The regulator looks set to face significant industry resistance on key items in its proposed KiwiSaver fees and ‘value for money’ guidance.
Released early in November for feedback, the draft KiwiSaver fees guidance note attracted 27 responses by close of the submission period last Monday (December 14), according to a spokesperson for the Financial Markets Authority (FMA).
A sneak preview of several submissions shows mounting industry concerns around several aspects of the FMA proposals including plans to prohibit scheme-wide embedded advice fees and impose broad ‘value for money’ requirements on KiwiSaver schemes.
For instance, Generate, one of the fastest-growing KiwiSaver schemes in recent years, notes in its submission that separating out advice fees would “create two classes of members, advised and unadvised”.
“Asking members to pay a higher fee for advice will result in many choosing to be unadvised. The unintended consequence of separating out advice fees will therefore be large numbers of KiwiSaver members go without advice,” the Generate submission says. “This goes against the Government’s stated objectives of greater access to quality advice and improving the financial literacy and capability of KiwiSaver members.”
Henry Tongue, Generate chief, said most of its scheme members had been advised with over 80 per cent invested in the growth fund.
Tongue said a higher allocation to growth assets would deliver better longer-term returns to members, demonstrating the value of advice in KiwiSaver.
“Of course, fees have to be transparent but there’s a danger if you ask members to pay more if they want advice, they won’t,” he said. “And what happens when there’s volatility – as we saw during COVID – and members ask for advice but we have to charge them?”
Generate along with other providers such as Booster and NZ Funds have built large KiwiSaver distribution influence in the adviser market by paying both upfront and ongoing commissions out of management fees.
And the Generate submission says KiwiSaver providers should be able to “wrap advice fees within a flat-fee model, so long as the manager is able to demonstrate that the fees incurred are reasonable for both unadvised and advised members”.
Mint Asset Management also argues in its submission that arbitrarily removing in-built advice fees from KiwiSaver without creating alternative adviser payment systems would “drive consumers to the banks and vertically integrated businesses”.
“In our view, we need a solution to access to advice which is clean and simple to understand,” Mint says. “An agreed fee for simple product specific advice, which consumers can see value in and for which advisers will actually get paid. “
But while separating out advice fees in KiwiSaver could emerge as the most contentious industry clash point in the FMA proposals, Mint says the regulator’s ‘value for money’ guidelines also “require greater clarity”.
Following a review carried out by consultancy firm, MyFiduciary, the FMA raised doubts about whether KiwiSaver fees matched underlying services, particularly around passive and active management strategies.
The FMA draft guidelines stipulate that “all managers and supervisors should regularly review their scheme fees to assess whether they provide value for money to members” with trigger points including a move from active to passive investment management.
However, the regulator says the KiwiSaver value-for-money ‘conversation’ should also take place when:
- funds under management increase – fees should reduce to reflect reduction in fixed costs due to economies of scale;
- fund input costs have fallen due to a decrease in third-party fund manager fees; and,
- scheme amalgamations where economies of scale are an end result.
“The independent review by MyFiduciary focused on ‘activeness’ relative to fees,” the Mint submission says. “This is only one potential measure of a strategy that could be consistent with value for money or more accurately a true to label test.
“In our view, this is narrow and not particularly useful as a measure for consumers of these products to understand or to evaluate value for money.”
In its submission. start-up KiwiSaver provider, InvestNow, argues that while the FMA’s approach to assessing “scheme fee reasonableness has been pragmatic and appropriate” to date, the draft guidance reflects a “considerably more aggressive” stance.
InvestNow says in the submission that market forces rather than “FMA intervention” would drive fees lower over time.
The regulator “needs to give careful consideration to the policy implications of market intervention”, according to InvestNow.
“For example, we could end up with a small number of providers and therefore limited investor choice. Innovation could be stifled as new entrants will struggle to compete or even enter the market,” the submission says. “Remaining large players may opt for cheaper and potentially lower quality offers.”
Legal firm, Dentons Kensington Swan (DKS), also cites concerns that the proposed guidance “goes beyond the FMA’s regulatory remit”.
Specifically, the DKS submission says the FMA has conflated the “legal condition” of KiwiSaver fee ‘unreasonbleness’ and the “broad ‘soft law’ objective” of ‘value for money’, which is yet to be defined in legislation.
David Ireland, DKS partner, said: “We support FMA issuing guidance to help participants know how it will approach things, but the fee guidance proposed does not present a balanced approach to assessing whether a fee is unreasonable, and risks discouraging KiwiSaver providers from innovating or investing in their proposition.
“The ever increasing regulatory burden placed on providers, coupled with the need to ensure providers can extract a reasonable reward for the regulatory and commercial risks they are taking on, need to be recognised as appropriate matters to take into account,” Ireland said. “Value for money is a matter of conduct, and considering that aspect should be separated out from assessing compliance with the legal constraint on charging unreasonable fees. They are different concepts.”
Other issues raised in the submissions include buy/sell spreads, tax slippage, performance fees, fixed administration charges and whether offshore retirement savings systems serve as appropriate comparisons for the relatively small, and young, KiwiSaver market.
The FMA is due to publish the final version of its KiwiSaver fee guidance early next year. Broader KiwiSaver fee levels will also likely be influenced by the draft scheme review process to be played out over the first quarter of next year.
Applications for a spot on the new KiwiSaver default scheme carousel closed last Friday (December 18) with up to a dozen providers potentially in line. The government has indicated a preference for a maximum of five default providers in the new round of appointments, down from the current nine.
In addition to switching to a balanced investment portfolio (away from the current conservative settings), default providers will have to front-up with tighter fossil fuel stock exclusions, highly prescribed member service obligations and low fees (representing 60 per cent of the government’s scoring system).
Successful default providers should be known by early April ahead of a transition to the new regime next December.