Towards best practice managed fund regulation

Another Morningstar Global Fund Investor Experience Report, another clip around the ear for New Zealand.  In the first two reports – 2009 and 2011 – we came dead last with a rating of D-.  This year we scored a C- which is an improvement but still puts us second to bottom.

However we would expect the 2015 survey to show a sharp rise in the ratings to reflect the coming into effect of the new KiwiSaver disclosure rules and Financial Markets Conduct Bill.

The Morningstar method

Morningstar seeks to measure how investor-friendly managed fund markets are in different jurisdictions based on criteria such as investor protection, transparency, fees, taxation and investment distribution. It sets a helpful scorecard for our legislative framework (but marks us harshly in some areas).

The four categories Morningstar assesses on, and New Zealand’s current grading in each, are:

  • regulation and taxation   C
  • disclosure   D
  • fees and expenses   C
  • sales and media   B-

As will be evident, many of these factors relate to the general regulatory and legislative environment, and are not a criticism of fund manager behaviour.

Disclosure

Disclosure was our worst mark, but our grading should improve substantially next time when full credit is given for the standardised KiwiSaver periodic disclosure regulations, which come into force on 1 July this year.  Morningstar indicated that New Zealand was marked down heavily for not requiring disclosure of asset allocations, portfolio holdings and performance details. 

The new laws will require KiwiSaver schemes to report quarterly and annually on:

  • fund performance and returns
  • fees and costs
  • asset allocation and portfolio holdings
  • liquidity and liabilities, and
  • key personnel, policies and conflicts of interest.

Chapman Tripp’s commentary on the new regulations is available here.  Morningstar encourages extending the reporting to other fund products.

Rated too harshly?

New Zealand’s grade may have been higher, had Morningstar:

  • not mistakenly stated that investment statements need not contain risk descriptions and manager information
  • recognised that performance disclosure is required in fund product prospectuses
  • realised that the 1 July KiwiSaver disclosure reforms require quarterly (not only annual) website and FMA reporting, and will exceed the semi-annual benchmark set in the report
  • given credit for the requirement that full unit trust portfolio holdings are filed annually with the Registrar of Companies (albeit not sent to investors)
  • recognised that New Zealand has a website based electronic prospectus register
  • established that New Zealand does not in fact have a capital gains tax on domestic shares
  • given credit for New Zealand’s foreign investor regime, where foreigners pay no tax on 0% PIR foreign investor PIE funds (when the funds invest in foreign assets), and
  • given credit for the FMA’s Guidance Note on Effective Disclosure (and prospectus review) which encourage consideration of underlying fund manager disclosure when it could be material, which does not appear to be matched in many other countries.

On a positive note

  • The report provides fee data showing that domestic funds have lower fees than those provided from offshore.  Credit here may lie partially with the FMA which has actively required KiwiSaver fees are at the low end when ensuring KiwiSaver fees are not “unreasonable” as required by the KiwiSaver requirements.
  • New Zealand has a very low incidence of taxation on its managed funds compared to the rest of the world.

Governance

Although not a specific Morningstar measurement category, the governance requirements applying to managed investment schemes, including KiwiSaver, will be strengthened through provisions in the Financial Markets Conduct Bill.  The current intention is that the new Act come into force on 1 April next year (with a two year transition period), although that may slip out to July.  The new regime should also score well for the proposed website-based repository of fund information.

Chapman Tripp’s commentary on these aspects of the Bill is available here.

For further information on this brief counsel, please contact the lawyers featured.

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Related topics: Funds, KiwiSaver & superannuation; Capital markets reform; New Zealand productivity

Funds, KiwiSaver & superannuation; Financial services regulation

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