Edition: April / June 2016 Edition


Big advance

In the retail space, introduction of the EAC will shoot through the confusions that have hitherto befuddled consumers and advisors.

Rusconi . . . the right direction

Rob Rusconi, the independent actuary who has for years criticised the complexity and opaqueness of investment charges, welcomes the introduction by the Association of Savings & Investment SA (Asisa) of a standardised Effective Annual Cost (EAC) measurement for retail products. Coming from him, that’s high praise.

His impression of the requirements is that they are thorough, sound and client-centric to the extent that “I think it will be challenging for product providers to implement them”. But he hastens to add that none of the EAC principles are more demanding than the corresponding principles established by the Treating Customers Fairly (TCF) regime, so anything less in the EAC would be unacceptable.

Michael Summerton, convenor of Asisa’s working group on the EAC, believes that the standard could be a world first in its comparative scope and cost transparency: “It facilitates a standardised approach to cost disclosure by product providers that users and advisors can use to compare charges in a meaningful way irrespective of whether the product is a unit trust, living annuity, retirement annuity or endowment policy.”

The standard sets out the minimum disclosure requirement as well as disclosures required in terms of relevant legislation, Asisa point out. It does not replace any existing standards. In particular, the general code of conduct under the FAIS legislation has been used as the departure point.

The standard applies to all local collective investment schemes (including foreign schemes whose marketing in SA has been approved by the FSB), contracts issued under a LISP (linked-investment service provider) licence, and long-term assurance savings contracts.

It requires product providers to disclose four separate vat-inclusive charges, separately calculated, assuming that an investor terminates the investment at the end of specific time periods:

  • Investment management charges (i.e. total costs and charges for the management of all underlying investment portfolios);
  • Advice charges (i.e. initial and annual fees, both lump-sum and recurring);
  • Administration charges (i.e. all charges related to the administration of a financial product);
  • Other charges (e.g. termination charges, penalties, loyalty bonuses, guarantees, smoothing or risk benefits).


They might start to emerge as product providers begin to pick through the detail.

As an example, Rusconi points to a provision in the general principles: ”Where the purchase of a financial product requires an investor to waive or forego a benefit...the loss of such benefit and the effect thereof must be clearly explained.”

He asks whether it means that those synthetic investment products based on the growth of an index, implicitly withholding dividends because the growth is an ex-index measure, must now include disclosures that describe the loss of such a benefit.

Some providers, he suspects, will continue to suggest that “it is what I say that matters, and I will pay the index, rather than what I don’t say, which is that a market investment would normally include the dividends”. Would those products disappear if providers had to make it clear, in plain language, that the investor implicitly gives up the dividends?

Some interesting market dynamics might await.

Providers are strongly cautioned against manipulating any values to inflate projected or anticipated returns, or to make a product appear less expensive than it is. The use of plain language is also urged.

Teeth are in the requirement that Asisa members (representing the majority of providers) submit annual compliance statements. Implementation will be phased in from October.

Conventionally used for costs disclosures are the reduction in yield (RIY) method and the total expense ratio (TER). The former relies on estimates of expected costs; the latter doesn’t take into account such charges as initial fees and ongoing advice costs.

Neither allow for consumers and advisors to make proper comparisons between products with different legal structures, Summerton points out. The EAC will change all this, most definitely for the better.