The Australian Securities and Investments Commission (ASIC) today issued further answers to some regularly asked questions about the Corporations Amendment Regulations 2005 (No. 1) (the enhanced fee disclosure regulations) that were made on 10 March 2005.

The enhanced fee disclosure regulations include measures on the disclosure of transactions and fees and costs in product disclosure documents (PDSs). These provisions require PDSs for certain investment-linked financial products to include:

• a standardised fees and costs template (with accompanying explanation);
• an example of annual fees and costs for a balanced or similar fund; and
• a boxed consumer advisory warning.

The enhanced fee disclosure regulations apply to PDSs for superannuation products from 1 July 2005 and other financial products, including managed investment products, from 1 July 2006.

The regulations also mandate certain transactional disclosures in periodic statements for these financial products from 1 July 2006.

‘ASIC has issued these answers to further help those superannuation trustees who traditionally issue new PDSs or supplementary PDSs at this time of year. The answers provide greater clarity about some commonly raised compliance issues with the enhanced fee disclosure regulations as they apply to PDSs’, ASIC’s Assistant Director of Superannuation, Life Insurance and PDS Disclosure, Ms Louise du Pre said.

‘Nothing in the further guidance released today changes ASIC’s earlier messages to industry about the need to make a genuine effort to comply with the spirit and substance of the requirements, and to be able to demonstrate this’, Ms du Pre said.

Details of ASIC’s earlier guidance is in the ASIC Information Release 05-19 ASIC provides answers on some fees and costs questions (10 May 2005)and the ASIC Information Release 05-28 ASIC compliance guidance on the FSR refinement proposals and fees template regulations (3 June 2005).

The guidance issued today will also assist PDS issuers (such as responsible entities of managed investment schemes) who need to first comply with enhanced fee disclosure regulations from 1 July 2006.

In the attachment to this release, ASIC provides answers on the following questions:

Copies of Information Releases [IR 05-19] and [IR-05-28] and ASIC publications referred to in the attachment can be obtained from the ASIC website via www.asic.gov.au/fsrpolicy or by calling the ASIC Infoline on 1300 300 630.

Attachment to [IR 05-54]: Further answers on some fees and costs questions

1. How far do product issuers need to go in obtaining information for the purposes of disclosing management costs and the indirect cost ratio (ICR)?

Management costs information needs to take into account at least the costs of direct investments and the cost of investments in an entity that may itself make further investments (an interposed entity). Management costs information about the investments made by an interposed entity (and other entities in a chain of such entities) should be included in the assessment of management costs to the extent these are known to the product issuer.

By way of background, ASIC notes that:

• product issuers will be aware of all management costs information for direct investments made by the issuer
• where a product issuer makes investments in an interposed entity, the product issuer will also be aware of all management costs information about investing in the interposed entity, and
• product issuers may also be aware of management costs information relating to those further investments made by an interposed entity.

2. How do product issuers comply with the requirement to include estimated performance fees in assessing management costs and the ICR?

Product issuers will be able to satisfy this requirement by basing the assessment of performance fees on reasonable assumptions consistent with ASIC Policy Statement 170 Prospective financial information [PS 170]. For example, if appropriate, performance fees could be estimated by reference to the previous twelve months’ performance.

As required by the enhanced fee disclosure regulations, the actual estimate of performance fees used in the assessment of management costs and the reasonable assumptions on which it is based should be included in the ‘Additional explanation of fees and costs’ section of the PDS.

3. What information should the fees and costs template contain when there are multiple investment options?

The fees and costs template should contain information about all the multiple investment options unless to do so is likely to confuse or mislead consumers because of the volume of the information presented.

Where the volume of information about multiple investment options in the template is likely to confuse or mislead consumers, the Explanatory Statement to the enhanced fee disclosure regulations states that fees and costs information for multiple investment options may be cross-referenced from the fees and costs template to another part of the PDS.

Where a product issuer is cross-referencing from the template to another part of the PDS, the Explanatory Statement also makes clear that as a minimum the template should include the fees and costs information for the balanced investment option and the default option (if relevant or applicable).

As a reference for this answer, see the section headed Specific requirements - Clauses 201 to 208 - Fees and costs template in the Explanatory Statement.

4. What balanced fund information do product issuers need to disclose when there is more than one balanced investment option?

The product issuer should use the balanced investment option with the most funds invested. ASIC thinks this is consistent with the spirit and substance of the enhanced fee disclosure regulations.

An example of where this answer may be applicable is where a superannuation fund has multiple sub-plans with balanced investment options.

5. How current does management costs information need to be for calculating the ICR?

The product issuer should use the most current management 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, if management costs information for the last financial year is not available for determining the ICR at the time that the PDS is issued, a product issuer should use information that is available for a different financial period provided that it is reasonably current and that its use is not misleading to consumers. For example, a product issuer may determine that a period of less than twelve months may be appropriate.

In any case, a product issuer should prepare updated management costs information where the issuer knows it would be misleading to continue to rely upon management costs information in the PDS from a previous financial period (whether the most recently ended financial period or a later period). For example, this updated information can be included in a supplementary PDS, or, if it is not materially adverse, it can be made available in a way allowed under ASIC Class Order [CO 03/237] Updated information in product disclosure statements.