The Financial Markets Authority (FMA) has released a consultation paper setting out the FMA's proposed guidance for managers and supervisors on the regulatory approach to the requirement in the KiwiSaver Act 2006 that KiwiSaver fees must not be unreasonable. Feedback will be used to help the FMA refine its proposed guidance. Submissions close on 14 December 2020.
Focus on fees
KiwiSaver fees have been a focus for the FMA recently, in the context of whether KiwiSaver schemes are providing good value for money.
The proposed guidance is intended to address the FMA's concerns that average fees have not been reducing as funds under management increase, despite the expectation that economies of scale would be passed on to members.
Scope of the guidance
The FMA guidance will clarify the following:
- the statutory duties of managers and supervisors in relation to fees and value for money;
- what factors should be considered when assessing whether fees are unreasonable and whether KiwiSaver fees are providing value for money;
- examples of when fees may be unreasonable; and
- the FMA's role and enforcement options.
Statutory duties of managers and supervisors
The KiwiSaver Act includes a requirement that managers must not charge a fee that is unreasonable.
The proposed guidance states that the statutory duties on managers and supervisors to act in members' best interests and the FMA's expectations in relation to good conduct mean that the assessment of a scheme's fees should take into account whether the fee (and the product overall) offers value for money to members.
The FMA expects supervisors of KiwiSaver schemes to monitor schemes to ensure the fees charged are not unreasonable and are reflective of actual costs.
If fees are unreasonable, the FMA expects action to be taken, including reducing fees and refunding members who were overcharged. The FMA will take into account whether members have been promptly refunded when considering enforcement action.
Factors that should be considered when reviewing fees
Managers and supervisors of KiwiSaver schemes should regularly review fees, with members' best interests being the overarching consideration.
The proposed guidance sets out matters that should be considered when reviewing fees, including:
- the cost of services and whether the fees reflect those costs;
- the performance of underlying managers;
- how assets are invested;
- the number of members;
- the value of scheme assets and whether the value has increased over time so benefits of scale are passed on to members; and
- the proportion of returns eroded by fees.
Examples of when fees may be unreasonable
The proposed guidance sets out the following examples of when the FMA expects KiwiSaver scheme fees to decrease:
- funds under management increase, meaning fees should reduce to reflect the reduction in fixed costs due to economies of scale;
- moving from active to passive investment management;
- fund input costs fall due to a decrease in third party fund manager fees; and
- scheme amalgamations, where economies of scale are an end result.
The FMA notes that while costs should represent actual costs, the actual costs themselves may be unreasonable – for example, if the scheme's structure unnecessarily raises costs or the scheme does not adopt cost-saving practices.
The FMA also draws specific attention to membership fees, given they have the potential to erode members' balances and have a disproportionate effect on members with low balances.
The role of the FMA
The proposed guidance states that the FMA can undertake a fee assessment of a KiwiSaver scheme at any time and the FMA will not hesitate to use its statutory powers to look into commercial arrangements and obtain information to understand scheme costs.
The proposed guidance also refers to the wide range of enforcement options available to the FMA if it determines that fees are unreasonable, including stop orders, direction orders, censures, action plans, directions and Court action.
KiwiSaver scheme fees (as compared to other types of fees charged by financial institutions, such as fees for consumer credit contracts charged by creditors) also need to account for some rate of return/profit for KiwiSaver managers. This element is not recognised in the current draft guidance.
The MyFiduciary independent report commissioned by the FMA in relation to KiwiSaver providers' investment management styles included a comment, in the context of default providers, that total fees could be tested to ensure providers are earning a fair and not excessive rate of return on their equity. We expect that the FMA will look to apply this concept to all KiwiSaver managers and that the FMA will expect KiwiSaver managers to only charge reasonable margins above their costs.
The FMA has included a number of consultation questions in the consultation paper. Submissions close on 14 December 2020. A final guidance note will be published early next year. Please get in touch with one of our experts if you would like assistance with your submission.
While the proposed guidance is specific to KiwiSaver schemes, we recommend that all managers and supervisors review the proposed guidance and consider whether their scheme fees provide value for money to members. In particular, we strongly recommend reviewing any membership fees.