In a media release by the Association for Savings and Investment South Africa (ASISA) on 10 February 2016, it announced details of a new “meaningful” basis to allow consumers and advisers to compare charges and its impact on investment returns across most savings and investment products from October this year.
This will be achieved by the introduction of the “Standard on Effective Annual Cost” (EAC).
The EAC Standard facilitates a standardised approach to cost disclosure by product providers that consumers and advisers can use to compare charges in a meaningful way, irrespective of whether the product is a unit trust, a living annuity, a retirement annuity or an endowment policy. The EAC Standard will apply to the majority of products offered by ASISA members.
Why the EAC Standard
Michael Summerton, convenor of the ASISA EAC Working Group, explained that before ASISA was formed in 2008, the savings and investment industry had been fragmented along product lines, which had led to vastly different cost disclosure methods.
The Collective Investment Schemes (CIS) industry had been applying the Total Expense Ratio (TER) method of cost disclosure. Although this method is used widely and is internationally accepted, it is backward looking and does not take into account fees such as advice and initial fees.
The long-term insurance industry developed the Reduction in Yield (RIY) method. While this method is able to incorporate advice and initial fees, it is forward looking and relies on assumptions based on an estimation of expected costs.
Summerton said that while both the TER and RIY are good cost calculation measures, neither allow for meaningful comparison between products with differing legal structures.
“As a result, it has been almost impossible for consumers and advisers to compare the costs of different products in a meaningful manner. One of ASISA’s earliest priorities, therefore, was the development of a standardised approach to cost disclosure.”
Summerton said an ASISA team of product specialists, actuaries and marketers from the various member companies was tasked with developing the EAC Standard.
“Given the challenges presented by the product and disclosure diversity, we are exceptionally proud that we now have in place a solid approach to cost disclosure, which carries the approval of our members and is viewed as a positive development by National Treasury and the Financial Services Board.”
In addition the EAC Standard is aligned to the outcomes of the Treating Customers Fairly framework, in particular Outcome 3, which requires product providers to ensure that customers are given clear information and are kept appropriately informed before, after and during the point of sale.
What to expect from EAC disclosure
The EAC Standard applies to all local CIS (including foreign CIS approved by the Financial Services Board for marketing in South Africa), contracts issued under a LISP license, all long-term insurance savings contracts (including endowments and living annuities), as well as retirement annuity funds and preservation funds.
The EAC standard requires product providers to disclose four separate components of charges (including VAT), and perform the EAC calculations assuming that an investor terminates the investment at the end of specific time periods that must be shown in the disclosure table:
- Investment Management Charges – costs and charges for the management of all underlying investment portfolios
- Advice Charges – initial and annual fees, both lump sum and recurring
- Administration Charges – all charges relating to the administration of a financial product
- Other Charges – catch all for all remaining charges such as termination charges, penalties, loyalty bonuses, guarantees, smoothing or risk benefits, wrap fund charges and risk benefits like waiver of premium
In terms of the Standard, the EAC must be calculated separately for each of the four components and then totalled to provide one EAC figure for the financial product, expressed as a percentage. The Standard specifies how these costs must be calculated.
All charges that an investor will incur must be included in the EAC measure. Where a charge is not available, a reasonable best-estimate must be used. This must be disclosed.
The table below (which must be presented with prescribed explanatory wording) is an example of what investors can expect to receive from product providers in October this year when obtaining a quotation for a savings or investment product:
| Charges | 1 Year | 3 Years | 5 Years | Terrn to maturity: 10 Years |
| Investment Management2 | 1.1% | 1.1% | 1.1% | 1.1% |
| Advice | 0.5% | 0.5% | 0.5% | 0.5% |
| Administration1 | 0.9% | 0.9% | 0.9% | 0.9% |
| Other3,4 | 0.3% | 0.3% | 0.3% | 0.0% |
| Effective Annual Cost | 2.8% | 2.8% | 2.8% | 2.5% |
Summerton emphasised that the EAC Standard facilitates cost comparison only, and does not provide any insights into the differences in product features.
The Standard strongly cautions product providers against manipulating any values to inflate the projected or anticipated performance of a product or to make a product appear less expensive. It also requires companies to use plain language in their cost disclosure.
The EAC Standard and detailed examples of the disclosure table that must be provided to consumers and advisers can be downloaded from the ASISA web site: http://tinyurl.com/zub94zr
Adherence to the Standard
ASISA members will be required to submit a compliance certificate to ASISA annually within three months of 31 December, which certifies that the EAC calculations and disclosures comply in all respects with the letter and spirit of the EAC Standard. The certificate must be signed by the company’s CEO as well as the auditor, statutory actuary, or chief compliance officer.
Disclosure for existing products
As part of a phased implementation, investors can expect companies to provide them with an EAC, for products sold after 1 April 2010, from 1 June 2017.
From 1 June 2018, products sold after 1 April 2000 must be compliant. From 1 June 2019, products sold before 1 April 2000 must also be compliant.
