Responsible entities and superannuation trustees only have a matter of a few months to update Product Disclosure Statements (PDSs) for their funds or face the risk of ASIC enforcement action when the new fees and costs disclosure rules become effective in early 2017. Just as the financial services industry is coming to grips with these changes, there has been a significant development in the interpretation of a key element of the requirements.
With the 1 February 2017 deadline for updating all PDSs to meet new fees and costs disclosure requirements fast approaching, ASIC has now confirmed a significant change to the way transactional costs need to be calculated and disclosed. Those PDSs for managed funds and superannuation which do not meet these requirements will risk being in breach and the subject of ASIC enforcement action, notwithstanding the facilitative compliance period which has been announced.
ASIC has recently provided confirmation that PDSs will need to include additional information about transactional and operational costs, which will be a significant change to current market practice. This comes as part of the changes to fees and costs disclosure through the updates to Schedule 10 and RG 97.
In summary, ASIC has confirmed that in PDSs under the additional explanation of fees and costs for managed funds, the transactional and operational costs will need to include all the transactional costs i.e. not limited to those costs that are recovered by charging of the buy-sell spread. The additional information should also include an explanation of how the transactional and operational costs are charged.
This will mean indicating to what extent those transactional costs are borne in any buy-sell spread charged to investors being issued or redeeming interests and to what extent it is borne by the fund. In practice, this means PDSs will need to separately state those transactional costs associated with day-to-day trading in the format prescribed by clause 209(j) of Schedule 10.
This will come as a surprise to many in the market and will require careful consideration as to how to determine day-to-day trading costs, which are likely to include "implicit" costs such as those embedded in bid-offer spreads. We are now seeing managers develop policies and procedures to capture house views on these calculation issues and also to document the steps taken to meet the requirements from a compliance perspective.
Given the timing for the deadline and the practical difficulties with managers' and trustees' key personnel and due diligence committees organising reviews and sign off over the Christmas and January holiday period, we are now seeing many managers schedule PDS rolls for RG 97 compliance for before the end of 2016.
This is the first in a series of insights in which we address specific issues arising from the new product disclosure statement content requirements under updated Schedule 10 of the Corporations Regulations and ASIC's Regulatory Guide 97. Under these new rules, all PDSs are required to be compliant by 1 February 2017.