Skip to content.

Home

Allens Arthur Robinson

Funds Management - Real Estate & Superannuation

Focus: Funds Management – November 2005

Good practice in unit pricing guide released

In brief: ASIC and APRA released a joint Guide to Good Practice in Unit Pricing earlier this month. This follows more than a year of industry consultation and review by the regulators of unit pricing practices in the funds management, superannuation and life insurance industries. Senior Associate Penny Nikoloudis and Lawyer Priya Kumar summarise the key aspects of the Guide, including the five good practice principles developed by ASIC and APRA.

Background

In recent years, both the Australian Securities & Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA) have raised concerns about unit pricing practices in the funds management, superannuation and life insurance industries, and have taken enforcement action in a number of high-profile instances of unit pricing errors.

To address these concerns, between July and December 2004, ASIC and APRA undertook a joint review of unit pricing practices. The findings of the joint review were not all bad news, with the regulators acknowledging that, of the thousands of unit prices calculated each day, most will be correct. However, they highlighted that, when pricing errors do occur, they can be very costly. Indeed, according to ASIC and APRA, the risk of pricing errors is one of the most significant non-market risks faced by investors in unitised products.

The joint review culminated with the release by ASIC and APRA of a joint consultation paper on good practice in unit pricing in December 2004. A period of industry consultation followed, and the final joint Guide to Good Practice in Unit Pricing was released by ASIC and APRA on 3 November 2005.

Return to top

What is the status of the Guide?

The Guide outlines a range of good unit pricing practices for the funds management, superannuation and life insurance industries. It is a guide to 'good practice' – not a guide to 'best practice' or a mandatory set of instructions. This recognises that there is not only one preferred way to address unit pricing issues.

Nevertheless, ASIC and APRA expect that product providers' unit pricing practices will measure up with the good practices described in the Guide. If there are unusual circumstances in which alternative practices are appropriate, product providers should have a reasonable and documented justification for adopting those practices.

Although the Guide relates to unit pricing, and does not specifically address crediting rate practices, some of the issues outlined in the Guide are also relevant to crediting rate practices.

Return to top

Strategic unit pricing issues for the board and senior management

The Guide highlights a number of strategic unit pricing issues that should be considered by the board and senior management of product providers, including the following:

  • recognising that errors in unit pricing can be costly;
  • ensuring that unit pricing has a high profile and adequate resources within the organisation;
  • building an effective risk management culture from the top down, which demonstrates the organisation's commitment to risk management;
  • establishing a unit pricing policy framework that is implemented in a way that enables unit pricing policies to be discussed, understood and applied consistently throughout the organisation, and updated as required;
  • if unit pricing is outsourced, building and maintaining effective working relationships with service providers and appropriate monitoring systems; and
  • being prepared to manage unit pricing errors and to apply rectification and compensation procedures promptly and consistently.

Return to top

The five 'Good Practice Principles' for unit pricing

The Guide identifies the following five 'Good Practice Principles' that should underpin the unit pricing practice of all product providers:

1. Unit pricing policies and practice must be consistent with the governing documents for each product

Unit pricing policies and practice must be implemented in accordance with statements made in the governing documents (eg constitution, trust deed, compliance plan) and the offer document (eg product disclosure statement) for a product. To the extent that implementation of good practice is constrained by statements in the governing or offer documents, those documents should be updated and aligned with good practice.

2. Sound unit pricing policies should be implemented consistently and kept up-to-date

Product providers should:

  • implement unit pricing policies that seek to achieve equity between unitholders and that cover the range of reasonably foreseeable circumstances;
  • develop procedures to ensure that unit pricing policies are implemented consistently, especially where exercise of judgment is involved, and monitor and report internally on the use of these procedures;
  • review these policies and procedures periodically and update them in line with changes in market conditions, legislation, strategic direction or other circumstances; and
  • document all policies and procedures.

3. Adjustments to unit price, if based on sound policy, are not errors

If a unit price needs to be adjusted and the price was developed under sound policy applied consistently, the Guide suggest that compensation may not be required. For example, if reasonably based estimates are used in unit prices and an adjustment is required when actual amounts become known, neither the unit price before the change, nor the unit price after the change, is 'incorrect' for the purpose of deciding whether compensation is required. On the other hand, compensation does need to be considered where the policy has been inappropriate or where the application of the policy has been deficient.

4. Judgment may be applied to develop estimates in some circumstances

Estimates should not be used where actual values are available. However, the Guide recognises that there are instances where there is no alternative but to use estimates (eg some aspects of tax provisioning). In such cases, estimation policies should seek to provide equity to unitholders and should be formulated on the most sound and reasonable basis available at the time. Product providers need to be able to justify why the use of an estimate is appropriate and that the estimated value is reasonable. Estimates should also be tested periodically against actual data, and adjustments made as soon as information on the actual position becomes available.

5. Information for unitholders should be accessible, timely and useful

Product providers are subject to a range of statutory obligations to provide information to unitholders (eg in product disclosure statements and periodic statements) and may also do so voluntarily (eg through websites, call centres or correspondence). Such information must be expressed in terms that unitholders will understand and must comply with the Good Disclosure Principles outlined in ASIC Policy Statement 168.

Return to top

How do the 'Good Practice Principles' apply in practice?

Having identified the 'Good Practice Principles', the Guide then describes how those Principles apply to a broad range of unit pricing issues. This aspect of the Guide is likely to be of most practical significance to product providers. ASIC and APRA have attempted to identify the key management, technical and consumer issues arising from unit pricing practices, and to provide 'good practice' guidance in relation to them. The Guide covers the following issues:

Management issues in unit pricing:

    • risk management culture
    • unit pricing issues common to many products (eg forward or historic pricing; transaction costs; backdating; batching, etc)
    • additional unit pricing issues for products with complex structures (eg 'fund of fund' structures; performance fees, etc)
    • managing diversity in systems and products
    • managing changes in strategy and structure, product offerings, systems and staff
    • outsourcing unit pricing functions

Technical issues in unit pricing:

    • determining asset values
    • determining tax treatments
    • determining the use of reserves
    • applying accounting standards, including Australian equivalents of International Financial Reporting Standards

Consumer issues in unit pricing:

    • providing information about unit pricing
    • managing complaints
    • managing errors and compensation.

An overview of the key issues, and the accompanying 'good practice' guidance, is provided in the attachment. For further details on each of these issues, you should refer to the relevant sections of the Guide.

Return to top

Does the Guide affect IFSA Standards?

The Investment and Financial Services Association (IFSA ) has welcomed the release of the Guide and considers the guidelines to reinforce IFSA's existing standards No. 8 (Scheme Pricing) and 9 (Valuation of Scheme Assets and Liabilities) and Guidance Note 4 (Incorrect Pricing of Scheme Units – Correction and Compensation).

However, as the ASIC/APRA Guide does not expressly refer to or endorse the IFSA standards, it should not be assumed that continuing to comply with the IFSA standards will necessarily satisfy all of the new Good Practice Principles. In particular, the Good Practice Principles relating to compensation do not adopt a minimum dollar materiality threshold as set out in the IFSA Guidance Note, and ASIC/APRA expect product providers to comply with the Guide when considering compensation matters.

More information?

For more information, please see the following:

Unit Pricing – Guide to good practice, Joint ASIC and APRA Guide, November 2005

ASIC Media Release 05-344, APRA and ASIC release guide to good practice in unit pricing, 3 November 2005

ASIC Media Release 04-424, ASIC and APRA consult the funds management industry on good practice in unit pricing, 23 December 2004

Unit Pricing – Guide to good practice, Joint ASIC and APRA Consultation Paper, December 2004

Return to top

For further information, please contact:

Return to top

Tweet or bookmark with
Tweet this article

What are these?

 

Recent Funds Management - Real Estate & Superannuation publications