ASISA recently published the following Standards on their website:
- ASISA Retail Standard on Effective Annual Cost
- ASISA Retirement Fund Standard: Effective Annual Cost for Individual Fund Members
- ASISA Standard: Calculation and Disclosure of Total Expense Ratios and Transaction costs
These Standards should help advisors fulfil their duties to clients when providing advice and/or intermediary services and support a culture of treating customers fairly (TCF).
The Standards share a few common themes, some of which we discuss below:
Treating Customers Fairly
The Standards mentioned above were developed in seeking to achieve Outcomes 1 and 3 of TCF which requires that customers can be confident that they are dealing with firms where the fair treatment of customers is central to the corporate culture and that customers are provided with clear information and are kept appropriately informed before, during and after the point of sale.
General Disclosure Principles
Although the Standards do not replace the general disclosure requirements in terms of the relevant legislation, they set out the minimum disclosure requirements which must be followed. Furthermore, when Providers prepare information it has to follow well accepted principles that disclosures should:
- be timely;
- be relevant and comprehensive;
- promote product understanding;
- promote product comparisons;
- highlight important information; and
- have regard to consumer needs.
This should make it easier for advisors when providing information to clients so that they can make better informed decisions.
Governance principles are set out in the Retail Standard on Effective Annual Cost (EAC) and the Retirement Fund Standard: Effective Annual Cost (EAC) for Individual Fund Members. Essentially the governance principles focus on a certificate being submitted to ASISA which demonstrates that all the Provider’s calculations and disclosures comply in all respects with the letter and spirit of the relevant Standard.
When an FSP is reviewing or considering entering into an Intermediary Agreement with a Provider, part of the due diligence process could entail obtaining confirmation that such a certificate has been submitted to ASISA. This would provide the FSP with comfort that the Provider(s) whose products they use are committed to fair customer outcomes.
We take a closer look at each of the Standards below.
Retail Standard on Effective Annual Cost (EAC)
The ASISA Retail Standard on EAC is a standardised disclosure methodology that can be used by both consumers and advisors to compare charges on most retail investment products and their impact on investment returns. The EAC is a measure of the charges that an investor will likely incur in purchasing and holding a financial product. The Standard came into effect on 1 October 2016 and was recently updated on 28 May 2019.
This Standard applies to the following financial products:
- Participatory interests in collective investment schemes (including foreign collective investment schemes duly approved for marketing in South Africa);
- Contracts under a linked investment services provider licence;
- All insurance contracts (other than pure risk-based insurance contracts and compulsory and voluntary purchase guaranteed non-profit Life Annuities) and products wrapped in a life wrapper; and
- Memberships of retirement annuity funds and preservation funds.
The EAC comprises four separate components into which various charges are allocated. The EAC is calculated separately for each of the four components in isolation and then summed to derive the EAC for the Financial Product as a whole. The four separate components are:
- investment management charges (IMC);
- advice charges;
- administration charges; and
- other charges.
ASISA Standard: Calculation and Disclosure of Total Expense Ratios and Transaction Costs
In seeking to achieve TCF outcomes 1 and 3, ASISA members have developed the Total Expense Ratio (“TER”) and Transaction Costs (“TC”) measures. These are standardised disclosure tools that can be used by investors and advisors to assess the impact of Investment Charges (“IC’s”), on Financial Products. To comply with this Standard, Providers must calculate and disclose the TER of each Financial Product under their administration as well as the related TC incurred. This Standard came into effect on 1 January 2016 and was recently updated on 28 May 2019.
ASISA Retirement Fund Standard: Effective Annual Cost for Individual Fund Members
ASISA members have developed a standardised retirement savings cost disclosure methodology that can be used by retirement fund members of Financial Products (as defined in the Standard) to review and/or compare charges on retirement fund products, and their impact on investment returns, so that Fund Members are in a position to make better informed decisions around both new and existing retirement fund product choices. This Standard was approved by the ASISA Board on 28 May 2019 and will take effect from 1 October 2020.
The significance of the new EAC is that individual umbrella fund members will be able to review and compare charges on retirement fund products and then assess the impact on investment returns. The Standard applies to ASISA members as sponsors of commercial retirement fund products including but not limited to umbrella funds, unclaimed benefit funds and in-fund living annuities.
Advisors should be cognisant of the principles set out in these Standards. The Standards can be of assistance to advisors in providing information to clients, and as mentioned above, can form part of the FSP’s due diligence process when considering doing business with a Provider.