EXPLANATORY STATEMENT
Select Legislative Instrument 2005 No. 139
CORPORATIONS AMENDMENT REGULATIONS 2005 (NO. 3)
SCHEDULE 1: AMENDMENTS RELATING TO ALIGNMENT OF EXISTING DISCLOSURE REQUIREMENTS
Overview
The ‘enhanced fee disclosure regulations’ (Corporations Amendment Regulations 2005 (No. 1)) were made on 10 March 2005 to, amongst other things, standardise the description and calculation methods for fees and costs to allow for easier comparability and understanding of this information in both Product Disclosure Statements (PDSs) and periodic statements.
The purpose of the Regulations is to minimise compliance costs for industry and streamline legislative requirements by more closely aligning existing fee and cost disclosure requirements with the new ‘enhanced fee disclosure regulations’ .
The Regulations include amendments that broadly:
• provide temporary relief from the requirement to disclose ‘common fund’ expenses in product disclosure statements (PDSs) for non-superannuation products until 1 July 2006. This involves aligning these arrangements with the relevant commencement date of the ‘enhanced fee disclosure’ requirements provided for by the Corporations Amendment Regulations 2005 (No.1), made in March 2005;
• align the timing for the requirement to compulsorily disclose ‘common fund’ expenses attributable to individual investors in periodic statements to the relevant commencement date of the ‘enhanced fee disclosure’ requirements; and
• delay the requirement for investment life insurance products to disclose transactions in exit statements until 1 July 2006 (consistent with the treatment for superannuation products).
Item [1] – Disclosure of ‘common fund’ amounts in Product Disclosure Statements (PDSs)
New regulation 7.9.16JA provides temporary relief from the requirement to disclose ‘common fund’ fees, expenses or charges in non-superannuation PDSs as required by sub-paragraph 1013D(1)(d)(iii) of the Corporations Act 2001.
Broadly, the term ‘common fund’ relates to the situation where amounts from multiple investors are paid into a common pool and costs of running the fund are deducted from that pool.
While this disclosure requirement currently exists in the law, there has been uncertainty as to what exactly constitutes ‘common fund’ amounts. Importantly, with the making of the ‘enhanced fee disclosure regulations’ (Corporations Amendment Regulations 2005 (No.1)), a methodology has been introduced to determine ‘management costs’ using an Indirect Cost Ratio (ICR) which in turn satisfies the ‘common fund’ disclosure requirement.
Importantly, ‘management costs’ include amounts deducted from a ‘common fund’ by way of fees, costs, expenses or charges. Therefore, complying with the ICR methodology (provides a ratio of a fund’s ‘management costs’ that are not deducted directly from a member’s or product holder’s account to its total average net assets over a given period) amounts to complying with the requirement to disclose ‘common fund’ amounts pursuant to sub-paragraph 1013D(1)(d)(iii).
As a result, the ‘enhanced fee disclosure regulations’ provide the necessary certainty for industry to comply with the ‘common fund’ disclosure requirement. However, the ‘enhanced fee disclosure regulations’ have a staggered application depending on the nature of the disclosure document and the type of product – superannuation or managed investment. Broadly, superannuation PDSs must comply with the new requirements from 1 July 2005, whilst managed investment product PDSs are to comply from 1 July 2006.
As a result, industry has sought temporary relief from the ‘common fund’ disclosure requirement for non‑superannuation products to enable greater time to conduct due diligence procedures in applying the new methodology – which does not come into effect for such products until 1 July 2006. This will spread out compliance costs for industry over the course of a year, rather than compressing the timeframe for system changes and subsequent compliance activities for both superannuation and managed investment products.
Although the effect of these regulations is to delay the disclosure of ‘common fund’ amounts for non-superannuation products until after 1 July 2006, it is expected that those able to implement the new ICR methodology prior to it being mandatory will comply with the requirement as they roll-out new PDSs. In the meantime, it is also noted that sub-paragraph 1013D(1)(d)(i), which requires information about the ‘cost of the product’ to be disclosed, will cover the majority of fees and costs otherwise disclosed in respect of ‘common fund’ amounts.
Item [2]
Makes a minor typographical correction.
Items [3-5] – Disclosure of transactions in periodic statements
Regulation 7.9.60B deals with the disclosure of transactions in periodic statements for certain financial products. The regulation provides for the staggered introduction of these requirements depending on the particular document and type of financial product in question. For instance, regulation 7.9.60B provides a delay for superannuation product exit statements (paragraph (1)(b)) and for managed investment product periodic statements (paragraph (1)(c)).
Concerns have been raised about the timing of the application of regulation 7.9.60B to ‘investment life insurance product’ exit statements.
The amendments amend regulation 7.9.60B so that the disclosure of transactions for ‘investment life insurance products’ are not mandated for exit statements issued before 1 July 2006. This reduces compliance costs by giving industry greater time to undertake necessary systems changes.
Item [6] – Disclosure of ‘common fund’ amounts in periodic statements
The ‘enhanced fee disclosure regulations’ mandate that periodic statements for certain superannuation products must disclose an item showing the amount of ‘Other Management Costs’ that were not paid directly out of a member’s account.
The requirement to disclose ‘Other Management Costs’ is based on the ICR concept, and as a result will satisfy the requirement in regulation 7.9.75(1)(b) for periodic statements to disclose an investor’s share of any common fund expenses, fees and charges that have been deducted from the fund.
By way of ASIC Class Order 04/1434, the requirement to compulsorily disclose ‘common fund’ amounts attributable to individual investors will take effect for periodic statements prepared after 1 July 2005. Industry has raised concerns that it will not be able to comply with the common fund requirements by 1 July 2005 as required.
The effect of the sub-regulation 7.9.75(1A) is to delay the ‘common fund’ requirement in periodic statements from 1 July 2005 in relation to reporting periods commencing on or after 1 July 2005 to 1 July 2007, depending on the product and particular situation. This timetable aligns ‘common fund’ disclosure with the commencement dates for the ‘enhanced fee disclosure regulations’.
Specifically, items 3 and 4 of the table provide relief to all financial products other than superannuation products to which Division 4C applies (Regulation 7.9.16J defines the class of superannuation products to which the enhanced fee disclosure regulations apply). Importantly, items 3 and 4 include life insurance investment products.
The regulation therefore satisfies industry concerns about their desire to work on implementing the ICR methodology by aligning the timing of the disclosure of ‘common fund’ amounts with the application of the ‘enhanced fee disclosure regulations’.
Rather than simply delaying the operation of the common fund disclosure requirement, the amendment maintains the disclosure obligation but provides an option not to disclose such an amount if the issuer includes specific statements in the periodic statement alerting investors that common fund expenses, fees and charges have been deducted and that further information can be obtained from the issuer of the product. In effect, this reinstates the pre-1 January 2005 position.