KiwiSaver providers that charge in-fund advice fees will have to better disclose where and why those costs fall under proposed new guidelines, the Financial Markets Authority (FMA) has confirmed.
A spokesperson for the FMA said the regulator was seeing examples of in-fund KiwiSaver advice fees “in the market at the moment” that could prove problematic under the proposals released early in November.
“… our consultation is seeking comment on this, among other issues,” the FMA spokesperson said. “One of the outcomes from the consultation we would like to see is that providers need to be willing to tell and show investors precisely what they will get for fees that are charged, and that the fees charged for any services need to be reasonable.”
The regulator specifically called out both upfront and ongoing KiwiSaver advice costs for attention in its fee guideline consultation paper.
Under the FMA proposals, KiwiSaver schemes would have to charge and disclose related fees directly to individuals who receive advice, rather than spreading the cost across all members.
In Australia financial institutions have set aside over $1 billion for reparations after the 2018/19 Royal Commission found many customers had been charged advice ‘fees for no service’ (FFNS) over long periods of time.
The FFNS regulatory claw-back is ongoing with the National Australia Bank (NAB) facing fines following court action this October initiated by the Australian Securities and Investments Commission (ASIC). NAB admitted to some of charges filed by ASIC in the second FFNS case the regulator has brought against the bank.
According to an October 2020 Reuters report: “In December 2019, the regulator accused NAB of 8,927 cases of fees for no service and 3,420 instances of unconscionable conduct. ASIC said the fees were even charged to customers during 2018 Royal Commission hearings into misconduct in the financial sector, at which the bank’s executives defended the practice.”
The FMA consultation closes on December 14 with the final KiwiSaver fee guidance due for publication early next year.
Meanwhile, the KiwiSaver default reappointment process is also hurtling to a late December deadline as potential candidates continue to seek clarification on the Ministry of Business, Innovation and Employment (MBIE) intentions.
Over the last couple of weeks, MBIE has confirmed default provider applications should not include transaction costs (such as buy/sell spreads) in quoted fees. Default KiwiSaver applicants must submit fee proposals separately from service plans. MBIE will score default applications with a 60 per cent weighting to fees, encouraging providers to bid low.
“The evaluation panel will use a mean response as midpoint methodology to score the fees responses. This methodology uses the mean of all fee proposals as the baseline and scoring is calculated on each respondents variation from that baseline,” MBIE says.
“… It is accurate that those providers with lowest fees (according to our calculation of average annual fee) will receive the highest scores for the evaluation of fees. However, due to the evaluation of the technical requirements, those with lowest fees will not necessarily receive the highest score overall.”
Furthermore, MBIE says default candidates won’t be assessed on either past investment performance nor expected future returns.
“However, the technical requirements do require assessment of the capability of the provider overall as well as the provider’s specific team responsible for the default product.”
Default KiwiSaver applications are due by December 18 with the government expected to name the winning providers early next May ahead of transition to the new regime in December 2021. The number of default schemes could fall from the current nine to five if the government sticks to its preferred minimum number of providers outlined in earlier documents.
While MBIE and FMA recommendations will influence the default provider appointments, government, including new Commerce Minister David Clark, makes the final call.