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Funds Management - Real Estate & Superannuation

Focus: Funds Management – September 2004

Fee disclosure regulatory changes

In brief: Senior Associate Justine Woodford discusses what's happening now with fee disclosure in the financial services sector and where things are heading.

In recent months, there has been much discussion in the financial services sector about the issue of fee disclosure. The Federal Government has made new regulations and guidelines in this area and the Australian Securities & Investments Commission (ASIC) has released details of its proposed policy to implement the Federal Government's new regulatory requirements. (For a more detailed discussion of this topic, refer to our FSR website.)

Some background

On 25 June 2004, the Dollar Disclosure Regulations 1 (the regulations) were gazetted. The finalisation of these regulations has ended, at least in the short term, months of debate and negotiation between the Federal Government, the opposition parties and industry bodies. The regulations seek to achieve meaningful and adequate disclosure in disclosure documents for financial products that have an investment component (such as superannuation funds and other managed investments) (the disclosure documents) and that are required to be given to retail investors under the FSR regime.2

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What the regulations say

Briefly, under the regulations, licensees and their representatives and product issuers are obliged to disclose various fees, benefits, costs and interests as amounts in dollars in the disclosure documents. However, these items need not be disclosed as amounts in dollars where ASIC makes a determination that, for a compelling reason, dollar disclosure is not possible, would be unreasonably burdensome (including for a specified period of time) or is contrary to a retail client's interests. If such a determination is made, the item needs to be disclosed as a percentage or description instead. The thinking behind these new requirements is that it will be easier for consumers to understand investment product fees and charges and they will be in a better position to compare different financial products before investing.

To give those required to comply sufficient time to meet their new disclosure obligations, the regulations provide for a six-month transitional period (so that, in effect, the obligations commence on 1 January 2005). However, to the extent that licensees and their representatives and product issuers are in a position to comply with the new requirements before 1 January 2005, they are encouraged to do so.

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Other guidance on disclosure compliance

The Federal Government and ASIC have released additional materials and guidelines that are designed to complement the requirements imposed on licensees and product issuers under the regulations. These include:

  • the ASIC superannuation calculator and user guide to help consumers calculate the long-term effect of fees and investment decisions in relation to superannuation funds;
  • ASIC's revised version of its good practice model for fee disclosure in the product disclosure statements of investment products (originally released in August 2003); and
  • the Federal Government's package of reforms that supplement the regulations and include an information booklet that incorporates the use of ASIC's superannuation calculator and the templates and guidelines included in ASIC's good practice model, and also introduces requirements to include a single fee comparison table and a consumer advisory warning in product disclosure statements. (The Federal Government has said that it will make further regulations to mandate the new measures contained in its package of reforms.)

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ASIC's proposed policy

As noted above, under the regulations, ASIC has the power to make determinations that, for compelling reasons, disclosure of various fees and benefits as amounts in dollars in disclosure documents would be unreasonably burdensome (including for a specified period of time) or is contrary to a retail client's interests. ASIC has recently released a policy proposal paper 3 that discusses how ASIC will:

  • administer the regulations;4
  • issue dollar disclosure determinations on a class basis and assess applications for determinations; and
  • approach transition.
Class determinations

ASIC proposes to make some determinations on its own initiative to cater for generic cases, for example where dollar disclosure is not possible because:

  • the amount depends on facts not known by and beyond the control of the providing entity or issuer; and
  • the item is an intangible client benefit (eg product benefits whose value cannot be converted into dollars).

Where these class determinations apply (which is more likely to be in the case of an industry or a group, rather than an individual), ASIC will permit disclosure in the disclosure documents (as applicable) as either a percentage or, if percentage disclosure is not possible, a description or narrative of the means by which the fees and benefits can be calculated. Worked dollar examples based on realistic fact scenarios will also be required. ASIC proposes to structure the class determinations to minimise potential opportunities 'to deliberately and artificially avoid' disclosure in dollar terms and it will retain the power to notify a person that they are no longer entitled to rely on a class determination.

Applications for an ASIC determination

ASIC will require applicants (individuals or groups) to provide 'compelling reasons' (which may include specific circumstances relating to the type of financial product and any unique or exceptional circumstances applicable to the providing entity, the product issuer and relevant third parties) why compliance with the regulations is not possible.

ASIC does not propose to make any class determinations on its own initiative under the unreasonably burdensome or contrary to clients' interests powers so that those affected must apply to ASIC for a determination. Again, ASIC is looking for 'compelling' reasons to make such determinations. For example, an unreasonable burden may exist where the burden of compliance is extreme or out of all proportion to the benefits of dollar disclosure. It may be contrary to clients' interests where compliance is likely to be prohibitively expensive and might affect the clients' investment (although it seems ASIC may require even more cogent arguments on this issue).

Extension of the transitional period

ASIC has said that it may be prepared to make a determination that would provide for a short, conditional extension of the transitional period from the commencement of the regulations (on 1 January 2005) until 28 February 2005. This is on the basis that some licensees and product issuers have already indicated to ASIC that they will have difficulty complying with the regulations by the commencement date. In these cases, ASIC is considering requiring those affected to 'self-certify' that they have reasonable grounds to believe that it would be unreasonably burdensome for them to comply fully by the commencement date but that they will be in a position to comply by 28 February 2005.

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Where to next?

ASIC is encouraging consumers and industry to comment on its policy proposal paper. Comments are due by 7 September 2004.5 ASIC has said that it will announce its decision about any determination on transition by the end of September 2004 and it expects to publish its final policy statement on dollar disclosure in October or November 2004.

We'll keep you informed about further regulatory and policy developments on dollar disclosure. In the meantime, if you have any queries about this or other FSR issues, contact one of our FSR experts.

References
  1. Corporations Amendment Regulations No 6 2004 No 149 (Cth).
  2. The relevant disclosure documents are statements of advice, product disclosure statements and periodic statements.
  3. Dollar Disclosure – ASIC policy proposal was released by ASIC on 10 August 2004.
  4. According to the ASIC policy proposal paper, the fees and benefits covered by the Dollar Disclosure Regulations are product fees, client benefits, and provider benefits and interests.
  5. For details on how to respond, refer to page 2 of ASIC's policy proposal paper.

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