The government’s upcoming rules changes will force super funds to be more detailed and transparent in the way they disclose the underlying assets, fees and costs associated with their portfolios. Complying with the new demands is one of the biggest challenges to confront investment operations teams in decades.

Critics of the new RG 97 rules argue that the heavy burden of compliance is set to create one more obstacle to super funds investing with a long-term mindset, by disadvantaging those with a higher allocation to unlisted assets.

The Australian Securities and Investments Commission’s (ASIC) controversial updated regulatory guidance on fees and cost disclosures (note RG 97) is set to come into effect from October 1, 2017.

JANA executive director John Coombe, one of the most powerful asset consultants in the industry, gives a scathing critique of the new rules.

“Without a shadow of a doubt, the regulators are the biggest barrier to long-term investing,” Coombe says. “They already limit how much illiquidity funds can have and now they are imposing this additional cost to investing in unlisted assets. I am concerned about what they are trying to achieve with RG 97; it’s crazy.”

Many, like Coombe, are worried the compliance challenges will deter funds from investing in unlisted assets. Historically, a higher allocation to unlisted assets has been the key driver of not-for-profit super’s superior average investment returns over the retail super sector.

At the moment, super fund members can typically see what investment managers their fund has mandates with, and find a list of the top 20 stocks and bonds in the portfolio, plus any major real-estate or infrastructure assets in which their fund has a significant stake.

Under the incoming regime, funds will be required to name at least 95 per cent of their underlying holdings, and provide much more detailed data about fees and other costs of particular investments every six months.

This will produce lists with thousands of line items. Also controversial is the exemption for platformbased superannuation providers – a segment of the industry typically controlled by the big banks and other retail wealth managers, such as AMP, that allows individuals to select the specific holdings within their own portfolio.

Industry groups pushed for a heavy watering down of the changes, but won only a delay to allow funds more time to get ready.

Providing members with a detailed breakdown of ‘look-through’ costs, including indirect fees, in their unlisted holdings will be one of the trickiest obligations to meet. Private asset classes are generally traded off market and infrequently, making them difficult to revalue every six months.

Becoming RG 97 compliant is causing grief for heads of investment operations and their back-office teams at super funds all around the country. Those funds without the latest technology and up-to-date data-management processes will be the most at risk of floundering.

On February 17, 2017, the Australian Institute of Superannuation Trustees (AIST), the Association of Superannuation Funds of Australia (ASFA) and the Financial Services Council (FSC) released a Guidance Notice to help funds comply with the regulator’s updated fees and costs disclosure requirements.

Is the industry ready?

TCorp general manager, investment implementation and operations, Jonathan Green, says that while the industry has begun the journey towards implementing more sophisticated and efficient investment operations systems, it still has a long way to go.

He warns that collecting data is just the first step. For this data to be valuable, funds have to be able to glean meaningful information from it, and then make wise decisions about how to use it.

“Whether it’s RG 97 compliance, disclosure of holdings, attribution analysis, or positions of dealing, the next five-plus years of investment operations will be defined by those organisations that can embrace that,” Green says.

TCorp, the investments arm of the New South Wales Treasury, is one of the largest institutional asset owners in the country, with nearly $70 billion in funds under management.

The Australian Prudential Regulation Authority will be responsible, along with ASIC, for monitoring RG 97 compliance.

APRA executive Stephen Glenfield, the regulator’s head of supervision for south-west Australia and chair of its superannuation industry group, argues that the updated rules will improve integrity and transparency.

“You want your members to make an informed choice about what they are doing,” he says. “Why shouldn’t members have transparency?”

Glenfield rejected Coombe’s criticism that the new regime would hinder long-term investing.

“You will never see APRA coming out and talking about short-term results,” he says.

This article first appeared in the February print edition of Investment Magazine. To subscribe and have the magazine delivered CLICK HERE. To sign-up for our free regular email newsletters CLICK HERE.

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