Dust-up looming over FMA’s value-for-money initiative

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A scrap is brewing between the Financial Market Authority (FMA) and some fund managers about the extent to which the regulator's value-for-money guidance on fees will apply to non-KiwiSaver funds.

Monday, October 3rd 2022, 1:58AM 4 Comments

by Jenni McManus

Chapman Tripp partner Tim Williams said there has been a lot of debate about the FMA’s value-for-money report released in May and whether its aim is to encourage the industry or spell out legal requirements. It’s probably a bit of both, he said.

In Williams’ view, applying the value-for-money guidance to KiwiSaver schemes is relatively straightforward. The rules attached to the KiwiSaver Act 2006 make it clear that fees must “not be unreasonable” and the regulations define that as being “significantly higher” than other comparable funds. So, the regulator would be looking for outliers.

But for non-KiwiSaver funds, the requirements around fees are more murky. “The justification [for applying value-for-money] seems to be that fund managers have a duty to act in the best interests of members,” Williams says.

“But that duty is to be exercised or required only when the manager is exercising powers or performing duties…. And what they charge when not exercising powers or performing duties is not subject to the best interests test. So there is a difference between KiwiSaver and non-KiwiSaver schemes as far as the obligation around fees goes.”

Fees would be constrained by competition and by the disclosure requirements that allow the market to make its own assessment, Williams said. Because the government subsidises KiwiSaver, it had “good justification” for being stricter on fees than for other managed investment schemes.

Williams said there had been discussions with MBIE some years ago about the meaning of “best interests” and the industry was assured at that time that it didn’t extend to fees. He said there had more recently been “very constructive” discussions with the FMA about value-for-money. At times there was consensus but at others “we have agreed to disagree”.

On the issue of commissions - a big part of the value-for-money initiative - Williams said if they were being charged to a member or scheme, he believed the “best interests” duty did apply because this related to the operation of the scheme.

It is now up to the value-for-money supervisors to unravel the issue, he said. And it is important to note that the FMA is asking the right questions “without indicating any particular answer”.

“I encourage the supervisor to apply the law if they’re talking about a matter of law and if they’re talking about matters of encouragement be open and transparent so there’s no confusion in the market between those things.”

Paul Gregory, FMA director of investment management, said the FMA and its scheme supervisors simply want fund managers to succinctly demonstrate value around the fees they’re charging. While the FMA has developed a tool for doing this, it isn’t mandatory and fund managers are free to demonstrate value in their own way, “so long as it’s convincing”.

Gregory said the FMA doesn’t have a philosophical opposition to performance fees if they’re well structured. “They can be a very good tool for aligning investor and investment manager interests….I think the future of performance fees will be in their structure, demonstrating how they’re value for money to the people who’re paying them and how well they’re disclosed.”

Supervisors, fund managers and the FMA are all trying to do the same thing, Gregory said. “We’ve all got a deep professional and personal interest in New Zealanders having good financial outcomes whether it’s a retirement horizon or a first home horizon or some other investment goal that’s outside KiwiSaver and that’s particular to them.”

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