New Zealand’s fund managers will have to adopt a more consistent approach to fund fee and returns calculations as well as how they are disclosed under new regulatory guidelines currently up for consultation.
In its recently-published proposals, the Financial Markets Authority (FMA) notes NZ fund managers have taken often-divergent approaches to calculating and disclosing fees, costs and returns, potentially giving investors misleading or incomplete information.
“In a recent review of funds’ offer documents and disclosure statements under the Securities Act regime, we saw some inconsistencies in how performance-based fees were disclosed and how managers were calculating 0% PIR returns and fund charges,” the FMA’s ‘Draft guidance disclosure of certain fees and returns by managed funds’ says.
With the industry transitioning to the Financial Markets Conduct Act (FMC) rules, the regulator is looking to impose some conformity across the three areas noted above.
The FMA says managers have been treating ‘accrued tax’ in three different ways when calculating returns based on a 0 per cent investor tax rate, which can have a “material impact” how performance is disclosed.
According to the regulator, managers should disclose “the returns of the fund as if tax credits had not been deducted” rather than measures that include some or all deductions.
“This is because, in our view, the 0% PIR returns of a fund should reflect the fund’s investment returns held during the period, before any tax credits were withheld from income generated by the fund’s investments,” the FMA proposal says.
The regulator also calls investment schemes to be much more rigorous in the disclosure of fees and charges (including performance fees) levied by underlying funds.
“Other than fees incurred or charged by the fund itself, managers must also include fees and charges incurred by underlying funds in which the fund invests,” the FMA says.
Under its proposals, the regulator says managers would have to disclose fees and costs incurred by a broad range of underlying investments, including unlisted and listed products (for example, exchange-traded funds).
The consultation document says an FMA review of fund disclosure statements found “many managers do not think fees and costs incurred by listed investments need to be disclosed”.
“Their view is these costs are similar to management costs (such as wages, rent, etc) of listed companies,” the FMA says. “We do not agree with this interpretation. Where fees and costs flow through to an investor, they must be disclosed.”
Performance fees, too, come in for intense scrutiny by the regulator with calculation methods and benchmarks an area of particular focus for the FMA.
The document ‘encourages’ managers to refer to the regulator’s 2012 guidance note on KiwiSaver performance fees as a standard for the broader funds market.
“We are particularly concerned about the effect of performance-based fees without a high water mark, and fees being linked to an inappropriate benchmark,” the FMA says. “Whether the schemes are KiwiSaver or not, the FMC Regulations require managers to provide an example of how fees apply to investors.”
The FMA discussion paper says if managers deviate from these best-practice performance fee standards they must include a warning in their disclosure statements explaining the potential effects.
For example, if an equity fund uses a cash benchmark the FMA says it should include a warning in disclosure docs along the lines of: “This means you may be paying a performance fee even if the fund’s performance does not match or beat the performance of what we have determined to be most appropriate market index.”
Interested parties have until November 27 to submit feedback on the FMA proposals.