A recent ASIC report, Fee and Cost Disclosure: Superannuation and Managed Investment Products, identified inconsistencies in reporting fees in underlying investments, variations in data quality and performance fee reporting, management costs being treated as transaction costs, the tax treatment of fees and costs, and insurance disclosures as the main disclosure issues in the industry.
ASIC said when it came to the treatment of management costs associated with investing funds through external investment structures, some funds “do not look beyond the first layer of fees in the underlying investment vehicle they invest through".
“As a result, funds may be materially understating the fee structure of the product, making any comparison of funds ineffective,” said the report.
ASIC also said the “under-reporting of management costs is a significant issue in the industry that has developed over time as industry innovation and product complexity have increased”.
Different practices are used across the industry to disclose performance fees, which makes it “difficult for investors to effectively compare products”.
Disclosing fees in the PDS based on past history, an average year or forward-looking estimates based on unrealistic expectations are also “inconsistent with its existing guidance”, ASIC said.
The regulator said the tax treatment of costs is also causing fees to be understated for some products, particularly when comparing superannuation fund fees.
ASIC said that as part of its continuing focus on fee and cost disclosure in 2014 and 2015, it will be “consulting with industry further on the definition of ‘indirect costs’ for superannuation funds and ‘management costs’ for managed investment products”.
ASIC said it will look to modify the law by issuing a class order to clarify the definition.
“We will also consult with industry on ways of improving disclosure about insurance offered through superannuation funds,” said ASIC.
The report said the regulator will also further explore the idea of “developing industry standards of other ways of improving fee and cost disclosure in the industry”.
ASIC Commissioner Greg Tanzer it is “crucial for super and managed fund issuers to disclose fees and costs on a consistent and comparable basis”.
“Our review shows that there is some inconsistency at the moment and we will work with industry to improve fee and cost disclosure more generally,” Mr Tanzer said.
