Review of the Managed Investments Act 1998

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Submission on the Review of the Managed Investments Legislation

7 September 2001

ACA logo

57 Carrington Road

Marrickville NSW 2204

Phone 02 9577 3333 Fax 02 9577 3377

About the Australian Consumers' Association

The Australian Consumers' Association (ACA) is an independent not-for-profit, non-party-political organisation established in 1959 to provide consumers with information and advice on goods, services, health and personal finances, and to help maintain and enhance the quality of life for consumers. Independent from government and industry, it campaigns on behalf of consumers to advance their interests.

ACA provides consumer education, conducts surveys into consumer attitudes, lobbies for improved conditions for consumers and distributes unbiased consumer advice. These activities are more than fund-raisers, they also form the basis of our work for consumers.

ACA is funded primarily through subscriptions to its magazines, fee-for-service testing and related other expert services. There is no government funding for normal running expenses of ACA, and no commercial sponsorship or advertising. The ACA products include CHOICE magazine, CHOICE online (, Computer CHOICE, CHOICE books.

For further information please contact:

Louise Sylvan
Chief Executive
Australian Consumers' Association
57 Carrington Road Marrickville NSW 2204
telephone: (02) 9577-3229
fax: (02) 9577-3377

Review of the Managed Investments Legislation


The Australian Consumers' Association (ACA) welcomes the opportunity to provide input to the Review of Managed Investments Legislation. The Managed Investments Act (MIA) regulates "managed investment schemes", encompassing a broad range of investments including mainstream public unit trusts and other (more speculative) schemes, under the MIA provisions of the Corporations Law (Chapter 5C).

The importance of appropriate consumer protection measures and sound regulatory structures for the managed funds industry has only increased since the introduction of the Act, as funds invested, and the number of investors, have increased significantly.

The central plank of the MIA reforms was the move from dual entity structures for managed investments to a single responsible entity regime. At the time of the change, ACA held the view that the move to a single responsible entity would operate to the benefit of consumers, provided that adequate resources were provided to the regulator and sufficient safeguards were established for consumers.

While we have no evidence to suggest that SRE structure has lessened safety and consumer protection, we believe that there is a need to review regulatory and industry issues. The significant and ongoing growth of managed investments makes effective consumer protection regulation critical. The amount of money at stake is demonstrated by the turf war within industry which the dual entity/SRE debate provokes, making independent assessment of consumer outcomes essential in any review. In ACA's view, key issues include ensuring that the security of investors' funds is supported by regulation, resourcing the regulator to enable proactive and vigilant monitoring and enforcement, improving disclosure of fees, risks and benefits, and reviewing what appear to be anti-competitive trends in the market.

This submission sets out suggested areas for the review process to consider. At present, resource constraints prevent ACA from providing substantive research. However, we would be pleased to provide further detail if this would be of assistance or to discuss issues relevant to the review. ACA's recommendations include:

• independent research on the consumer impact of the move to SRE structures

• an audit of the consumer protection elements recommended by ACA during the introduction of the legislation, to determine gaps in regulatory structures

• examination of the promised "fee savings" for consumers, which were heralded with the change from trustees to SREs, using independent assessment

• review of the extent of product proliferation and the benefit or detriment, if any, consumers face as a result of the number of products

• review of existing disclosure requirements and practices, and whether current fee disclosure is adequate for consumer comparison and understanding

• review of a mandated single cost of investment proposal, to improve competition and consumer outcomes

• consideration of marketing and promotion of managed funds to determine whether:

    ¬ the risks of investment are clearly outlined

    ¬ fees and charges are easily discernable and able to be compared

    ¬ past performance figures are used in a misleading way

The single responsible entity structure vs. dual entity

ACA considers that a single responsible entity is the preferred regulatory structure for managed investments. From our perspective, the trustee structure generally appeared to offer little additional benefit to consumers, added costs to investments and complicated matters where consumers sought redress.

At the time of the introduction of the Managed Investments Act ACA was supportive of the move to a single responsible entity. ACA perceived that:

    • consumers would find it simpler and more efficient to deal with an SRE

    • existing arrangements clearly warranted reform, evidenced by the various reviews and recommendations on the matter

    • the Wallis report argued that scope for improved efficiencies and expense performance existed, a finding broadly accepted by most players

    • accountability (for a variety of issues including mismanagement) would be clearer and more easily defined with a single responsible entity

While noting the arguments made by trustees concerning the safety of investors' funds, ACA was not convinced that the dual responsibility structure provided additional security for investors. "Blame shifting" between trustees and managers (for example, in Estate Mortgage and Aust-Wide) and confusion about the roles of the dual entities in the management and protection of investor funds had led to an unsatisfactory regime for consumers.

However, ACA noted the danger of forecast savings not being passed to consumers, and the importance of monitoring the effectiveness or otherwise of competition in delivering the promised results. ACA also highlighted the need for improved consumer protection and regulation regardless of which structure was in place.1

The ACA's support for the proposed reforms was conditional on:

• adequate resourcing for the regulator for the increased responsibilities

• willingness on the part of the regulator to enforce regulations

• rigorous compliance plans and quality assurance processes for schemes

• genuine independence in the board or compliance committee that oversees compliance of the scheme operators

• a proper separation of scheme assets from SRE assets

• meaningful requirements for financial reporting and the holding of meetings

• close monitoring of competition and costs to consumers, to ensure that the promised savings from the removal of trustees were passed on to investors

• improved disclosure for consumers on investment returns and fees

It appears that these suggestions were not fully implemented, and that gaps remain. This is particularly true in relation to disclosure, the promised cost savings to consumers, and the adequacy of the resources provided to the regulator to enable proactive and effective monitoring of managed investments.

To date, ACA is not aware of evidence to suggest that a single responsible entity structure is not the most appropriate regulatory structure for managed investments. It is important to note, however, that the introduction of the new regime has coincided with a period of generally strong returns for managed funds, potentially creating a false sense of security for the industry and investors. It may be that the review will uncover evidence that the current arrangements do not offer adequate security.

We would welcome further investigation into this issue and consideration of the extent to which the additional protections suggested by ACA at the time of the Bill's commencement remain outstanding, and whether additional action is required to ensure the consumer protection framework is adequate.

Independent views (separate to any industry commissioned studies) will be important given the vested interests of fund managers and trustees in the structure and management of a considerable and growing managed investment pool.


• that the reviewer commission independent research on the question of whether SRE structures have led to an improvement in consumer outcomes

that an audit of the proposed consumer protection elements of the MIA reforms be undertaken, to determine the adequacy of their implementation

Savings for investors: the vanishing trustee fees

One of the key arguments made by proponents of reform was the promise of reduced costs for investors - consumers were told that the removal of trustees (and associated costs) would translate into lower charges2.

The Wallis Inquiry noted that Australia's managed funds cost structures do not compare well internationally3. The move to an SRE structure, while involving some compliance costs, was promoted as one which would deliver savings to consumers as savings from the removal of trustee costs were passed on.

ACA is concerned, however, that these promised savings have not eventuated. For example, ACA has considered fee statistics for several Australian Equity Funds4 over the past three years (during which the transition to SRE took place). While ours was not a representative list, it appears that fees have not significantly reduction during the implementation of the SRE structure.

This raises a serious question about the projected cost savings - if they aren't flowing to consumers, where have they gone? In addition to the contrast with the public position of fund managers at the time the MIA was debated, this suggests a failure of competition in the market which deserves attention.

ACA recommends that the review consider, on the basis of independent research, the movement in MERs and fees generally for investors in the transition to the SRE structure, to determine whether cost savings have been passed on.


• that the overall change in fees be considered for funds moving to an SRE, using independent analysis (rather than industry commissioned studies)

• that justification be sought if MERs and other investment costs have not reduced for consumers with the abolition of trustee structures

• that potential anti-competitive or collusive behaviour be considered if the evidence suggests savings have not been passed to consumers

Proliferation of products: genuine choice or costs to consumers?

ACA is concerned at the plethora of funds in the market - according to research houses, there are more than 5000 managed funds on the market. This is clearly in excess of the needs of a country with a population of some 19 million, and a total investment pool of around $650 billion5. Anecdotal evidence suggests that up to 100 new funds are added to the databases of research houses such as Morningstar each month. By way of contrast, the United States - with a pool of some US$6.8 trillion under management and a population of almost 300 million- has 8,500 funds.

In this market, consumers do not have a meaningful choice and are unable to exercise genuine market power. ACA's concerns regarding disclosure and fee comparison (see below) only complicate investors' ability to navigate products in a market crowded with thousands of funds often distinguished only by bells and whistles.

There is a cost to this level of proliferation, and it's consumers who pay. It is important that the regulatory environment considers how effectively consumers are being served by managed fund offerings, and to what degree these market signals may demonstrate an ineffective or non-competitive market.


• that the influences on product proliferation be considered in the review

• that the extent to which product proliferation is leading to genuine innovation be considered, against industry advantage and consumer cost

• that the competition impacts of proliferation be considered

Level and disclosure of fees

ACA has also raised concerns about the nature and extent of fees on investments in the Australian market. Recent reports have highlighted the differences in our fund management charges compared with other jurisdictions. In late 2000, the US SEC published a report on mutual fund fees which found that the asset-weighted average expense ratio for all stock funds and bond funds was 0.94% in 1999 (from 0.99% in 1995)6.. A report by Barbara Drury in the Sydney Morning Herald showed that Europeans pay average annual fees of 1.45 per cent, based to research by London-based research group Fitzrovia International7. While it is difficult to determine average fees on the basis of available information, reputable research houses have estimated that managed investment fees averaged around 2%8.

There may be a number of factors contributing to this:

• ineffective disclosure of fees, which makes comparison (and therefore comparison shopping) extremely difficult for consumers

• non-transparent fee and commission structures

• an industry which through product proliferation and non-comparable disclosure is insufficiently competitive for genuine price competition

Regardless of the contributing factors, ACA is unable to justify management expense ratios and additional costs of investment at the average level in the Australian market. It is our contention that these fees are too high, and that closer scrutiny is required on the make-up and mark-up of such fees. We suggest that the review consider the level of total fees paid by investors, with international comparisons.

Another concern is the difficulty consumers face in comparing "apples with apples" - finding a simple way to compare the total cost of investing in different fund options. Management Expense Ratios are the only comparison tool consumers have available to them, and these are generally poorly explained. There is a common perception that an MER is the total cost of investing - despite the fact that it doesn't include entry, exit or transaction fees. Many financial planners describe the MER as the "total cost of investment" - which it often is not. If professional advisers are unable to grasp the limitations of MERs, individual investors will have considerable difficulty.

Despite a well promoted industry standard on MERs, consumers continue to face different wording and degrees of usefulness in documentation on MERs, and different presentations of entry, exit and transaction fees. With limited industry consistency, consumers face a difficult task in determining the cost of different investment options, or understanding the full impact of fees on existing investments.

A much needed improvement is a mandated "total cost of investment" calculation, using standard assumptions, that consumers could use to compare products. Such a proposal is likely to require regulatory intervention, but would offer major benefits to consumers, and facilitate genuine price competition in the market.

ACA is strongly supportive of standardised forms of disclosure, including dollar disclosure, a total cost of investment calculation, and consistent terms - with prescription to ensure consistent formats and terms are used. ACA strongly advocates consumer testing of disclosure regimes - in several qualitative tests that ACA has participated in, the need for standard terms, similar formats, dollar based examples and concise, clear explanations has been reinforced.

ACA is also concerned generally with asset based fee structures. While we intend to pursue this matter in superannuation, ACA is also concerned at asset based fee structures in managed funds. ACA considers the use of asset based fees inappropriate for the scale of work undertaken in managing investments, and the fees often conveyed to consumers in a way that does not clarify their impact in dollar terms.


• that consideration be given to disclosure requirements and whether current fee disclosure is adequate for consumer comparison and understanding

• that the review examine the merit of a mandated single cost of investment, to improve competition and consumer outcomes in managed investments

• that the review consider the appropriateness of asset based fees in managed investments, and their relationship to fund costs

Past Performance and risk - marketing on the basis of incorrect information

ACA is also concerned with the use of past performance by managed funds to promote products. There are several problems with the use of past performance:

• the use of point-to-point calculations is itself largely meaningless

• a company is able to choose what performance it discloses - and then place in the fine print (generally in very small font) that "past performance is no guarantee of future performance" despite large font use of selective past performance figures

• the use of past performance figures from different funds to that being advertised (one recent advertisement used 20% past performance figures based on a UK fund performance to market a new fund in Australia)

Past performance is a poor indicator for consumers to choose from with little statistical relevance, yet funds continue to use it as a marketing tool. In fact, the industry seems to have increased the focus on past performance - with some reporting 6-month results. Industry use of such figures as a basis for marketing longer term investments is a matter of concern.

ACA has lodged a complaint with ASIC, arguing that the use of past performance in this manner is misleading. We consider it appropriate that the review of managed fund regulation should also consider these consumer protection matters.

ACA is concerned at the growth in more speculative forms of managed investments - such as agribusiness schemes or mass marketed tax effective schemes - which have seen consumers lose significant sums. We believe that there is a clear need for the disclosure of risks to be improved, given that the current regulatory environment is not providing consumers with adequate protection.

An additional concern is the use of ASIC registration of scheme information as a marketing tool, particularly in speculative investment areas. ACA is concerned that consumers may misinterpret the statement that schemes are registered with ASIC to imply that the regulator has checked or endorsed either the operators or the investment strategy underlying the investment. Work on improved wording of the ASIC registration process is supported (ASIC's Consumer Advisory Panel is considering such research.


• That the review consider marketing and promotion of managed funds to determine:

    - whether the risks of investment are clearly outlined

    - whether fees and charges are easily discernable and comparable

    - whether past performance figures are used in a misleading way


ACA has raised major topic areas which concern us in the managed funds market:

• inadequate disclosure that hinders comparison and restricts competition

• high fees

• a need for the total cost of investing to be spelt out in dollar terms

• use of past performance figures in ways which may mislead consumers

• product proliferation that is excessive and costly, with little consumer benefit

• the failure of the SRE structure to deliver cost savings to consumers

• the need for independent research to determine whether the move to a SRE structure has improved or lessened the consumer protection framework

We consider the review a useful opportunity to take a careful look at the adequacy of our current regulatory arrangements, in an environment where returns may reduce in the short to medium term. ACA would welcome the opportunity to discuss these issues in detail as the review progresses.

7 September 2001

1 "ACA does not believe that either the trustee companies or the fund managers can look back on their track record with a great degree of pride. So if the SRE approach is to be successful, then the mechanisms that are proposed for protecting consumers must be sound." Consuming Interest Journal, Spring 1997, page 18

2 eg the MIA Explanatory Memorandum, the Wallis Report, industry submissions to the 1997 Joint Statutory Committee on Corporations and Securities Review of the Managed Investments Act

3 "What unit trusts charge" Wallis Report p217

4 using Morningstar data, ACA considered MREs for select Australian equity funds, data for 2001 was not available

5 Recent industry figures from IFSA sources, includes superannuation (unit trusts $117 billion)

6 "Report on Mutual Fund Fees and Expenses" US Securities and Exchange Commission, December 2000 (

7 "Fund clients feel the heat over fees" Barbara Drury, Sydney Morning Herald 24/2/2001

8 Ibid



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