Jun 30, 2021
In April 2021 the Financial Markets Authority (FMA) announced that it had published a Guidance entitled Managed fund fees and value for money. The Guidance has introduced a new permanent feature into the landscape of funds management in New Zealand. It directly affects most managed investment schemes (MIS) and their licensed Managers and licensed Supervisors.
Licensed Supervisors are expected to play an active and intrinsic part in the value for money (VfM) and reasonableness of fees (RoF) work required under the Guidance. The Trustee Corporations Association (TCA), which represents licensed Supervisors in New Zealand, is working closely with the FMA on how to apply the Guidance in practice within the normal annual reporting cycle of MIS Managers (Trustees Executors is a member of the TCA).
Work by TCA members on Guidance implementation is currently focused on designing and testing a shared-in-common review framework suitable for assessing MIS RoF-VfM that can be uniformly applied by Supervisors on an ongoing basis. To that end, a pilot project will be rolled out by Supervisors with selected MIS Managers to test out the framework in July of this year, with results expected back for analysis and evaluation in conjunction with the FMA in August. Thereafter it is intended that a finalised RoF-VfM review framework will be ready to apply to nearly all kinds of MIS, including KiwiSaver schemes.
VfM in the context of analysing charges within managed funds is closely allied to the concept of RoF. New Zealand law already contains an explicit prohibition that forbids the fees charged on all KiwiSaver schemes from being unreasonable. The KiwiSaver Act 2006 includes sections 118 and 119 respectively concerning the powers of the FMA and the High Court to act in respect of unreasonable fees in KiwiSaver schemes and complying superannuation funds. The Act incorporates Schedule 1 KiwiSaver scheme rules, which list a clause 2 headed up as “Fees must not be unreasonable”. Entities captured by clause 2 include a KiwiSaver scheme’s manager, supervisor, administration manager, investment manager and any other person who charges a fee for services in relation to the provision of a KiwiSaver scheme. Clause 2 maps over onto regulations 10, 11 and 12 of the KiwiSaver Regulations 2006. Thus RoF principles for KiwiSaver schemes are well entrenched in New Zealand law and regulation.
There is no comparable explicit set of RoF rules in New Zealand law to cover non-KiwiSaver retail MIS, but KiwiSaver regulation 12 fees assessment criteria could potentially apply.
Key questions arising for the development in New Zealand of formal RoF-VfM analysis standards for retail MIS, including KiwiSaver schemes, are what sorts of information should be required and how they should be collected, and how the results of such analysis are to be communicated effectively to the members of MIS so that they can use this information to their benefit. For example, MIS members may wish to rely on RoF-VfM information to determine whether to stay invested in a particular scheme or fund thereof, or else take their money out and go elsewhere. One overseas model to look towards for potential answers to such key RoF-VfM questions is the United Kingdom.
Over quite a number of years now, the United Kingdom has been developing a sophisticated and substantial legal and regulatory machinery to deal with the question of whether managed fund fee charges represent VfM. Part of this mechanism that came into force in September 2019 required that from January 2020 authorised fund managers (AFMs) must publish yearly in summary form their mandatory annual assessment of the overall value that their authorised funds (ie., authorised open-ended collective investment schemes/CIS) deliver to investors. The idea behind this requirement, introduced by the Financial Conduct Authority (FCA) in its April 2018 Policy Statement PS18/8, entitled Asset Management Market Study remedies and changes to the handbook – Feedback and final rules to CP17/18, is to ensure that AFMs provide meaningful VfM public domain information that will beneficially influence the behaviour of retail investors, professional investors, advisers and their representatives. PS18/8 could potentially provide a template for some similarly explicit VfM disclosure rules applying across MIS in New Zealand.
In the policy statement, the FCA sets out its case for the necessity for fund managers to perform VfM analysis and to communicate this information to their investors:
“Strengthening the duty of AFMs to act in the best interest of their investors – our Value for Money proposal
“1.14 There is an existing duty on AFMs to act in the best interests of fund investors. In our view, as part of fulfilling this duty, AFMs should assess and justify to their fund investors the charges taken from the funds they manage in the context of the overall service and value provided. We believe this is important as AFMs are the agents of the investors in their funds; they are not just product providers. In CP17/18 we called this a consideration of ‘value for money’ (VfM). We have found that AFMs generally do not consider robustly whether they are delivering VfM, despite their existing obligations.
“1.15 For many retail and institutional investors, making informed investment decisions can be hard. To protect those investors that are not well placed to find better value themselves, we consulted on proposals to strengthen and clarify AFMs’ duty to act in the best interests of fund investors. Specifically, we said that they must assess the VfM of each fund against a non-exhaustive list of prescribed elements, conclude that each fund offers good VfM or take corrective action if it does not, and explain the assessment annually in a report made available to the public.”
Source: PS18/8, p. 5
In June 2020, the FCA published a consultation paper (CP) entitled CP20/9: Driving value for money in pensions. This document is pitched at a class of pension fund agents that does not have a direct equivalent in New Zealand (Independent Governance Committees/IGCs), but which sets out the regulator’s thinking in ways that could find New Zealand application. A principal concern of the CP is to address the issue of how consistency of VfM assessment can be standardized in practice. The CP states:
“4.8 In this CP, we propose to introduce a common definition of VfM and 3 elements that IGCs must take into account in a VfM assessment. This would be supplemented by further Handbook guidance about our expectations. This is designed to promote a consistent approach with TPR [The Pensions Regulator] for assessing VfM. Our proposals would apply to IGCs’ VfM assessment of investment pathways as well as DC [defined contribution] workplace pensions in accumulation.
“4.9 Based on our discussions with IGCs the 3 key elements we think contribute to VfM in pensions are:
“4.10 We propose that IGCs are required to consider these elements as starting points when assessing VfM.
“4.11 We hope that these proposals can pave the way for the use of standardised metrics and/or benchmarks in initiatives such as the pensions dashboard or open finance. This may help at least the most engaged consumers to take greater control of their finances.”
(CP. P. 13)
In June 2021, the FCA published an updated version of the Chapter 6 Operating duties and responsibilities section COLL 6.6 Powers and duties of the scheme, the authorised fund manager, and the depositary of its Collective Investment Scheme Information Guide (COLL/COLLG) that forms part of its labyrinthine Handbook to state the rules, guidance and evidential provisions for AFMs with respect to VfM duties. The relevant items are COLL 6.6.19 R through to COLL 6.6.24 G. These items provide an example of an existing detailed regulatory system of accountability for fund manager VfM assessment of fees and services that is actually in current practice.
It should be noted that in the UK, AFMs and other entities responsible for assessing and reporting on VfM to investors are directly overseen by the FCA, whereas in New Zealand the regulatory infrastructure includes licensed Supervisors interposed as “frontline regulators” between the FMA and MIS Managers. But otherwise, apart from these structural differences, there are elements of the FCA’s approach to VfM that could fruitfully be applied in New Zealand.
Apart from the FCA, other British state agencies have had input into serving the VfM reporting cause along the way including the Office of Fair Trading (OFT, closed in 2014) and The Pensions Regulator (TPR). Additionally, private sector entities such as the pension industry-led Cost Transparency Initiative (CTI), which is a project operated by the Pensions and Lifetime Savings Association (PLTA), and Deloitte UK’s Centre for Regulatory Strategy EMEA have produced excellent free resources to assist AFMs and others obligated to report VfM assessments with such work. In the rest of this article, we shall consider a sampling of these resources that might be of use within New Zealand’s regulatory environment for reporting VfM.
TPR has published an online guide called “5. Value for members ”(updated 2019) that is based upon a Codes of practice Code 13: Governance and administration of occupational trust-based schemes providing money purchase benefits. This how-to guide provides a detailed, step-by-step walk through to assist trustee boards to comply with British law concerning their duty to assess VfM in occupational trust based schemes providing money purchase benefits and comes as part of a set of six. TPR notes that:
“The guides aim to provide you with practical information, examples of approaches you could take and factors to consider. The guides are not intended to be prescriptive, though in some instances they state what we consider to be best practice. Often, the methods you choose to adopt will depend on the nature of your scheme and its membership.”
(TPR online guide number 5)
Although the online guide is written for a quite restricted audience, the advice provided on how to go about determining VfM for a workplace pension scheme could readily enough be translated into the context of a KiwiSaver scheme, for example, particularly concerning the value provided by scheme services to members, which might not always be exhaustively assessable by quantitative financial analysis techniques.
The CTI has published online a set of open source standardised templates that fund managers and others are free to download and fill out when undertaking VfM assessments. Its home page succinctly sets out its mission:
Welcome to the Cost Transparency Initiative, a new industry standard for institutional investment cost data. The availability of comprehensive and transparent information on costs and charges is important in helping investors to decide whether investments represent value for money. We've created a set of templates and tools which together form a framework investors can use to receive standardised cost and charges information from asset managers.
Along with the templates, which are open source and free to download, we also provide guidance for pension schemes and their advisers on how to make use of cost information, and for asset managers on how to provide cost information to their clients.
Standardisation and consistency are important values for the CTI to propagate in respect of VfM data collection, assessment, and investor reporting. A sample template of note is the Main Account Template, which is offered in three versions: PDF, Excel, and machine readable. This template is designed to be completed by “Asset managers or relevant service providers.”
Deloitte UK’s Centre for Regulatory Strategy EMEA has produced two excellent papers on VfM. In 2019 it published a 22 page report entitled Assessing the value that investment funds deliver to investors – Navigating the challenges. This report functions like another “how-to” guide on VfM, in its case pitched at UK AFMs in respect of how they should go about effective VfM assessment in order to produce results that are useful to investors and acceptable to the regulator, the FCA. The report also contains some good summaries of VfM assessment practices in the UK pensions sector and the US mutual fund sector. Seven VfM assessment criteria applied by the FCA are examined:
On page 2 of the report there is a summary table which sets out the Centre’s “view of the principle good practices and potential pitfalls” that it recommends AFMs should follow that could readily be translated into the New Zealand situation. One good practice description states: “Focus on value, not just cost: good value of course does not necessarily mean ‘cheap’.” As an example of a potential pitfall, the report cautions against, “Including jargon or excessive detail in the published report: to be accessible to retail investors, the report should be concise and use consumer-friendly language.”
In 2020 the Centre followed up with another 17 page report, this time entitled Good value? - A suggested framework for financial services firms to assess the value for money of their products. This report has a wider ambit than the previous one in that it looks more broadly than only at managed funds to consider other kinds of financial services from a VfM perspective including insurance and consumer credit. The main concern of the report is to find some standardisation for VfM assessment and reporting across the financial services sector. The shrewd observation is made that, “‘Value’ can first appear to be a nebulous and debateable concept, and regulators will, understandably, be unwilling to provide firms with template answers for what good or fair value looks like” (p. 5).
The 2020 report considers a number of ways to tackle the economic value provided by financial products, grouping them under five headings:
The report then provides three practice examples, using the five headings above to create a VfM assessment matrix. In the New Zealand context, the report’s asset management matrix, being directly applicable to retail MIS, would be the most immediately useful, but the other two examples would have merit for insurers and retail lenders to examine.
The United Kingdom represents a continuously evolving environment for the assessment and reporting of VfM in financial products that will provide many opportunities for adaptation into New Zealand’s circumstances. The United States could be fertile ground for more such borrowings from abroad, tailoring them to New Zealand’s domestic needs as required.
“Value for money (VfM) and reasonableness of fees (RoF) have come to the fore in New Zealand as central considerations for MIS Managers and their Supervisors to address on a regular basis,” said Matthew Band, General Manager of Corporate Trustee Services at Trustees Executors.
“The FMA’s Guidance Managed fund fees and value for money has provided a pathway for Managers and Supervisors to explore and define how the fees charged and services provided by retail MIS relate to the benefits or otherwise that are actually being received by their members.”
“Corporate Trustee Services is actively working with the other MIS Supervisors under the Trustee Corporations Association (TCA) banner and in conjunction with the FMA on the implementation of the Guidance in practice.”
“One key area yet to be determined is how the information arising from VfM and RoF assessments is to be prepared, packaged and communicated effectively to MIS investors and the public at large.”
“This kind of RoF-VfM financial literacy information promises to be very valuable to the New Zealand public in helping it to make informed investment decisions, but it must be presented in useful, plain-English, no-nonsense form that is fit for retail investors to act on.”
“The UK is evidently much further down the track than New Zealand is in developing managed fund VfM regulations, consistent VfM assessment tools and methodologies, and appropriate means of communicating results of VfM assessments to investors and the wider public.”
“There could be many useful lessons to be learned concerning how the UK has already gone about undertaking the RoF-VfM journey that is getting underway in New Zealand.”
“It is very fortunate that so many excellent VfM resources have been developed and publicly shared in the UK, which is to the wider benefit of investors and fund managers globally.”
For comment or more information, or to be added to the free email subscriber list of “The Supervisor”, please contact Matt at [email protected].