The substantial increases in Financial Market Authority (FMA) levies for large fund managers announced last week could have the “perverse” effect of lowering the fees collected by the regulator, according to some industry insiders.
Several managers spoken to by Investment News NZ (IN NZ) said the fee rises increased the incentive to divert funds to wholesale products, which are not counted for FMA levy purposes.
“How managers structure their businesses shouldn’t hinge on what that means for their regulatory levies,” one manager told IN NZ. “But the way the FMA fees are set it could lead to that behaviour.”
Under the FMA levy hikes, revealed by Commerce Minister Paul Goldsmith last week, fund managers with more than $1 billion under management will face annual fee increases ranging from 15 per cent to almost 340 per cent.
The FMA fees are set at fixed costs, jumping considerably at each tier. For example, managers with between $2 billion to $5 billion would face annual FMA fees of $120,000 (versus about $87,000 under previous settings) – a figure that would more than double to $270,000 once the $5 billion barrier was breached.
“We have clients in retail funds that could just as easily go into wholesale products,” the manager said. “And if you’re about to step up a tier, those FMA fee increases become material.”
While a number of submissions on the fee increases suggested a per-FUM basis point charge would be fairer than the fixed cost approach, the government dismissed the idea as too complex to administer.
In its submission of the-then proposed FMA fee changes, Mercer says it “generally agrees” the fixed cost approach would fit best with regulatory needs.
“That said, where industry revenue is related to asset values, it is important to recognise dollar based fixed costs are expensive in a downturn of markets and we would look to FMA to continue to review its service delivery model and the costs it charges in a market downturn,” the Mercer submission says.
Mercer says the overall FMA fee increase – which it estimates at about 9 per cent – was surprising given the low “New Zealand’s inflation rate, running at 0.4%”.
While managers with less than $1 billion will get some slight levy relief under the new FMA fee rates, the Pathfinder Asset Management submission says a basis point approach would suit boutique managers.
In the submission, John Berry, director of the $120 million Pathfinder, suggests a third measure – based on net profit after tax – would work best for smaller firms.
“For a boutique manager the levy impact is significant relative to profitability – restricting the ability to invest back into the business, to hire new staff and to introduce new product,” Berry says in the submission.
The levy changes – which Goldsmith says will allow the government to claw back almost $10 million more from the industry – will also see managed fund product disclosure statement fees jump from $370 to $530.
Discretionary investment management scheme (DIMS) providers, too, face massive FMA fee hikes, with an increase from about $300 (under previous rules) to $36,000 per year for products managing more than $2 billion.
In its submission, Milford Asset Management, one of the 40 or so DIMS licensees, says the fee increase – of up to 4,000 per cent – could encourage firms to avoid licensing.
“We find it extremely difficult to understand the rationale for the significant DIMS levy increases and yet no change to the levy tiers for Authorised Financial Advisers (AFAs),” the Milford submission says. “… The FMA should be incentivising market participants to become fully licensed. These changes are a huge disincentive to run a DIMS model and will potentially create a lot more work for any regulator going forward if fewer market participants have a DIMS licence.”