Fees and Costs Headache Continues

In our last blog on the fees and costs saga, we held the hope that more clarity would follow in relation to ASIC’s announcement of the deferral of the end of the transition period to implement updated fees and costs disclosure requirements in product disclosure statements (from 1 February 2017 to 30 September 2017).

While the release of ASIC Corporations (Amendment) Instrument 2016/1224, and associated forms and instructions to take advantage of the deferral (published on the ASIC website on 19 December 2017) do provide some more clarity, they also contain some surprises and significant changes.

The Instrument is not confined to giving effect to the deferral of the fees and costs deadline.

The Instrument makes a number of changes to the substantive requirements in Class Order [CO 14/1252] including:

• introducing specific provisions dealing with borrowing costs (which extend to borrowing costs of an interposed vehicle). While the treatment of borrowing costs has more recently formed part of the guidance available on ASIC’s website, the inclusion of this concept in the law is new;
• modifying the base definition of indirect costs to clarify that an amount is only an indirect cost if the amount would be an investment fee or administration fee of a super entity or a management cost of a managed investment product, if the amount had been paid out of the entity or product;
• modifying the operation of the Asset Test for determining whether a body, trust or partnership is an interposed vehicle, so that securities or other financial products that confer control of another entity don’t have to be listed to be disregarded;
• modifying the operation of the PDS Test for determining whether a body, trust or partnership is an interposed vehicle, so that a retail client’s expectations can be based on information other than a product disclosure statement;
• modifying the definition of transactional and operational costs to include costs incurred in or by an interposed vehicle (if the costs would be transactional and operational costs if incurred by a super entity or managed investment product) excluding, in the case of superannuation, borrowing costs or certain costs associated with derivative financial products;
• inserting a requirement that superannuation products provide details about borrowing costs (including the amount of such costs) in the Additional Explanation of Fees and Costs in a product disclosure statement or incorporated information. These details must be provided on a backward-looking basis (where the relevant product or option has at least an 11 month history in the previous financial year);
• modifying (and re-structuring) the definitions of administration fee, investment fee and switching fee that must be shown in the defined fees text included in product disclosure statements or incorporated information. The changes to the definitions of administration fee and investment fee make clear that borrowing costs are not included, however the restructuring of the definitions may have other potential implications for the calculations of these fee amounts.

In relation to existing products, aspects of the Instrument which constitute "new law" do not have to be adhered to until 30 September 2017.

Product Disclosure Statements relating to new products that commence to be offered on or after 19 December 2016 will need to comply with the amended [CO 14/1252] from the time the statement is first given.

There are some errors in the Instrument, for example, the revised definition of Investment fee includes a typographical error in paragraph (b)(iii).

The deferral of the fees and costs deadline is also expressed in much more complex terms than was envisaged by ASIC’s announcement.  However, there have been some positive changes. For example, the information that must be provided to ASIC before 1 March 2017 (if an issuer wants to rely on the extended deadline) does not need to:

• relate to all investment options;
• include borrowing costs; or
• relate to products which will not be offered after 30 September 2017.

The specified information about fees and costs, that would be required to be included in a product disclosure statement if the statement complied with updated fees and costs requirements, and that must be given to ASIC appears to be confined (in the case of super) to the MySuper product (where relevant) and one other investment option (based on its size). However, there is some discrepancy between the language used in the Instrument and the ASIC’s published instructions in this regard. Also, ASIC can request information in relation to other investment options. And if the additional information is not provided, the updated requirements will apply from the date that is 6 business days after ASIC made its request.

The complexity in the Instrument is compounded by aspects of ASIC’s prescribed form for providing specified information about fees and costs to ASIC. Amongst the information that must be provided to ASIC is an amount of transactional/operational costs and must be accompanied by a declaration (by the person authorized to submit the information to ASIC for a product issuer) that the amounts advised to ASIC (based on the deferred updated requirements) are reasonable estimates and (significantly and, potentially, problematically) that the amounts shown in the current product disclosure statement are correct.

It will take some time to digest the unexpected intricacies of the Instrument and, consequently, this may provide another incentive for product issuers to defer implementation of the reforms until 30 September 2016.