributable to the managed investment or superannuation product or investment option (which is relevant to the PDS) must be invested in or through the body, trust or partnership. Further, the product issuer for the PDS must believe, or have reasonable grounds to believe, that the body, trust or partnership "has more than 70% of its assets by value invested in securities or other financial products", subject to certain conditions³.
   • PDS test – this test will be satisfied if, based on the PDS for the managed investment or superannuation product or investment option, a security or interest in the body, trust or partnership "could reasonably be regarded [by retail clients] as the means by which the benefit of the investment is obtained, rather than the end investment"⁴.
   • Platform test – if the PDS for the managed investment or superannuation product or investment option states that:
   • • the product holder (i.e. member) can give instructions, directions, or requests to acquire financial products;
     • the product issuer for the PDS has published a list of such products which the instructions, directions or requests may be given in relation to, which includes a security or interest in the body, trust or partnership; and
     • the arrangement is considered a custodial arrangement under section 1012IA(1) of the Corporations Act 2001 (Cth.)⁵,the platform test will be satisfied, and the body, trust or partnership will not be an interposed vehicle.

3. Investment fee – the Amended Class Order has altered the definition of investment fee in the Corporations Regulations 2001 (Cth.) (Corporations Regulations) (with respect to superannuation funds), to carve-out indirect costs that are not paid out of a superannuation fund, which the superannuation trustee has elected (in writing) to treat as indirect costs and not fees⁶. ASIC have also broadened this definition to include, as an investment fee, any costs incurred in an interposed vehicle or derivative⁷.
4. Calculating the indirect cost ratio – under the Amended Class Order, the indirect cost ratio (ICR) for a PDS is to be based on information from the previous financial year, except in the following situations:
5. • if the product or investment option was not offered at least 11 months prior to the end of the previous financial year – the ICR is to be determined on the basis of the product issuer's reasonable estimate of the ICR for the current financial year, at the time the PDS is prepared; or
   • if the product or investment option was first offered in the current financial year – the ICR is to be determined on the basis of information available from the time the product or investment option was first offered, and adjusted to reflect a 12 month period.

The above provisions concerning the calculation of the ICR apply equally to any part of a superannuation product (including MySuper) or investment option's fee (that is disclosed in a PDS), which relates to the costs incurred by the superannuation trustee or in an interposed vehicle or derivative.

5. Transactional and operational costs – similar to the calculation of the ICR, information about transactional and operational costs (including the amount or an estimate of such costs) that is disclosed in a PDS for a managed investment or superannuation product or investment option, is to be based on information from the previous financial year, except in the following situations:
6. • if the product or investment option was not offered at least 11 months prior to the end of the previous financial year – the transactional and operational costs are to be determined on the basis of the product issuer's reasonable estimate of these costs for the current financial year, at the time the PDS is prepared; or
   • if the product or investment option was first offered in the current financial year – the transactional and operational costs are to be based on information available from the time the product or investment option was first offered, and adjusted to reflect a 12 month period.

6. Consumer advisory warning – the Amended Class Order makes further minor amendments to the consumer advisory warning in the original ASIC Class Order [CO 14/1252] for a superannuation product's PDS. Under the new wording, it specifically mentions that a member or their employer (as applicable) may be able to negotiate to pay lower fees.
7. Due date (PDS) – PDSs will need to be updated to reflect most of the changes in the Amended Class Order from 1 February 2017, or earlier if the product issuer has opted-in to the applicable changes and has satisfied certain conditions⁸.
8. Due date (periodic statements) – periodic statements will need to be updated to reflect most of the changes in the Amended Class Order from the earlier of:
9. • on or after 1 January 2018; or
   • when the periodic statement applies the relevant provisions and the periodic statement states that the Amended Class Order applies to it .

9. Further guidance – ASIC Regulatory Guide 97: Disclosing fees and costs in PDSs and periodic statements (RG 97) provides further guidance on the Amended Class Order's changes to the fee and cost disclosure requirements.

In light of the number of upcoming changes to fee and costs disclosure for PDSs and periodic statements, we strongly encourage superannuation trustees and fund managers to familiarise themselves with the Amended Class Order and RG 97, and prepare to implement the raft of potentially time-consuming changes that will need to be addressed. In particular, what is now "in" and "out" of an indirect cost will be the major issue.

Footnotes

¹ Explanatory Statement, ASIC Corporations (Amendment and Repeal) Instrument 2015/876, 2.

² Australian Securities and Investments Commission, Regulatory Guide 97: Disclosing fees and costs in PDSs and periodic statements, 24 November 2015, para 97.53.

³Australian Securities and Investments Commission, Technical modifications to Schedule 10 of the Corporations Regulations, ASIC Class Order [CO 14/1252], 25 November 2015, para 6(a)(v).

⁴ Australian Securities and Investments Commission, Regulatory Guide 97: Disclosing fees and costs in PDSs and periodic statements, 24 November 2015, para 97.59.

⁵ Australian Securities and Investments Commission, Technical modifications to Schedule 10 of the Corporations Regulations, ASIC Class Order [CO 14/1252], 25 November 2015, para 6(a)(v).

⁶ Australian Securities and Investments Commission, Technical modifications to Schedule 10 of the Corporations Regulations, ASIC Class Order [CO 14/1252], 25 November 2015, para 6(f)(ib).

⁷ Ibid.

⁸ Australian Securities and Investments Commission, Technical modifications to Schedule 10 of the Corporations Regulations, ASIC Class Order [CO 14/1252], 25 November 2015, para 8 and 8A; Australian Securities and Investments Commission, Regulatory Guide 97: Disclosing fees and costs in PDSs and periodic statements, 24 November 2015, para 97.17 (table 2).

⁹ Australian Securities and Investments Commission, Technical modifications to Schedule 10 of the Corporations Regulations, ASIC Class Order [CO 14/1252], 25 November 2015, para 9; Australian Securities and Investments Commission, Regulatory Guide 97: Disclosing fees and costs in PDSs and periodic statements, 24 November 2015, para 97.17 (table 3).

This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.