Between January and April, interested parties were invited to provide submissions to ASIC's Review of ASIC Regulatory Guide 97: Disclosing fees and costs in PDSs and periodic statements report.
The report looked at implementing a range of changes to the disclosing of fees and costs for financial products, including changing the ‘fees and costs template’ for superannuation products and managed investment products and changing the treatment of transactional and operational costs, among a swathe of other proposals.
The Financial Services Council has commended ASIC's “significant progress” in reviewing Regulatory Guide 97, which provides guidance on the fees and costs disclosure regime for product disclosure statements and periodic statements.
Jon Ireland, partner at Norton Rose Fulbright and chair of the FSC’s RG 97 Working Group, said: “For some products, such as platform products with many investment options, more work is required to ensure disclosure meets the needs of people buying the product – meaning disclosures need to be appropriate for consumers.”
The FSC’s RG 97 Working Group submission, sent to ASIC on 2 April, stresses the need for greater fee transparency and comparability to help consumers make informed decisions about financial products.*
The FSC noted that, in response to the concern raised that “many platforms disclose only the cost of gaining access to a product, not the cost charged by those issuing the product”, it had suggested to ASIC that platform providers disclose these costs on a voluntary basis.
FSC’s general counsel, Paul Callaghan, said: “We are pleased ASIC took on board feedback that ‘implicit costs’ in a transaction would not be meaningful for consumers.
“In order to comply with fee and cost requirements, product issuers will need to make extensive systems changes; they will also need to ensure disclosure is understandable by customers. The FSC, accordingly, has asked for ASIC to consider a lengthy transitional period after the new requirements have been settled.
“While it is clear there is more to do on these issues, significant progress has been made to date, and we look forward to continuing our engagement with ASIC as drafting and consultation progresses.”
The council last week welcomed the passage of the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Bill 2019, noting that financial products and services providers are now legally obligated to take a “customer-focused approach” when designing and distributing products, which adds “an extra layer of protection” for customers.
FSC chief executive Sally Loane said that while ASIC’s new product intervention power – as introduced in the bill, enabling ASIC to step in to protect customers from inappropriate products if there is a risk of significant detriment – is an important one, the council believes “the greatest consumer benefit comes from quality advice and products appropriate for the goals and needs of individuals”.
The ASIC report also noted that managed investment schemes' product disclosure statements for property or mortgage funds may include variations such as a variety of costs not paid by the member or out of the fund such as fees or costs paid by the borrower like the “loan application fee”, “loan administration fee”, or “early repayment fee”.
Feedback provided to ASIC during its consultation with industry includes that “mortgage funds should not have to disclose fees paid by borrowers as a fee or cost of the fund” and that the regulator “needs to provide further guidance on how mortgage funds should disclose fees paid by borrowers”
“In essence, the concern raised is that such payments should not be disclosed as a component of fees and costs because they are not paid by the investor nor out of the fund as they are paid by the third party. Even where such items are treated as a fee or cost, some complications also arise in relation to the circumstances where the amount should be treated as a transactional and operational cost as opposed to administration/investment fees or management costs,” the report states.
The regulator clarified that the law has “always required that such amounts be included within an appropriate fee element and clause 101A of Schedule 10 has been modified to clarify the application of the principle to indirect costs”.
“The principles behind including such items within fee and cost disclosure is that where an amount is applied to benefit the product by paying for a fee or cost that would otherwise be borne by the product, it should be treated as a fee or cost. The fact that it is paid for by a third party should not affect its characterisation as a fee, cost or other payment,” the ASIC report states.
*This story was updated on 12.04.2019 to clarify that the FSC submission did not focus on mortgage funds.
[Related: ASIC should establish fee registry: Report]