An external review commissioned by the Australian Securities and Investments Commission has found Australia’s Regulatory Guide 97 fees and costs disclosure regime for super funds is failing to provide practical comparison tools to consumers, despite being more onerous in many ways than disclosure regimes in other countries.
While noting ASIC’s RG 97 is a “notable improvement” for consumers over what existed before its implementation in September last year, the report states that those looking to compare products can still do so only by comparing Product Disclosure Statements – “a laborious and time-consuming exercise that most consumers would likely avoid or short-cut”.
In November last year, ASIC commissioned independent expert Darren McShane to conduct the review following widespread contention among industry and retail super funds over how fees should be disclosed.
Industry funds that hold significant investments in unlisted assets complained the RG 97 requirements would push costs up. There was also disagreement over whether investment platforms should be forced to disclose consolidated costs that included the fees for using the platform in addition to those for the investments to which they offered access.
McShane’s report states thta the breadth and intensity of reactions received during industry engagement, and the fact that ASIC committed to the external review, “suggest that some directional change should be considered…if this can be done in a manner that is consistent with the overall, higher level objectives of the disclosure regime.”
With the primary objective being to provide consumers with better information that can guide more informed decisions, the existing requirements could be re-considered along the lines of “parameters such as relevance, reliability and the extent to which the item is consistent with consumer expectations”, the review states.
There should also be an emphasis on simplifying available data so it can better support consumer decision-making, the report states.
In comparison with other disclosure regimes around the world, Australia’s does turn out to be more onerous in a range of areas.
Investment operational expenses, such as property operating costs and borrowing costs, “do not appear to be within the contemplation of consumer-level fee and cost disclosure regimes anywhere except in Australia”, the report finds.
While parsing out fees and costs from underlying investment structures is done in some jurisdictions, they all adopt a simpler test than Australia’s for identifying which types of structures must do this.
Transaction cost information is generally not included in simplified fee disclosure, but there is a trend in Europe towards doing so, the review finds. And periodic account disclosure to members is generally more inclusive in Australia than elsewhere, particularly when it comes to including “approximated, apportioned impacts of non-account level fees and charges”.
Suggested changes to disclosure
The report takes a hard look at two elements of Australia’s disclosure regime: the fee template and fee example in the Product Disclosure Statement. While these are the primary comparison tools available to consumers, they contain “numerous limitations that severely inhibit” this role, the review finds.
Comparing products by using the PDS of each would be too laborious for most consumers; variations in presentation make it hard to use fee templates for effective comparison across products or providers, despite the standardisation already required, the report finds.
And the fee example is calculated only for a single MySuper product or MIS balanced investment option. This represents only a small fraction of available options.
“Whilst this may cover the most commonly used, default option, the rather perverse outcome of this is that, as a comparison tool, the fee example is most usable for those who do not make choices and does not well serve the needs of those who do make choices,” the review states.
It recommends ASIC look into developing a searchable consumer-facing facility that compares fee and cost information extracted from PDS. ASIC should also work with industry to improve consistency in the way fee information is set out, it finds.
Bank platforms a sticking point
The way fee disclosure tools apply to platforms that provide access to investment products was a sticking point in the industry, the report states, with a “significant divergence of views between different industry sectors”.
The report suggests tabulating key fees and costs of accessible managed investment schemes within the platform’s investment menu documents, and increasing consistency across the industry in the location and expression of warnings that make it clear there are fees to access investments on the platform, in addition to fees within those investments.
This is not enough for some in the industry. A statement from Industry Super Australia says that more than $500 billion is invested through platforms, typically owned by banks and wealth management groups, and their exemption from consolidated investment costs disclosure remains an issue.
“We remain concerned that the business practices of platforms are being accommodated over comparable and understandable disclosure for consumers,” Industry Super public affairs director Matt Linden says.
McShane engaged with more than 120 stakeholders to produce the 232-page report.
ASIC says in a statement it agrees changes to disclosure rules are in the interests of consumers and industry, and it is “keen to ensure any changes are practicable for industry while providing transparency and useable comparability for consumers”.
In the first half of next year, ASIC will release a consultation paper with a proposed response to the review’s findings.