New fee and cost disclosure rules set to take effect in less than a week, are fundamentally flawed, “creating risk” to investors and providing “substantial advantage” to some funds over others, an independent superannuation ratings agency confirms.
According to a new report by SuperRatings (commissioned by ISA), the inconsistent treatment of investment vehicles under the ASIC’s new Regulatory Guide 97 (or RG97) rules will contribute to a lack of comparability, and create risks to investor understanding.
In particular, the ratings agency highlights the different disclosure mechanisms for platforms and superannuation funds which could mislead an investor into believing a platform investment is cheaper when, in fact, it may be more expensive.
SuperRatings describes this “lack of simple comparability” as one of its biggest concerns, and goes on to state “it is imperative that consumers can make fair and reasonable comparisons, which are not unduly complicated”.
According to Industry Super Australia (ISA):
- The new disclosure rules mean that if a consumer invests through a super fund, all fees and costs are disclosed in one place, including indirect costs.
- If, however, a consumer invests through a super fund that uses a ‘platform’, he or she could need to scrutinise multiple Product Disclosure Statements to calculate fees and costs.
It appears ASIC is optimistically relying on the wealth management industry (including bank-owned super funds) to not make direct comparisons between super funds that utilise platforms or not - and for consumers to work out for themselves the combined effect of multiple disclosure documents.
ISA Public Affairs Director, Matthew Linden said: “Over $500 billion is invested through platforms, which are typically owned by banks and wealth management groups and used by financial planners”.
“The new super rules are more likely to mislead consumers than help them.
“It is time for the Government to step in, otherwise super fund members across the country could be misled.
“This is a litmus test for the Government that claims to be on the side of super fund members, or favouring the retail and bank-owned super funds,” he said.
Superannuation funds have been updating their systems to comply with the new regulations but have real concerns the carve outs will leave consumers worse off.
Industry Super Australia is calling on the Government to defer the implementation of RG97 until it can guarantee full disclosure by reversing the exemptions on platforms and intermediary trusts investing in real property or infrastructure.
Of RG97, the SuperRatings report confirms:
- "There is a substantial difference in the investment related fees/costs that must be disclosed in a primary PDS (product disclosure statement) by a non-platform superannuation entity versus a platform superannuation entity."
- ASIC's guidance is too complex and impairs investor understanding: "The definitions of interposed vehicles and the three tests are unnecessarily complex and do not provide a corresponding level of meaningful information to prospective and current members."
- ASIC's treatment of REITs (real estate investment trusts) also results in disclosures that cannot be compared: "the same property held jointly by a REIT and a Superannuation Fund directly, could have materially different disclosed costs."
- It can make the most inexpensive way of investing in real property or infrastructure look more expensive than alternatives. "The exclusion of entities that invest in real property or infrastructure from the Assets Test means that indirect costs related to the use of a listed vehicle may not be required to be disclosed, resulting in this method appearing to be cheaper relative to direct investment, when it is typically the more expensive option"
- The “requirements provide a substantial advantage in relation to funds that invest in a listed security as opposed to a very similar security that might be held directly”.
The report highlights how the primary PDS disclosure of a conventional super fund could look four times as expensive as the costs disclosed in a platform's primary PDS, even when the total costs of investing in the same product via a platform might be more expensive.
The report states that “members are to be provided with a secondary PDS and calculate the ETF costs themselves, which will cause confusion and introduce the risk of miscalculation”.
|Total Fees/Costs Disclosed in Primary PDS||0.66%||0.16%|
|Fee required to be disclosed to members in primary PDS under 67|
|Fund A Non-platform superannuation entity||Fund B Platform superannuation entity|
|Exchange Traded Fund (ETF)||0.50%||0.00%|
In another example, the disclosed costs of a direct investment in infrastructure look more than twenty times more expensive than a listed investment, even though the listed investment is more costly.
|Total Fees||$1,350,000 (or 1.35%)||$60,000 (or 0.06%)|
|Direct Infrastructure Investment||Fee included?||Listed Infrastructure Security||Fee included?|
|Annual Management Fee||$500,000||Y||$500,000||N|
|Annual Administration Costs||$50,000||Y||$50,000||N|
|Repairs and maintenance||$300,000||Y||$300,000||N|
Amendments to fee and cost disclosures for super and managed investment products were announced in 2015. They were re-issued with changes in March 2017; Q&As were provided later. New requirements for product disclosure statements apply from 1 October 2017.
Matthew Linden is available for interview. Media contact: Phil Davey 0414 867 188
Industry Super Australia provides policy, research and advocacy on behalf of 16 not-for-profit Industry SuperFunds who are the custodians of the retirement savings of five million Australians.
Industry Super Australia Pty Ltd ABN 72 158 563 270, Corporate Authorised Representative No. 426006 of Industry Fund Services Ltd ABN 54 007 016 195 AFSL 232514 MEDIA