The FSC recently welcomed Harry New to present an update on the RG 97 regime at a member briefing in Melbourne.
In its current form, is RG 97 working well for both the industry and consumers?
It’s not quite working, and that’s why ASIC had asked for an independent review of the RG 97 regime. In my view, obtaining an independent review of the regime is an admission by ASIC that it wasn’t quite working as well as it could have and required improvements.
In my experience, compliance with the RG 97 regime has proven to be costly to industry in terms of both internal and external compliance costs, and from the consumers’ perspective, it’s debatable that providing additional or more detailed disclosures under the RG 97 regime changes consumer behaviour – or improves consumers outcomes.
Plus, it's become a bit too clumsy, as such that it might well have undermined the very purpose of the RG 97 initiatives in the first place.
What challenges does RG 97 present the industry?
I think the current regime raises a number of interpretive issues and then leads to a divergence on understanding in the industry, which then undermines the regime’s aim of providing comparability of fees and costs across products – and in particular across similar products issued by different issuers.
So, the challenge for industry has been to come to agree outcomes, but this hasn’t been perfect as there isn’t always commonality of interests between fund managers and super trustees, for instance.
Another significant challenge has been to calculate or estimate some of those costs, and in particular the costs of derivatives and implicit transactional and operational costs. So the draft revised RG 97 document issued by AISC in January does go some way in dealing with some of these most difficult areas of contention, and also I think has improved the regime in relation to disclosure of property operating costs and borrowing costs, for instance.
Are there parts of RG 97 that have been overlooked and/or should be reconsidered, in your opinion?
I think the most obvious feature is that ASIC requires counter-party spreads to be included in transactions costs calculations, but this hasn’t been defined in the new draft. I expect it will be subject to debate in industry. The rationale for including them (keeping them in as disclosures) was that they can be reliably measured, and I think that’s not necessarily a view that is shared within industry with there being a range of complex calculation methods.
The technical distinction of disclosure of historical fees and costs, and also prospective fees and costs in different parts of the disclosure regime, also need to be carefully considered. But the removal of the concept of the indirect cost ratio might help in achieving this.
What further changes do you think the sector can expect with RG 97?
We should expect more reform to the regime because it is clear from the draft document from ASIC that it’s going to be open to much consultation. I think there will be an extended period of consultation, and after drafting is settled and promulgated by ASIC, there will be a transition period. I think you can see from the timeline from the consultation paper that ASIC has allowed quite a bit of time (until end of year) to go through the process.
But there’s definitely improvement, so I think there’s been breakthrough by virtue of the independent review and recommendations, so the regime will end up being much better than it was.
Other features are that the compliance costs are still going to continue, and issuers will need to comply with the new regime and deal with the likely transition as well – but I think we’ll be better off for this latest round of changes.
In talking to industry and clients, I think this period of consultation is a bit awkward, as industry can see these improvements are going to be made – but in the meantime anybody that is rolling over PDS’ or establishing new products are still going to have to comply with the old regime, and that would be frustrating knowing that there are things that you would rather not have to deal with.
I’m not sure what the solution is here because ultimately the law has not been changed. I do wonder if there is some comprise to be worked out on an interim basis to take advantage of some of these reforms, instead of industry knowing that they’re coming, but still having to be being frustrated doing things the old way.
For more on the RG 97 conversation, we invite to listen to the FSC podcast from another recent member briefing featuring Jon Ireland of Norton Rose Fulbright and Austin Bell of Johnson Winter & Slattery here.