Full disclosure: The dawn of the RG 97 era

Sally Rose

By

03/10/2017

The superannuation industry’s two most senior regulators are rock solid in their conviction that more stringent rules for reporting of fees, costs and performance will lead to better outcomes.

Superannuation funds and investment managers have awakened to the dawn of a new era of transparency when it comes to their obligations to disclose fees and costs – and the transition has not been easy.

From October 1, 2017, most super funds must comply with the Australian Securities and Investments Commission’s (ASIC) new Regulatory Guide 97 (RG 97).

The updated guidance ushers in more onerous rules for how super funds must disclose both direct and indirect fees and costs in their product disclosure statements (PDS) and the periodic statements they provide members.

The final deadline for compliance expired on September 30, 2017, after being pushed out three times. There remain a few particularly problematic areas where ASIC is still prepared to grant an exception, however, such as the new rules for reporting building and facility management costs related to property assets.

More controversially, industry players are divided over whether the RG 97 regime lets providers who distribute their products via retail platforms off the hook.

The struggle to implement RG 97, and its relative merits, were topics of much discussion at the Australian Institute of Superannuation Trustees’ (AIST) annual Superannuation Investment Conference (ASI 2017), held on the Gold Coast, September 6-8.

“While we still have issues with key aspects of RG 97 and will continue to advocate for improvement, it has been pleasing to see ASIC address some of our concerns and defer some of the more contentious requirements,” AIST chief executive Eva Scheerlinck said in her opening address.

RG 97 deadline

ASIC senior executive leader, investment managers and superannuation, Ged Fitzpatrick told the gathering that the corporate regulator was aware of the difficulties many funds have had preparing for the introduction of RG 97, but would be monitoring compliance from October 1.

Analysis of RG 97-compliance information ASIC has already received has shown an increase in the average amount of the fees and costs disclosed across the industry, Fitzpatrick said. Some funds have shown a minimal increase, while others have had a rise of about 100 basis points in the costs they report.

“The average increase across MySuper products was 23 basis points, equating to about $115 a year in additional reported costs,” Fitzpatrick said.

Members of these default super funds will see this increase in reported fees and costs on their next statement, even though they will not be paying any extra. This poses a challenge for the funds’ marketing and communication teams.

Platforms in play

Groups such as AIST have been critical of RG 97 for providing an exemption for platform accounts, which often have thousands of investment products for individuals to choose from.

Platforms are typically operated by the banks and other retail providers, such as AMP Ltd.

Fitzpatrick sought to hose down fears that the new fee and cost disclosure rules would fail to provide people who invest their super via a retail platform with the same level of transparency as other super fund members.

“Contrary to some statements that have appeared in the media, there are no carve-outs for fee disclosures on platforms,” Fitzpatrick said. “To ensure that retail investors are not misled, [product disclosure statements on platforms] will need prominent statements, following our example, on annual fees and costs. The PDS will need to show what the fees and costs are related to the platform, as well as the investments on the list and that the additional fees and costs will be charged by the issuers of these products.”

He said ASIC would like platform providers to show consumers a typical example of the combined effect of the fees for the investments themselves and the costs from the platform.

“An example should be given in terms of its fees and costs and investment strategy for a major portion of the investments selected by the investor rather than the platform,” Fitzpatrick said.

“We encourage platform providers to provide similar information with the cumulative effect of fees and costs for each investment in the list, taking into account the fees and costs of the platform and the fees and costs of the investments selected. This information should be based on what is known, ought to be known, and can be reasonably estimated. Marketing activities will need to ensure there are no unreasonable comparisons.”

Many of the representatives from non-profit funds in the audience remained sceptical about how this would work. It would require a high level of engagement from consumers to read and understand the PDSs of all of the underlying investments they hold via a platform.

But Fitzpatrick was emphatic that ASIC would seek to ensure that RG 97 was implemented across all players in the industry.

“I would emphasise that we are seeking to provide, via RG 97 and other reforms, a level playing field among all forms of investment,” he said.

He also offered assurances that the regulator would not become obsessed with monitoring costs to the exclusion of considering net returns.

Performance matters

“We are very aware that fees and costs are not the only factors that funds should be considering in terms of what they are delivering to their members,” he said. “Asset allocation, investment risk and strategy are clearly also very important, as are elements of services. One area we are very interested in is that the focus should move to looking at net returns, and that if you have consistency and accuracy in terms of fee disclosure, then the focus can shift to net returns.”

He said ASIC would be turning its attention to how to improve reporting of investment performance and he encouraged interested parties to get in touch.

Australian Prudential Regulation Authority (APRA) deputy chair Helen Rowell also addressed the crowd, regarding the prudential regulator’s plans to ramp up its monitoring of super fund performance reporting over the coming months.

“For the year ahead, APRA will be focused on strategic planning and member objectives,” she said. “Looking at business planning, how funds are delivering value for money for members and how they are going to be sustainable into the future.”

Rowell noted that APRA would afford different weighting to different criteria in its assessment of a fund’s performance, to ensure there was not an unhealthy focus on costs.

“Keeping fees low is a good objective, but it is not the be all and end all,” she said. “In fact, sometimes, having slightly higher costs that can provide the right investment performance and services for members is desirable.”

She said APRA would be looking for evidence that funds had investment strategies in place that were well-suited to the needs of their membership, and warned against trying to compare the pricing of high-risk strategies with more conservative options.

All trustees need to be thinking about how demographic and employment trends are affecting their fund in particular, and what that might mean for their investment strategy and other aspects of their operations, Rowell said.

She warned trustees of funds with negative cashflows to be mindful of the implications for their investment strategy and liquidity needs, and also to consider how this would inhibit their ability to invest in systems and technology. Funds with ageing member profiles must reconsider their strategic asset allocation as they move into negative cash flow, Rowell said.

Price of reform

Both Rowell and Fitzpatrick acknowledged funds are dealing with a large volume of regulatory change, but said it was all designed to foster a stronger industry.

A number of conference delegates complained the regulators did not seem to have considered how the expense of implementing more stringent fee and cost disclosures might, itself, contribute to higher costs.

Both regulators said they were aware of this potential conundrum, and encouraged funds to provide more detailed feedback on their compliance burdens.

“The challenge we often face is getting good cost information from industry,” Rowell said. “We do ask in our consultation papers, and maybe people ignore it because it is a standard section, but we very rarely get any meaningful information and that means it is really hard for us to do a rigorous cost/benefit analysis.”

Fitzpatrick said ASIC would also welcome more detailed feedback on the cost of regulatory compliance.