Contact: Andy Young
Client Director, Assurance & Advisory
Deloitte
02 9322 5250

Contact: Paul Swinhoe
Trowbridge Deloitte
Partner
02 9322 5017

Contact: Adele Watson
Tax Services Deloitte
Partner
02 9322 7752

Contact: Louise Denver
Deloitte
Financial Services Communications
0414 889 857

The fact that 40% of respondents in a recent poll of the wealth management industry conducted by Deloitte have yet to finalise their unit pricing discretions’ policies and procedures, “was surprising” given the original deadline for compliance passed some ten months ago, according to Andy Young, Deloitte Unit Pricing specialist.

There is clearly work to be done to ensure responsible entities comply with the ASIC Class Order (CO 05/1236) by the 1 May 2007 ASIC deadline,’ he said.

“From our survey of 90 respondents from 50 wealth management organisations, it is clear that there is still a spectrum of divergent policies, processes and practices”.

Many of these differences arise from ‘discretions’ - decisions on specific unit pricing valuations or methodologies - that are made to strike prices, but are not fully described in product offer documents or governing constitutions.

ASIC requires that managed investment scheme operators have publicly available policies to deal with these discretions. So the fact that the majority of the Deloitte poll respondents who had decided how they are going to make this information available, are only going to do so ‘on request’ (being the bare minimum requirement), ‘is likely to be a disappointing outcome for those who believe consumers should be more involved in and informed about their investments’, according to Deloitte.

The 21% of organisations that have decided their existing policies are ‘sufficient’ will need to be comfortable that they can justify this position to their managed investment scheme compliance plan auditors who are likely to be assessing compliance with the new requirements as part of their 30 June 2007 audits.

The poll also suggests that the ASIC compliance model is likely to become best practice for both superannuation funds and life insurance companies. 

“Given the additional complexity involved in striking prices for these products, we believe this is appropriate,” said Paul Swinhoe, partner Trowbridge Deloitte, who adds his actuarial weight to the Deloitte Unit Pricing team.

In fact more than half the superannuation and life companies surveyed intend to draft an appropriate discretions policy for their products despite the fact that they actually fall outside the scope of the ASIC Class Order requirements.

“Wholesale fund managers should take note of this as that they can expect their super and life investors to request copies of their unit pricing discretions policies,” said Swinhoe.

Emerging trends and issues

While the broad principles of unit pricing in the one year old ASIC/APRA ‘Guide to Good Practice’ have generally been picked up by the industry, clear industry trends emerged from the Deloitte survey around funds paying for backdating and the use of benchmarks as a pre-release check on prices.

And while forward pricing has been widely adopted as a means of preventing arbitrage, “industry participants should be aware that arbitrage opportunities may still exist if stale prices are used to value fund assets”, said Young.

Backdating - who pays?

There is a range of practices on backdating. The fund pays for backdating more often than the customer, provided the backdating is within normal processing rules, according to the poll (35%).

“More surprising though is the almost 20% where the cost of backdating falls on the fund manager”, said Swinhoe. “This may be an unnecessary burden for the manager to bear in all circumstances, although there may be profits as well as losses”.

Almost one third of poll respondents answered, ‘It depends’, and so appear to decide each case on its merits. “This response has the benefit of flexibility but may be burdensome to administer or lead to some inconsistencies,” said Swinhoe.
More rigour required in estimating tax impact on unit prices.

“Historically, tax has represented one of the most common sources of unit pricing errors because of the twin difficulties of theoretical complexity and imperfect information flows,” Adele Watson Deloitte tax partner said. In this environment, Deloitte believes more product providers would benefit from regularly conducting a ‘true-up’ of their unit pricing tax provision using a more complete tax calculation model than was evident from the survey.

Ms Watson pointed out that 50% of respondents do not do a ‘true-up’ of tax.

“Given that tax errors have been among the prime reasons for the estimated $750 million paid in compensation for unit pricing errors in recent years, a precautionary approach is justified,” said Watson.

“Although this is equivalent to only 0.08 per cent of the combined superannuation and managed funds industry market size of around $1 trillion, it is significant”, she said.

Deloitte acknowledged that the ASIC/APRA ‘Guide to Good Practice’ could be challenged for being ‘too high level’ with a focus on ‘management issues’ such as risk management and outsourcing, but given that the relevant ASIC Class Order (CO 05/1236) prescribes a number of detailed requirements as to the contents of the discretions policy, “‘no action’ is no longer an option”, said Young.

The poll also showed almost one quarter of the respondents in the wealth management industry ‘don’t know’ or ‘did not’ conduct a review of their unit pricing practices against the ‘Guide to Good Practice’. 

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