Enhanced Fee Disclosure

Matthew Bransgrove has created this compillation of the law relating to Enhanced Fee Disclosure in Product Disclosure Statements. Should you have any questions about enhanced fee disclosure, or need help drafting a PDS please contact Matthew.

Enhanced Fee Disclosure regime
Common problems
Corporations Act
Corporations Regulations
Schedule 10 to the Regulations
Regulatory Guide 97
Regulatory Guide 168
Regulatory Guide 182
Class order 04/1430

Enhanced Fee Disclosure regime

  1. The Enhanced Fee Disclosure Regime commenced on 1 July 2006 . Judging from the Product Disclosure Statements currently on offer most funds seem to have misunderstood the regime.
  2. It is essential that this misunderstanding be rectified; otherwise funds are giving to ASIC a pretext for a stop order, as well as exposing themselves and their officers, to actions for breaches of the law and compensation from investors.

Common problems
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  1. A common mistake is to believe that if the borrower pays a fee that it need not be disclosed. This flies in the face of s 1013D(1)(d)(iii), Clause 102, Clause 104, Clause 218(2). Moreover, a trustee may only profit from a trust if the beneficiaries have provided their express informed consent.
  2. A common mistake being made is in relation to the Management Costs Section of the Fees and Costs Template (prescribed by clause 202 of Schedule 10 to the regulations ). Most funds seem to confuse the statutory definition with their own internal definition of management fee and disclose the latter.
  3. A common mistake is to have fees but not particularise them. Apart from being a breach of 1013D(1)(d)(iii) arguably they cannot be collected. 
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  4. Section 1013D(1)(d) requires a PDS to contain information about:
    1. the cost of the product;
    2. any amounts that will or may be payable by a holder of the product after its acquisition, and the times at which those amounts will or may be payable; and
    3. if the amounts paid in respect of the financial product and the amounts paid in respect of other financial products are paid into a common fund – any amounts that will or may be deducted from the fund by way of fees, expenses or charges.
  5. Section 1013D(1)(e) specifies that if the product will generate a return then the PDS must contain information about any commission, or other similar payments, that will or may impact on the amount of such a return.
  6. Section 1013D(1)(k) requires a PDS to contain information required by the regulations.
  7. Section 1013D(1)(m) provides that, unless regulations prescribe otherwise, amounts disclosed in accordance with paragraphs 1013D(1)(d) and (e), are to be stated in dollars.
  8. Section 1013D (4)(c) empower the regulations to prescribe a more detailed statement of the information that is required under subsection (1).
  9. Section 1015C(5)(b) specifies that the regulations may provide for the presentation, structure and format for a PDS or SPDS.

Corporations Regulations
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  1. Regulation 7.9.15A amends 1013D(1)(m) of the Act adding the words “and a determination by ASIC”.
  2. Regulation 7.9.16L provides that a Product Disclosure Statement must include the details of fees and costs set out in Part 2 of Schedule 10.
  3. Regulation 7.9.16N(1) provides that the information required by Section 1013D(1)(d) of the Act, “must be set out single section of the Product Disclosure Statement ( fees section ) with the heading ‘Fees and other costs’.
  4. Regulation 7.9.16N(2) provides that the fee section of a Product Disclosure Statement must include the following details Part 2 of Schedule 10:
    1. a fees and costs template;
    2. a worked example of the fees and costs in relation to the product during a single year’s holding of the product; and
    3. a boxed Consumer Advisory Warning.

Schedule 10 to the Regulations
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  1. Clause 102 of Schedule 10 to the Corporations Regulations defines Management Costs as including :
    1. in relation to a product or fund – an amount payable for administering the fund;
    2. for a custodial arrangement – the cost involved, or amount paid or payable, for gaining access to, or participating in, the arrangement;
    3. distribution costs (means the costs or amounts paid or payable for the marketing, offer or sale of a product);
    4. other expenses and reimbursements in relation to a product or fund;
    5. amounts paid or payable for investing in the assets of the fund;
    6. amounts deducted from a common fund by way of fees, costs, charges or expenses, including:
      1. amounts retrieved by an external fund manager or a product issuer; and
      2. amounts deducted from returns before allocation to the fund;
    7. estimated performance fees (an amount paid or payable, calculated by reference to the performance of a product or fund);
    8. any other investment – related expenses and reimbursements, including any associated with custodial arrangements.

      and excluding:

    1. a contribution fee (an amount paid or payable against the initial, and any subsequent, contributions made into a product by or for a retail client for the product);
    2. transactional and operational costs;
    3. an additional service fee (adviser service fees, special request fees and switching fees);
    4. an establishment fee (means an amount paid or payable for the establishment of a client’s interest in a product);
    5. a switching fee (means an amount paid or payable when a product holder transfers all or part of the product holder’s interest in the financial product from one investment option to another);
    6. a termination fee (means an amount paid or payable on the disposal of all interests held in a financial product);
    7. a withdrawal fee (means an amount, other than a termination fee, paid or payable in respect of: a withdrawal; or the disposal of an interest in a product;
    8. costs (related to a specific asset or activity to produce income) that an investor would incur if he or she invested directly in the asset;
    9. incidental fees (means costs or amounts, other than costs or fees defined in this clause, that are: paid or payable in relation to the product; and not material to a retail client’s decision to acquire, hold or dispose of his or her interest in the product).

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  2. Clause 104:
    1. defines Indirect Cost Ratio (ICR) as the ratio of the fund’s management costs, that are not deducted directly from a member’s or product holder’s account, to the fund’s total average net assets.
    2. requires that the ICR for a Product Disclosure Statement is to be determined for the financial year before the Product Disclosure Statement is issued.
  3. Clause 202 prescribes:
    1. The preamble to the template for the single fee structure.
    2. The layout for the template for the single fee structure.

      The preamble relevantly reads:

      “This document shows fees and other costs that you may be charged. These fees and costs may be deducted from your money, from the returns on your investment or from the fund assets as a whole. You should read all the information about fees and costs because it is important to understand their impact on your investment.

      Taxes and insurance costs are set out in another part of this document.

      You should read all the information about fees and costs because it is important to understand their impact on your investment.”

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  1. Clause 203 states that material in the preamble to the template should only include matters that are relevant to the product. It then gives the example: “Insurance costs will generally not be relevant to a managed investment product”.
  2. Clause 204 explains how to present the amounts being:
    1. If a particular fee or cost is not charged, ‘nil’, ‘zero’, ‘0’ or ‘not applicable’ (if it would not be misleading) must be written in column 2 opposite the type of fee or cost.
    2. If it is not possible to determine a single amount or percentage of a fee or cost, it may be written as a range of fees or costs.
    3. If the exact amount of a fee or cost paid or payable is not known, an amount that is a reasonable estimate of the amount attributable to the retail client must be shown and must be clearly designated as an estimate.
    4. If an amount or cost has a number of components, the amount of each component must be listed separately.
    5. A cost or amount paid or payable must include, if applicable GST less any reduced inputs tax credits; and stamp duty.
  3. Clause 207 explains how to present the “How and when paid” column, which must include:
    1. how the fee is or will be recovered, for example by deduction from:
      1. the member’s investment balance; or
      2. the fund’s assets; or
      3. contributions; or
      4. withdrawals; and
    2. the recurrence of the recovery of the fee; and
    3. the timing of the recovery of the fee.
  4. Clause 208 states that must clearly indicate which fees and costs are negotiable.
  5. Clause 209 lists information which must be contained under the heading “Additional explanation of fees and costs”. These include relevantly:
    1. worked examples (if appropriate);
    2. additional details of incidental fees (if appropriate);
  6. Clause 210 prescribes that the worked example of annual fees and costs:
    1. must contain fees and costs in accordance with the table in clause 212; and
    2. must be set out using the headings and the form in clause 212; and
    3. must be included in the ‘Fees’ section of a Product Disclosure Statement, following the fees and costs template.
  7. Clause 212 provides a worked example of annual fees and costs table as follows:

* Additional fees may apply: Establishment fee — $50 And , if you leave the fund early, you may also be charged withdrawal fees of between 0 and 5{b7985816e4c2d38c24539d766f06a191377b02d9d0f358b24d1839690147e1c7} of your total fund balance (between $0 and $2 500 for every $50 000 you withdraw) (Top)

  • Clause 214 requires that the fees and costs stated in the worked example must be the typical ongoing fees that apply to the product.
  • Clause 215 provides that if the minimum balance required to enter a fund is greater than $50,000, the example must be based on an amount that is a multiple of $50,000 that exceeds the minimum entry balance that the fees and costs stated in the example must be the typical ongoing fees that apply to the product. Thus if a fund has a minimum entry balance of $65,000, the relevant amount for the example of annual fees and costs is $100,000.
  • Clause 217 provides that the amounts of contribution fees are to be applied against an additional $5,000 contribution.
  • Clause 218 prescribes how the Management costs section should be completed in the worked example.
  • Management costs that are not deducted directly from a member’s or product holder’s account must be calculated using the indirect cost ratio for the fund.
  • Any percentage-based management costs that are deducted directly from a member’s or product holder’s account should be added to the indirect cost ratio amount.
  • Dollar-based management costs that are deducted directly from a member’s or product holder’s account must be shown separately in the management costs cell.
  • Clause 219 prescribes that the example of a withdrawal fee or a termination fee is to be applied against $50,000 or an amount that is a multiple of $50,000 if clause 215 applies (contributions during the year should not be counted).
  • Clause 220 prescribes that if a fund does not have a balanced investment option or a default investment option, the example should be based on the investment option under which the fund has the most funds invested.
  • Clause 221 of prescribes a Consumer Advisory Warning be included in the PDS:

EXAMPLE

BALANCE OF $50,000 WITH A CONTRIBUTION OF $5,000 DURING YEAR

Contribution Fees

0-4{b7985816e4c2d38c24539d766f06a191377b02d9d0f358b24d1839690147e1c7}

For every additional $5,000 you put in, you will be charged between $0 and $200.

PLUS Management Costs

1.3{b7985816e4c2d38c24539d766f06a191377b02d9d0f358b24d1839690147e1c7}

And, for every $50,000 you have in the fund you will be charged $650 each year.

EQUALS Cost of fund

 

If you had an investment of $50,000 at the beginning of the year and you put in an additional $5,000 during that year, you would be charged fees of from:
$650 to $850*
What it costs you will depend on the investment option you choose and the fees you negotiate with your fund or financial adviser.

DID YOU KNOW?
Small differences in both investment performance and fees and costs can have a substantial impact on your long term returns.
For example, total annual fees and costs of 2{b7985816e4c2d38c24539d766f06a191377b02d9d0f358b24d1839690147e1c7} of your fund balance rather than 1{b7985816e4c2d38c24539d766f06a191377b02d9d0f358b24d1839690147e1c7} could reduce your final return by up to 20{b7985816e4c2d38c24539d766f06a191377b02d9d0f358b24d1839690147e1c7} over a 30 year period
(for example, reduce it from $100 000 to $80 000).

You should consider whether features such as superior investment performance or the provision of better member services justify higher fees and costs.
You may be able to negotiate to pay lower contribution fees and management costs where applicable. Ask the fund or your financial adviser.
TO FIND OUT MORE
If you would like to find out more, or see the impact of the fees based on your own circumstances, the Australian Securities and Investments Commission (ASIC) website ( www.fido.asic.gov.au ) has a managed investment fee calculator to help you check out different fee options.

  1. Clause 222 requires that the Consumer Advisory Warning be located at the beginning of the fees section of the PDS.

Regulatory Guide 97
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  1. ASIC’s Regulatory Guide 97 Enhanced fee disclosure regulations: Questions and answers provides ASICs approach to the enhanced fee disclosure regulations above.
  2. A7 states: “Additional voluntary information should not be included in the fees and costs template or in the worked example of annual fees and costs. However, in limited circumstances some tailoring of the fees and costs template and the example of annual fees and costs can occur. Examples might be where:
    1. gross fees do not accurately reflect the cost of a product to the consumer- in this case, a product issuer may also wish to include the net fees with a simple explanation;
    2. a total figure for management costs is inserted – in this case, a product issuer may also choose to show how that cost is split; or
    3. management costs do not affect a consumer’s investment (e.g. in a pure defined benefit super fund) – in this case, a product issuer may wish to include a note explaining this.

When including additional information, product issuers should bear in mind the requirement to show information in a clear, concise and effective manner: see s1013C(3) of the Corporations Act 2001. In particular, product issuers should be careful not to complicate disclosure by including large amounts of information. We will closely monitor any tailoring of these PDS requirements by product issuers to ensure that the ability of consumers to effectively compare products is not affected.”

  1. A7 states: “ASIC does not consider there are any circumstances where prescribed information can be omitted from the fees and costs template, the example of annual fees and costs, or the boxed consumer advisory warning. However some Responsible Entities may need to adapt the example of fees and costs to take into account the nature of the scheme and its fee and cost arrangements”.
  2. A10 states: “Where a correction or update of fee and cost information is provided in a supplementary PDS. Product issuers should include in the supplementary PDS a complete fees and costs template and, where necessary, a complete example of annual fees and costs reflecting the amended fees and costs. This is to assist consumers to understand the fees and costs of a product by not having to look in two places for information included in the most up-to-date template.”
  3. A13 states that contingent fees or costs cannot be excluded from the calculation of management costs. ASIC “Considers contingent fees and costs to be part of management costs. This is because management costs are intended to capture all relevant costs involved in managing the fund and deriving an investment return for product holders. These include amounts that are chargeable but which may not be charged in the particular circumstances of all product holders or of the fund or scheme. These amounts may be contingent.

    However, contingent fees or costs will not be management costs where they fall within an exclusion. See clause 102(2) of Schedule 10 for costs that are not management costs. Issuers can provide an explanation of the contingent costs, and the circumstances in which they are likely to be charged, in the ‘Additional explanation of fees and costs’ section of the PDS.

  4. B3 explains that the product issuer should use the most current management costs information available for determining the ICR at the time that the PDS is issued. Typically, this will be management costs information for the last financial year ended before the issue of the PDS.

    However, where current or prospective fee information is available which differs to that applying over the financial year before the PDS is to be issued, this most recent fee information should be used to calculate the management costs and ICR. This may also be required to ensure the PDS is not misleading.

  5. D1 explains that:
    1. the enhanced fee disclosure regulations require PDSs for managed investment products to provide consumers with a prescribed worked example of the application of fees and costs in relation to the product during a single year’s holding of the product.
    2. Where the nature of the product and its fees and costs arrangement supports disclosure in the prescribed format, that format must be used and prescribed information cannot be omitted.
    3. In other cases, we think that it would be good practice for the product issuer to adopt a format that provides consumers with a clear example or examples of the application of the fees and costs arrangements of the product. Any adapted format for the example of annual fees and costs should bear in mind the objectives of the regulations and continue to reflect the central features of the prescribed format in Schedule 10 including:
      1. the placement of the example of annual fees and costs in the Fees section of the PDS;
      2. making the minimum necessary adaptations to the required preamble to the worked example;
      3. that the fees and costs should be the typical ongoing costs that apply to the product as required to be disclosed in the worked example;
      4. if contributions are clearly not relevant, the adapted disclosure need not refer to contributions as would otherwise be required in the worked example;
      5. that management costs are calculated in accordance with the definition in the enhanced fee disclosure regulations;
      6. that the adapted format note any establishment and withdrawal fees that may apply consistent with the prescribed content and format for the worked example.

    ASIC also expects that in adapting the disclosure product issuers will provide a clear, concise and effective description of the annual application of fees and costs for the product and make such disclosures as necessary to ensure it is not misleading or deceptive. For example, the fee and cost structure for a certain managed investment product may mean that in a typical ongoing year there are no fees and costs applied, but other fees and costs are applied at or towards the end of the product holding (eg harvest fees for agricultural schemes). In this case, we would expect the adapted disclosure of the annual application of fees and costs to clearly refer to these so that the description of the cost free typical ongoing year refers to these later fees and costs

  6. D1 explains that Product issuers of contributory mortgage schemes may wish to split fee disclosure information by placing general fee information in a PDS and transaction-specific fee information in a supplementary PDS. However, if product issuers of contributory mortgage schemes split fee information, ASIC thinks it is good practice for all fee information required by the regulations to be set out together in the supplementary PDS. This might mean some repetition of general fee information in the supplementary PDS. However, this helps consumers to understand the fees and costs of a product by not having to look in two places for that information. This guidance is also relevant for issuers of contributory mortgage schemes who use a two part PDS.

Regulatory Guide 168
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  1. ASIC’s Regulatory Guide 168 (“Product Disclosure Statements (and other disclosure obligations)”) provides ASICs approach the drafting of PDS generally.
  2. RG168.140 explains that when assessing whether a PDS appears to be misleading or deceptive, ASIC will pay particular attention to:
    1. statements about future matters such as forecasts (they should have reasonable grounds);
    2. statements about past performance;
    3. statements of opinion (they should be formed honestly and reasonably);
    4. the likely overall impression of the PDS;
    5. the use of illustrations or examples to highlight an aspect of the disclosure being provided;
    6. the use of disclaimers;
    7. ambiguous statements;
    8. whether statements draw inaccurate, unfair or inappropriate comparisons;
    9. the currency of information; and
    10. how information is set out and the prominence given to particular pieces of information.

Regulatory Guide 182
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  1. ASIC’s Regulatory Guide 182 (“Dollar disclosure”) illuminates ASICs approach to dollar disclosure.
  2. Dollar disclosure is required for section 1013D(1)(d) and 1013D(1)(e) by 1013D(1)(m).
  3. RG182.21 states:

    If we do give you relief you will need to comply with the conditions applying to your relief. You will also need to meet your general disclosure obligations:

    1. the obligation to present information in a clear, concise and effective manner;
    2. the obligation to ensure that a disclosure document is not misleading;
    3. the obligation to comply with provisions that are not subject to our determination powers including (but not limited to) s1013E … and
    4. the ability to include additional information (…1013C(1)(b)(i)), provided the above obligations are satisfied.
  4. RG182.22 states:

    If you are relying on a determination, you must include worked dollar examples in the disclosure document unless that would be inappropriate.

  5. RG182.24 states:

    In administering the law, we will take the view that it will rarely be inappropriate to include worked dollar examples where you are relying on a determination, except to the extent that including them would be highly likely to confuse or mislead consumers. We expect worked dollar examples will almost always be required to illustrate … the costs, fees, charges or expenses payable (directly or indirectly) by the consumer.

  6. RG182.24 states:

    We expect that product issuers and providing entities can generally avoid confusing or misleading consumers by ensuring that worked dollar examples are accompanied by warnings that make clear the nature and limitations of the examples (e.g. that they are illustrative only).

  7. RG 182.26 states:

    It would be highly desirable if common or standard formats for worked dollar examples were developed by industry to ensure the policy objectives of the law are met through clear, concise and effective disclosure. We may decide to mandate the required form of worked dollar examples if industry does not develop appropriate standards in this area

  8. RG 182.28 states:

    Providing entities and product issuers relying on ASIC relief should keep records demonstrating that:

    1. they are entitled to rely on the relief; and
    2. they are complying with the conditions applying to that relief.
  9. RG 182.31 states:

    Class Order (CO 04/1430) Dollar disclosure: Unknown facts or circumstances grants relief from the obligation for information to be disclosed as an amount in dollars in a PDS or SOA where the amount depends, in whole or in part, on a fact or circumstance that:

    1. is not known to the providing entity or responsible person (as the case may be) by the time the preparation of the document is completed; an
    2. could not have been found out by that person.
  10. RG 182.32 states:
    1. annual management fees applying to managed investment products or … (where the amount of such fees is dependent on the future size of the fund).

Examples of items envisaged by CO 04/1430 are:

  1. RG 182.33 states:

    If you are relying on CO 04/1430, you must either:

    1. describe the item as a percentage of a specified matter; or
    2. if the item is not calculated by reference to a percentage of one or more matters—provide a description of the method you will use to calculate the amount. (We consider that a description of the method of calculating a cost, fee, charge or expense borne by the client will generally be satisfactory provided it enables the maximum amount payable to be ascertained.)
  2. RG 182.34 states:

    In either case (a) or (b) above, you must provide worked dollar examples. The only exception is where it would be inappropriate to provide worked dollar examples. We consider that it will rarely be inappropriate to include worked dollar examples, except to the extent that including them would be highly likely to confuse or mislead consumers.

  3. RG 182.35 states:

    For example, under CO 04/1430, a PDS for a managed investment product would not need to disclose the amount in dollars of its annual management fee if the amount of that fee was dependent, at least in part, on the future (unknown) size of the fund. The PDS would, however, have to disclose the fee as a percentage of a specified matter or, if that is not possible, a description of the method of calculation of the fee would need to be disclosed, together with worked dollar examples.

Class order 04/1430
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  1. Paragraph 3 of Class Order 04/1430 reads:

    Under subregulation 7.9.15B(1) of the Regulations ASIC determines, for the avoidance of doubt, that it is not possible to state in a Product Disclosure Statement (the PDS) information (the numeric PDS information) to be disclosed in accordance with paragraphs 1013D(1)(b), (d) or (e) of the Act as an amount in dollars where the amount depends, in whole or in part, on a fact or circumstance that, by the time the preparation of the PDS is completed

  2. is not known to the responsible person; and
    1. could not have been found out by the responsible person.
  3. Paragraph 4 of Class Order 04/1430 reads:

    Under subregulation 7.9.15B(2) of the Regulations, ASIC determines that it is not possible to state in a PDS numeric PDS information as an amount in dollars or as a percentage of one or more specified matters where:

    1. the amount depends, in whole or in part, on a fact or circumstance that by the time the preparation of the PDS is completed:
      1. is not known to the responsible person; and
      2. could not have been found out by the responsible person; and
    2. the numeric PDS information is not calculated by reference to a percentage of one or more matters.

Corporations Amendment Regulations 2005 (No. 1) (Regulations)

 

Clause 201 prescribed a slightly different form for multiple fee options – this has been ignored for the purposes of this paper although some mortgage funds (such as those running a contributory and a pooled fund off the same PDS will need to use it).

 

Words in italics have sub-definitions in brackets that are taken from definitions given in Clause 101 of Schedule 10.

 

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