The Australian Securities and Investments Commission (ASIC) has released a Class Order to address fees and costs disclosure obligations in product disclosure statements (PDS) and periodic statements for managed investment and superannuation, or retirement funds, products.

Concerns about the under-disclosure of fees and costs for investment vehicles and performance fee reporting, and the incorrect treatment of management costs have motivated ASIC to create Class Order 14/1252. The requirements will come into effect on February 1 2017.

Though ASIC’s goal is not to create new policy or change disclosure requirements drastically, investors and their lawyers are concerned about the definitions and interpretations of the core concepts in implementing the disclosure obligations.

Indirect costs

Issuers will need to identify indirect costs and management costs in managed funds and superannuation products. An indirect cost is any amount that the issuer knows, reasonably ought to know,  or may reasonably estimate, will directly or indirectly reduce the return on the product or option that is paid from the product or option, or an interposed vehicle through which the property attributable to the product or option is invested. Indirect costs for superannuation products need to be disclosed separately, while for managed investment products, they are disclosed as part of management costs. Except for new products, indirect costs are to be calculated based on those paid in the previous financial year.

Interposed vehicles

Issuers have to account for costs when making investments through an interposed vehicle and where further investments are made through other interposed vehicles. A three-fold test determines whether an investment is made through an interposed vehicle: the platforms test, assets test and PDS test. If securities or interests in an entity are acquired through a platform, the entity is not treated as an interposed vehicle if they are selected by the investor. An entity will be treaty as an interposed vehicle if the vehicle has more than 70% of its assets by value invested in relevant securities and financial products. If an investment benefits by the means of an entity rather than the investment of the fund, the entity will be treated as an interposed vehicle.

Reasonable estimates

Jon Ireland

 A challenge of determining costs is to have to provide an estimate when costs are not known. “Issuers need to get figures correct and can’t be misleading,” says Jon Ireland, a partner in the of corporate and financial services practice of Henry Davis York. “There may be lots of layers of vehicles and offshore funds may not be compelled to provide information, so the issuer would need to give the best estimate.”

OTC derivatives

Similar to interposed vehicles, the costs of obtaining investment exposure through OTC (over-the-counter) derivatives need to be factored into management costs, though exchange traded derivatives and hedging are not included. “The costs of OTCs can be challenging to navigate,” says Ireland.

In addition to understanding complex definitions, there are concerns of whether a product disclosure statement needs to be updated when the issuer has information about updated costs. “The complexity level is an overall concern. While the goal is to improve transparency and consistency, issuers need to take in different views on how to interpret the rules, so the risk is that policy objectives may not be fully met in the short term,” says Ireland.

ASIC’s PDS rules are part of a trend towards increased disclosure in financial products. “More generally, as an approach for policy development ASIC is looking to overseas regulators such as the UK Financial Conduct Authority for inspiration,” says Ireland. Similar initiatives include the regulation on key information documents in the UK.

“Issuers need to understand whether the rules apply, whether a business is issuing managed funds or superannuation products and making sure compliance steps are taken, including record keeping and learning from potential future enforcement actions,” says Ireland. Product issuers will need to take precautions and be prepared to review how information about indirect costs are being calculated and whether they need to be disclosed to ensure compliance.