New cost standard for investments

PF 13Feb pg1 update iol PF Illustration: Colin Daniel

The days of opaque and confusing financial products that too often leave investors disappointed are drawing to an end thanks to pressure from the government and regulators. For the first time you will soon be able to compare costs of most formal products.

And this is not the end of the road in simplifying your product choice – on the cards is a requirement for a standardised “key information document”, which will allow you to compare the features of different products more easily .

The changes are expected to result in greater competition among financial services companies and in lower product costs.

The new cost measure, the “effective annual cost” (EAC), has been developed by the investment industry body, the Association for Savings & Investment SA (Asisa), to ensure that the industry meets the demands of the outcomes-based Treating Customers Fairly (TCF) regulatory regime (see “What EAC standard requires”, below).

The announcement of the EAC has been welcomed by the Financial Services Board (FSB) and has received the approval of National Treasury.

Leanne Jackson, the FSB’s deputy executive in charge of TCF, says Asisa’s EAC disclosure model is “a very helpful step towards our TCF aim of helping financial customers understand whether financial products will deliver on expectations created at the time of sale”.

She says that progress is being made on the key information documents. “We are in the process of finalising templates in consultation with insurance companies on two sets of products as a starting point, namely short-term motor vehicle insurance and a long-term assurance risk product. The next step before finalising them will be to carry out consumer testing.”

Currently, it is virtually impossible to compare costs between collective investment schemes (unit trust funds and exchange traded funds, or ETFs) and life assurance investment products, and neither disclose all the costs.

The collective investment scheme industry uses the total expense ratio (TER), which reflects annual asset management fees, including any performance fees, as a percentage of your investment, while the life assurance industry uses the reduction in yield (RiY). The RiY shows the effect of costs as an erosion of value, or a reduction in the annual yield or return over a fixed term. Neither measure fully discloses all the potential costs, and the RiY uses assumptions that could prove to be incorrect.

Now, with what Leon Campher, the chief executive of Asisa, calls a world first, you will be able to compare the costs of life assurance products with those of collective investment scheme products. You will be provided with a cost figure that will be more comprehensive than either of the other two measures.

From October 1, you must be provided with the EAC on any new product you buy from an Asisa member company. The actual implementation date of the EAC standard for all new business is June 1, but the companies have until October 1 to comply.

All existing products will also have to be brought into line with the EAC standard when there is change to the contractual terms of the product. The deadlines for compliance for existing products are:

* June 1, 2017 for products sold after April 1, 2010;

* June 1, 2018 for products sold after April 1, 2000 and before April 1, 2010; and

* June 1, 2019 for products sold before April 1, 2000.

Included in the EAC net are all collective investment schemes (including unit trusts, ETFs and foreign funds approved for sale in South Africa), contracts with linked-investment services provider administrators, life assurance products (except pure risk assurance, but including life policies that wrap together underlying investments), investment-linked living annuities, retirement annuity funds and preservation funds.

Occupational retirement funds, including umbrella retirement funds, have not been included, because their structures are very different from products for individuals. Campher says, however, that a cost standard is also being developed in the occupational retirement fund space.

Michael Summerton, the actuary who headed the Asisa working group that developed the EAC, says the application of the EAC does not mean that other Asisa standards on products do not have to be met or that these other standards may be used to dilute the required EAC disclosures. For example, on living annuities, existing Asisa standards apply to pension drawdown rates, and prudential investment guidelines apply.

For the first time, the impact of things such as early-surrender penalties applied by life assurance companies if you fail to meet contractual premium or contribution terms, loyalty bonuses you have lost out on, and even adviser fees (if paid by the product company on your behalf) will be included in the EAC calculations.

Summerton says that, in terms of the EAC standard, Asisa member companies must meet various conditions. They will not be allowed to:

* Provide you with manipulated, biased, skewed, untrue, misleading or incomplete costs, including by doing things such as inflating projected or anticipated investment performance or shifting charges between different elements of a product to make a product appear less expensive; or

* Use other required disclosures to undermine, obscure or contradict the EAC.

The product providers must:

* Use plain language that is appropriate for your level of understanding, and it may not be printed in small type.

* Disclose full details of any rebates paid between any parties and whether or not they are passed on to you. When such a rebate is passed on to you, the impact must be included in the EAC calculations.

* Provide you with the EAC at the proposal stage and not after you have bought the product.

* Provide Asisa with annual certification of compliance with the EAC standard, signed off by the member company’s chief executive plus its statutory actuary or chief compliance officer.

* Have a facility that allows any third party, including a competitor, to request confirmation of EAC calculations and disclosures.

Summerton says Asisa will have the power to review all EAC calculations and disclosures, and if they are found wanting, the association will be able to order the withdrawal and correction of such disclosures.


The effective annual cost (EAC) standard developed by the Association for Savings & Investment SA (Asisa) requires product providers to disclose the costs of investment products in four separate categories of charges (including VAT) and over at least four periods.

The EAC is expressed as an annual percentage of your investment.

The EAC calculations must assume that you will terminate your investment at the end of each specific time period. So if your investment has a penalty that will be applied, or a loyalty bonus you will lose if you stop paying premiums or contributions, this must be shown as a cost.

The product provider must give you EAC information relevant for one, three and five years, and where there is a specified term, for that term, or 10 years if no investment term is set, or to age 55 for retirement products such as retirement annuities.

The four cost disclosures that must be shown are:

* Investment management charges. All costs and charges must be shown. These include the charges of any wrap product, such as a fund of funds, and those of the underlying funds as well things such as stock broker charges and VAT.

* Advice charges. If the product company pays commissions or fees to your financial adviser on your behalf, these fees must all be disclosed. This includes all initial and annual fees on both lump-sum and recurring-premium products.

* Administration charges. All charges relating to the administration of the product must be disclosed.

* Other charges. This is a catch-all for all remaining charges, such as termination charges, penalties, loyalty bonuses, guarantees, smoothing or risk benefits, and charges for risk benefits such as a premium-waiver benefit. These “other changes” must all be explained in notes published directly under the EAC table of costs.

Each of the four components must be calculated and disclosed separately and then totalled to provide one EAC figure for the financial product, expressed as a percentage of your investment (see example via link below).

The EAC standard sets down how each element must be calculated and what assumptions may or may not be used.

Example of EAC breakdown

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