Consultation on KiwiSaver fees
Today the FMA has published a consultation on proposed guidance on KiwiSaver fees and value for money.
The consultation is aimed at providing guidance on the statutory requirement that KiwiSaver fees must not be unreasonable and the related overarching statutory duties.
Submissions close on Monday 14 December.
Who needs to read it? Why?
KiwiSaver providers and their supervisors should carefully read the consultation and consider making a submission.
This guidance will influence how a provider may set their fees and comply with their duties under the Financial Markets Conduct Act 2013 (FMCA).
What does it cover?
The consultation and its resulting guidance aim to address the FMA’s concerns that there has been very little shift in KiwiSaver fees over recent years. The FMA is particularly focused on membership fees, which disproportionately affect members based on their balance. The FMA considers that whether fees are “not unreasonable” should involve an assessment of the underlying costs and competitive pressures and whether the fee offers value for money to members. Submissions from the consultation will be used to help the FMA issue guidance to clarify:
- The statutory duties of managers and supervisors in relation to fees and value for money: The FMA considers that providers must set reasonable fees in order to comply with the duty to act in the best interests of members in Part 4 of the FMCA. The FMA also expects supervisors to monitor the scheme’s compliance with their trust arrangements, which includes monitoring whether fees charged are not unreasonable.
- What factors should be considered when assessing whether fees are unreasonable and whether KiwiSaver fees are providing value for money: The consultation document sets out a number of factors for providers to consider when they review their fees, such as how fees are calculated, the cost of services, the structure of the scheme, whether the fees reflect the level of management, the number of members, fund performance and how the fee compares to other comparable KiwiSaver schemes.
- Examples of when fees may be unreasonable: Providers must ensure that their fees continue not to be unreasonable after their initial registration. The proposed guidance will require providers to regularly review fees with regard to the factors above. The FMA has also set out a number of examples where they expect fees to decrease:
- When the funds under management increases. Fees should reduce to reflect the reduction in costs due to economies of scale
- Moving from active to passive management
- When fund input costs have fallen due to a decrease in third-party fund manager fees
- When a scheme is amalgamated and there are economies of scale
- The FMA’s role and enforcement options: The consultation highlights that the FMA may review a provider’s fees at any time and will not hesitate to take enforcement action if it determines that a provider’s fees are unreasonable. The FMA has also indicated that it may also take action for a breach of the duty to act in the best interests of scheme members where fees are unreasonable.
This consultation document indicates the clear intention of the FMA to ensure that all KiwiSaver fees are reasonable, reflect the cost of providing the service and provide good value for money for members.
These are important. However, a focus on fees must not restrict innovation in KiwiSaver, or the ability of KiwiSaver members to choose from a variety of providers offering different styles and structures for investment. The FMCA itself includes among its purposes the enhancement of innovation and flexibility in financial markets. Apart from the default schemes, the KiwiSaver regime does not mandate a particular style of investment. Some structures and styles are going to cost more for the manager to implement.
The factors listed in the consultation allow for the FMA to consider the necessary difference in fees between active and passive schemes. These include the costs of running the scheme and whether the fees reflect the degree of active or passive management when assessing the reasonability of a scheme’s fees. Under the KiwiSaver Regulations 2006, the FMA needs to compare the scheme to a comparable scheme, with the same kind of management. Actively managed schemes or schemes which invest in different types of assets will have higher fees. The guidance must recognise this, acknowledging that it may still seek to tie the reasonableness of fees to actual costs.
Providers should review and assess whether the proposed guidance raises any questions around their own fees, whether for existing or proposed KiwiSaver options, taking into account the factors listed in the consultation document. Particular attention should be paid to membership fees. The FMA has indicated that it expects fees to decrease after they release their finalised guidance. If providers wish to maintain or intend to increase their fees, they will need to be able to demonstrate that this is not unreasonable by reference to the FMA’s guidance.
If you have any questions in relation to KiwiSaver fees or considering how this consultation may affect your business, or if you would like any assistance in making a submission, please contact one of our experts.