Fund manager value-for-money reporting took centre-stage at the Financial Services Council (FSC) annual conference last week as industry and regulators grappled with the vexed issue.
And based on a packed FSC panel session there are still considerable gaps between regulatory expectations and industry interpretations of both the legal requirements and practical implementation.
Under the controversial FMA value-for-money guidelines published earlier this year, licensed managed investment schemes (including KiwiSaver providers) must formally justify their fees at least once a year.
In a joint effort with licensed supervisors and managers, the regulator released a value-for-money assessment tool that providers are ‘strongly encouraged’ to use.
But while the FMA tool is a coalface issue for the industry, Chapman Tripp partner, Tim Williams, raised more fundamental objections to the regulatory mining of fund manager operations.
Williams said the regulator must take care to apply the law with the value-for-money push.
“At times we have agreed to disagree,” that the FMA had correctly interpreted the legal power to question fund fees, he said.
For example, Williams said while the KiwiSaver law included clear stipulations that fees be ‘not unreasonable’, other funds were government by different regulations that afforded providers with more flexibility in setting fees (including adviser commissions).
“The FMA is entitled to [probe fund value-for-money],” he said. “But it shouldn’t pre-judge… and it has not found fault.”
However, Paul Gregory, FMA director investments, said the value-for-money guidelines sit well within its powers.
“We are all trying to do the same thing – to produce good financial outcomes for consumers,” Gregory said. “The FMA has a role to play: some of that includes enforcement, some is by influence – value-for-money spans both.”
He said fund managers should be assessing value-for-money as a matter of course, anyway.
“We’re not asking managers to show something that isn’t already core to their operations,” Gregory said.
Harry Koprivcic, Guardian Trust chief, told the FSC crowd that providers should start engaging now on addressing the value-for-money reporting requirements with the first cut due for the current financial year.
“[Managers] need to discuss it sooner rather than later,” Koprivcic said.
He said providers should focus on performance benchmarks and the use of embedded product commissions or advice fees.
In particular, managers must avoid any “fee for no service”, Koprivcic said, referencing a problem that has seen Australian institutions collectively cop billions of dollars in fines over the last few years.
Some institutions at the pointy end of value-for-money rule, though, remain sceptical about the value of those regulations.
Sharon Mackay, Fisher Funds head of third-party distribution, told the FSC panel that the new reporting obligations might add unnecessary cost without improving client outcomes.
“We need to take a breath,” Mackay said. “What is value-for-money? [The industry] needs to ask questions and push for answers.”
For instance, she said there is a danger that investors may lose access to financial advice under the value-for-money regime.
“Advice is critical but investors haven’t figured that out yet,” Mackay said.
In a keynote presentation the previous day, however, FMA chief, Samantha Barrass, told the FSC audience that value-for-money should be a win-win process.
“There is value in financial advice, in helping people make good decisions, and avoid bad ones. We, as a regulator know this, and want to encourage financial advice. The outcome we all must seek is more knowledgeable consumers, with higher levels of financial confidence and greater participation,” Barrass said.
“Value for Money is not about driving an approach that is solely focused on low-cost passive funds. It is about driving an approach that delivers value for KiwiSaver members and investors, that ensures they meet their goals.”
Meanwhile in a separate FSC session, Clare Bolingford FMA banking and insurance director, turned the spotlight on the regulator’s other looming new financial institution conduct powers.
Bolingford said previous investigations carried out in the wake of regulatory reviews of the banking and insurance sectors had emphasised the need for greater scrutiny of the industry.
“Since our 2018 review of life insurers’ conduct and culture, many providers have been evaluating their products to ensure they’re fit for purpose, and self-reporting any concerns to us.
In that time – almost four years – 225 such issues have been reported to us involving life insurers, many the result of creaking systems and weak controls,” she told the FSC. “Nearly half a million customers have been impacted, and more than $43 million paid in remediation. And that’s just for the one-third of issues whose impacts have been fully assessed.”
Furthermore, Bolingford said as the regulator has continued its enquiries into insurance industry practices the “more firms have looked, the more problems they’ve found”.
“We’ve recently taken action against one life insurer as a result of issues caused by customers not having the right information, or having decisions made for them that weren’t well communicated,” she said.
“It is highly likely there’s more self-reporting to come as firms continue to look for and find other historic issues. You can reasonably expect our future monitoring activities to consider how well firms have completed, and reported on, these matters.”