The Financial Markets Authority (FMA) has identified six key themes among the 26 submissions lodged on its draft fund fee guidance, rebuffing claims of regulatory over-reach.
After publishing the final fund fee guidance last week, the FMA released the previous submissions plus its summary response, distilling the underlying thematics as:
- guidance or intervention is unnecessary;
- value for money is not just low fees;
- investment managers are entitled to make a profit;
- statutory responsibilities should not be conflated with expectations;
- advice is necessary and valuable; and,
- there should not be too much focus on performance
As reported last week, the final FMA guidance both explicitly pushes out the fee scope beyond the initial KiwiSaver market while adding specific annual and ‘event-driven’ reporting duties for managers along with significant detailed examples.
For example, the FMA rejected claims lobbed in several submissions that the guidance itself represented regulatory overkill given market forces would ultimately govern the ‘reasonableness’ of fees.
“The provider perspective may be that lots of competition and a wide range of offers, pricing and value propositions are encouraging hallmarks of a vibrant market achieving maturity,” the FMA response says. “But from a member and FMA perspective, a maturing, still-inefficient market means risk of investor harm. Intervention is required.”
Furthermore, the regulator knocked back multiple challenges to its statutory powers – particularly in non-KiwiSaver funds – to align fee levels with ‘value for money’.
“It is illogical – or disingenuous – to argue unreasonable fees should be considered without considering value for money. This, presumably, is why some submitters strongly urged the FMA to consider them together,” the response says.
“Not charging unreasonable fees, and providing value for money, are surely among the most fundamental elements of all managers’ overarching statutory duties to act in their members’ interests. Alternately, we look forward to managers explaining to us and their investors why they shouldn’t have reasonable fees and provide value for money; or why having unreasonable fees and not providing value for money is in their members’ interests.”
The FMA submission analysis also addresses submitter concerns about scalable costs, cross-subsidisation of lower-balance members, performance fees, annual member charges and buy/sell spreads.
For the first time, too, the regulator included comment about the importance of considering ‘tax leakage’ – where underlying fund structure can see investors losing return in tax paid to offshore governments – in disclosure documents.
“Some investment approaches do attract more tax (e.g. investing in underlying funds domiciled in other countries). Where a manager’s chosen style involves significant ‘tax leakage’, this should be identified as part of a fee review,” the FMA says. “The manager should explain to the supervisor why ‘leakage’ exists and the extent to which it can be mitigated, or why the manager chooses not to mitigate it and why that is in members’ best interests. The manager and supervisor should also consider whether this feature should be disclosed – e.g. in the Other Material Information document and website – to ensure investors are aware.”
Furthermore, the FMA defended the appropriateness of using KiwiSaver default scheme pricing as a comparison for the entire fund market – a position several submissions refuted.
For instance, the submission from legal firm Denton Kensington Swan, notes: “Fees charged in default funds reflect a commercial bargain, between default providers and the Crown, with default providers gaining a regulatory advantage as a trade-off for charging lower fees and committing to particular service levels. Such a comparison is, not relevant to unreasonableness.”
However, the FMA response says “default schemes are absolutely a valid pricing reference point for the non-default schemes of those providers”.
“Additionally, better understanding how each default provider calibrated its ‘bargain’ trade-off is a useful input when considering the pricing approach used by other providers who do not offer default schemes but do offer similar products and service levels,” the regulator says.
Paul Gregory, FMA director of investments, said the new fund fee guidance ‘expectations’ – now in force – should not be too difficult for providers to implement.
Gregory said managers and supervisors should already be regularly reviewing fees and value for money.
“They shouldn’t be throwing their hands up [at the new guidance],” he said.