Scheme fees must be disclosed in product disclosure statements and fund updates according to prescribed criteria.
Our guidance note ‘sets out our expectations about how managers, with assistance from their supervisors, should take a disciplined approach to considering and being transparent about the fees they charge and why, and what value their members receive in return.
The guidance applies to both MIS managers and KiwiSaver managers. There is an additional requirement for KiwiSaver managers to notify the FMA of all fee increases.
In addition, our KiwiSaver performance fee guidance note also applies to both MIS and KiwiSaver managers.
MIS manager’s basic fee
The MIS manager’s basic fee is a subset of overall management and administrative charges. It refers to the fees charged by the MIS manager for their services.
In this respect, it distinguishes the management and administrative charges which originate from the MIS manager from those which have been passed onto for services provided by other parties (underlying funds, auditors, supervisors etc).
We note that in some instances, third parties’ services are charged to the MIS manager. The MIS manager then charges these fees to the scheme. These third-party service charges should not be classified as the MIS manager’s basic fee.
References: Schedule 4, clause 1 and 63 of the FMC Regulations.
Buy/sell spreads
It is appropriate for trading expenses incurred, when implementing the investment strategy of a fund, to be borne by all scheme participants. However, material costs driven by investors transacting in fund MIPs should generally be borne by those transacting investors as a group over a particular period.
Buy/sell spreads on entry and exit to the fund can be an appropriate tool to help best to achieve this. The fundamental principle in considering the use of buy/sell spreads or any similar tool is fair treatment of investors.
Other tools that can properly allocate those costs include swing pricing and anti-dilution levies.
When necessary, MIS managers should work with their Supervisor to determine the tool most likely to ensure fair treatment of investors.
Buy/sell spreads can also be appropriate for some KiwiSaver schemes
When considering if and when buy/sell spreads are suitable for their funds, KiwiSaver scheme managers should take into account likely fund inflows and outflows under different scenarios. KiwiSaver scheme managers should also be particularly diligent in avoiding making the scheme unnecessarily complex.
Buy/sell spreads can be a permanent feature or limited to material impacts
If buy/sell spreads are implemented, they could be a permanent feature of the fund, or they could be limited to times when the impact of trading expenses incurred due to scheme participant transactions is material to fund returns. Regardless of the approach, as noted below they must be actively managed to ensure they result in the fair treatment of scheme participants.
MIS managers will need to weigh the benefit of implementing buy/sell spreads against other factors, including any additional complexity both operationally and in regard to scheme participant understanding. Similarly, MIS managers not using buy/sell spreads or a similar tool should consider if their use would promote fair treatment of scheme participants. Currently, not all governing documents provide for the use of buy/sell spreads or other tools such as swing pricing or anti-dilution levies. MIS managers should consider if those governing documents should be amended to allow for their use if needed.
Depending on market conditions, costs may be skewed towards buying assets or towards selling assets. In such scenarios buy spreads and sell spreads should be separately determined to ensure they reflect trading costs incurred due to the relevant scheme participant action (buy or sell).
Since the spread is meant to allocate trading costs to the appropriate scheme participant, and to prevent ongoing scheme participants from subsidising transacting scheme participants (or vice versa), the spread should always be applied to the benefit of the and never to the benefit of the MIS manager.
The FMA will monitor the implementation and level of buy/sell spreads in conjunction with MIS Supervisors.
Buy/sell spreads must be actively managed
A liquidity management tool can only be used if allowed in, and in the manner allowed by, the scheme’s governing document. It should also be consistent with the PDS, SIPO, and any other offer documents. Supervisor approval may be required. Where Supervisor approval is not required, we recommend the Supervisor is consulted.
Fair treatment of all scheme participants requires that any buy/sell spread should be maintained at an appropriate level. This implies that the MIS manager must monitor the underlying asset spreads, and the costs of fund transactions, and must adjust the spread so that it is neither too high nor too low. If it is too low, then ongoing scheme participants are subsidising transacting scheme participants. If it is too high, then transacting scheme participants are subsidising ongoing scheme participants.
Maintaining an appropriate spread would require that the MIS manager:
- Set a threshold that would trigger a review of the level of the spread to determine if it is aligned with underlying costs.
- Review the level of the spread on a periodic basis to ensure the level remains appropriate in the overall context of the market.
Buy/sell spreads should be disclosed
If buy/sell spreads for issue or redemption of MIPs or interests in a fund are charged to scheme participants, then this information should be disclosed to scheme participants, including in the PDS and fund updates.
However, there is no requirement to disclose trading expenses (see cl.2(1) of schedule 4 of the FMC Regulations for the definition of trading expense) such as buy/sell spreads or brokerage fees relating to underlying fund assets as part of fund charges where they are incurred by the fund (provided they reflect only the actual cost of buying and selling investments such as brokerage fees and spreads), though they will reduce reported returns. Because of this, and the fact that spreads go to the fund rather than to the MIS manager, our view is that describing buy/sell spreads as ‘fees’ is not necessary.
While noting the ‘fees’ comment in the paragraph immediately above, we consider that it is appropriate to treat buy/sell spreads in a similar way to individual action fees for PDS and fund update disclosure purposes. In the PDS this would include disclosure in the Key Information Summary and the section titled ‘What are the fees?
Clause 37 of schedule 4 of the FMC Regulations details how individual action fees must be disclosed. As buy/sell spreads may rapidly change in stressed market conditions, our view is that the information that 37(2) would require can be fulfilled by:
- Disclosing indicative spreads under usual conditions, noting for example that in stressed market conditions they may materially increase (consider giving an example of what they may increase to); and
- Noting how the actual spread will be set (e.g. it will reflect the estimated trading expenses incurred by the fund in carrying out the buy/sell request); and
- Including a link to a publicly available document with further information such as current buy/sell spreads.
MIS managers should take care to ensure that technical wording is minimised and disclosure is clear, concise and effective. In our view, even the wording ‘buy spread’ or ‘sell spread’ is quite technical and wording that describes the application and effect of the spread is more likely to be effective.
Where buy/sell spreads are mentioned, disclosure should include the fees example required by clause 38(1) of schedule 4 of the FMC Regulations, e.g.:
“[Name] invests $10,000 in the [specify fund name]. A [contribution cost] of [x] is [charged/incorporated in the price that he/she pays for her investment]. This brings the starting value of his/her investment to …”.
Any MIS manager webpage or other publicly available document linked to or referenced in the PDS that contains further information on buy/sell spreads should include the current buy and sell spreads, ideally in a table with the different buy and sell prices. This information should be disclosed in a clear, concise and effective manner.
However, if buy/sell spreads are not limited to estimated trading expenses incurred by the fund because of the buy/sell decision by a scheme participant – i.e. they may go beyond this – then our view is that they should instead be described as a fee and the disclosure of the amount included in the PDS.
If buy/sell spreads are introduced to an existing fund, MIS managers should not only update their PDS and other disclosure, but should also consider how they will inform existing scheme participants.
Our view on buy/sell spreads limited to trading expenses
In our view, a buy/sell spread could reflect the immediate trading expenses incurred by the fund, or alternatively, the average trading expenses incurred by the fund over the short to medium term (if over that term underlying average trading expenses are relatively consistent), due to such transactions.
It is important to note that funds incur trading expenses for reasons outside of scheme participants buying or selling MIPs – for example, to rebalance or actively manage the portfolio. Such trading expenses are not relevant to scheme participant buy/sell decisions and should not be included in buy/sell spreads.
