The Government has released regulations implementing a shorter Product Disclosure Statement (PDS) regime for ‘simple’ managed investment schemes, superannuation products and margin loans. In summary, the regulations impose a prescriptive format for such PDSs which is designed to provide consumers with a substantially shorter PDS than currently applies.

What financial products does the shorter PDS regime apply to?

The shorter PDS regime applies to:

• simple managed investment schemes, being schemes which invest at least 80% of their assets in cash (including on deposit for a fixed term of up to three months) or in investments that can reasonably be expected to be sold at market value within 10 days. However, listed schemes, stapled securities and platforms are excluded from the new regime
  
  
• superannuation products, excluding both pension products and interests that are solely in a defined benefits fund. Therefore, combined accumulation/pension products and combined accumulation/defined benefits products, as well as pure risk products, are included, and
  
  
• margin lending facilities, excluding non standard margin lending facilities (i.e. margin facilities which involve securities lending).

When will the shorter PDS regime apply to these products?

The regulations came into effect on 22 June 2010. There is a two year transitional period. For simple managed investment schemes and superannuation products, any new PDS issued or existing PDS amended from 22 June 2011 onwards must comply with the new regulations. At the end of the transition period (i.e. from 22 June 2012 onwards), all PDSs for simple managed investment schemes and superannuation products need to comply with the new regime.

The shorter PDS regime applies to margin loan PDSs from 1 January 2011, given that the existing PDS regime does not currently apply to margin loans.

What are the requirements for a shorter PDS?

The regulations prescribe both the form and content of a shorter PDS and these requirements are summarised below.

What are the format requirements?

The regulations prescribe a maximum length of eight A4 pages for superannuation and simple managed investment scheme PDSs and four A4 pages for margin loan PDSs (not including the title and contents pages). The font size is also mandated and is nine point for a majority of the shorter PDS content.

What are the content requirements?

The regulations prescribe numbered section headings and content requirements for shorter PDSs and the shorter PDS must include, in order, the number and title of each section as prescribed.

A prominent warning must be included at the start of each shorter PDS highlighting that the shorter PDS only contains summary information, that other information may be available and a person should consider all the information before making a decision to invest in or acquire the product. The shorter PDS for superannuation and simple managed investment schemes must also include a general advice warning.

Summary of specific content requirements

The sections of a shorter PDS which must be included in a margin loan, superannuation and simple managed investment scheme are set out below, along with a brief summary of the information required to be included for each section.

Content requirements for simple managed investment scheme shorter PDSs

A shorter PDS for simple managed investment schemes has eight sections as follows:

• section 1*: About [name of responsible entity] - this section must include a brief summary of the responsible entity and its role. Where the investment manager is different from the responsible entity, a brief summary of the investment manager and its roles must also be included
  
  
• section 2*: How [name of simple managed investment scheme] works - this section must include information on how the scheme works, the interests investors acquire and other information such as the minimum application amount, distribution frequency, scheme structure, additional subscriptions and withdrawals and the impact of redemption freezes
  
  
• section 3*: Benefits of investing in [name of simple managed investment scheme] - this section must summarise the significant features and benefits of the scheme
  
  
• section 4*: Risks of simple managed investment schemes - this section must include a summary of the significant risks of the particular scheme as well as the statements addressing the key risks of investing in managed investment schemes generally
  
  
• section 5*: How we invest your money - a summary of the investment options offered by the scheme must be included and accompanied by a warning that the investor must consider the likely investment return, risk level and their investment timeframe when choosing which option to invest in. For at least one investment option, certain prescribed information must be included such as the name and a short description of the option, the assets it invests in, the investment objective return and the risk level of the options. The investment option for which this prescribed information must be provided is the balanced option or, in the absence of a balanced option, the option in which most funds are invested. These details must also be provided for all other investment options, although the information can be incorporated by reference rather than set out in the shorter PDS
  
  
• section 6*: Fees and costs - this section must include a consumer advisory warning (in the form currently applying to the managed investment scheme PDSs), a fees and costs table (based on the table required to be included in managed investment scheme PDSs) and a worked example for at least one investment option. Again the fees and costs and worked example must relate to the balanced investment option or, if not applicable, the option with the most funds under management. The same information on fees and costs must also be included for all other investment options although can be incorporated by reference
  
  
• section 7*: How managed investment schemes are taxed - this section must include a warning that investing in a managed investment scheme is likely to have tax consequences and that consumers are strongly advised to seek professional advice. Other prescribed information regarding the taxation effects of an investment in the scheme must also be included, and
  
  
• section 8*: How to apply - information on how to invest in the scheme, details of the cooling-off period which applies and how a consumer may make a complaint must be contained in this section.

Content requirements for superannuation shorter PDS

There are nine prescribed sections for a superannuation shorter PDS and they are as follows:

• section 1: About [name of superannuation product] - this section contains a short summary of the superannuation fund and the products it is offering
  
  
• section 2*: How super works - this section must contain prescribed statements summarising key elements of how superannuation works. The prescribed information covers matters such as the purpose of superannuation and its compulsory nature, different types of contributions that can be made, limitations on contributions and withdrawals and tax savings associated with superannuation
  
  
• section 3*: Benefits of investing with [name of superannuation product] - this section must contain a summary of the applicable superannuation product and its significant features and benefits
  
  
• section 4*: Risks of super - this section requires a summary of the significant risks associated with a particular superannuation product to be included as well as statements addressing certain general risks of investing in superannuation products. These general risks address matters such as the fact that the value of investments will vary, the level of returns will vary and future returns may differ from past returns, returns are not guaranteed, superannuation savings may not adequately fund a person’s retirement and the appropriate level of risk for each member will depend on their particular circumstances
  
  
• section 5*: How we invest your money - this section must describe the investment options offered by the fund and what happens if no investment option is chosen. For the default option (or, if there is no default option, the balanced investment option or, if none, the option in which most funds are invested), certain prescribed information must be set out covering such matters as the name and description of the option, the asset mix, investment return objective, minimum recommended timeframe for remaining invested and a description of the risk level. This prescribed information must also be included for all other investment options, although it may be incorporated by reference
  
  
• section 6*: Fees and costs - this section must include a consumer advisory warning, a fees and costs table (which is based on the table currently applying to superannuation fund PDSs) as well a worked example. The fees and costs table and worked example must apply to the default option or, if no default option exists, the balanced investment option or, if none, the option in which the majority of funds are invested. The fees and costs information and a worked example must also be provided for every other investment option, although this information can be incorporated by reference rather than being set out in the shorter PDS
  
  
• section 7*: How super is taxed - a summary of tax information relating to superannuation funds, including how tax amounts are paid and the main taxes payable on contributions, fund earnings and withdrawals must be included in this section. Warnings regarding the taxation consequences of the tax file number (TFN) not being provided (and a statement that the TFN does not have to be given) and contribution limits being exceeded must also be included
  
  
• section 8*: Insurance in your super - this section is only required to be included if insurance cover is included in the superannuation product. If no insurance cover is included then this section can be omitted. Where applicable, this section needs to summarise the main types of insurance cover available and how members can apply as well as details of the costs of the insurance and who is responsible for paying these costs. Other prescribed information must also be included depending upon whether default insurance cover is provided or whether the insurance cover is optional, and
  
  
• section 9*: How to open an account - this section must provide information, where applicable, on how to open an account with a superannuation provider, explain the cooling-off period which applies and how to make a complaint.

Content requirements for margin loan shorter PDS

A shorter PDS for a margin loan must contain seven sections and the regulations prescribe the information which must be included for each section. A summary of the disclosure requirements for each section is set out below:

• section 1: About [name of provider for margin loan] and [name of margin loan product] - this section provides an overview of the lender, a short summary of what margin lending is and an overview of some key factors potential borrowers should consider and understand before taking out a margin loan, such as that borrowing to invest may magnify both gains and losses and that additional amounts may be payable by the borrower or investments realised in certain circumstances
  
  
• section 2*: Benefits of [name of margin loan product] - this section must state the key benefits associated with a margin loan
  
  
• section 3*: How [name of margin loan product] works - this section provides a basic overview of how a margin loan operates and must explain how margin lending works (including information on maximum loan amounts and loan to value ratios accompanied by examples), what financial products can be purchased with the margin loan and other significant features of the margin loan
  
  
• section 4: What is a margin call? - this section must explain how margin calls work and provide at least one example to illustrate this. The explanation must cover the circumstances in which a margin call may be triggered and how the borrower can deal with the margin call
  
  
• section 5*: The risk of losing money - this section must describe the risks of margin lending including that the value of client’s investments might fall, that the lender may remove an investment from an approved securities list and the consequences associated with this, that interest rates may rise, that interest payments may exceed returns from the investment portfolio and that tax laws can change
  
  
• section 6*: The costs - this section must include a description of the interest rate of the margin loan, the fees and costs charged and whether any commission may be payable to a financial adviser or third party, and
  
  
• section 7*: How to apply - this section has to provide information about how to apply for a margin loan and a summary of the dispute resolution system provided by the lender.

Can a shorter PDS include other information?

A shorter PDS can include information other than that prescribed or covered by the sections listed above. However, such information must be included at the end of the shorter PDS and must not result in the shorter PDS exceeding the maximum prescribed length.

Can information be incorporated by reference in a shorter PDS?

Yes. The regulations facilitate and, in some instances, mandate the inclusion of further information via incorporation by reference. However, a shorter PDS may only incorporate information by reference where expressly allowed under the regulations. The sections marked with an asterisk above are those sections where additional information either can, or must, be incorporated by reference.

Any information incorporated by reference is deemed to be part of the shorter PDS. Therefore, the PDS liability and enforcement provisions of the Corporations Act apply to such information as they do to information actually included in the shorter PDS.

Where information is incorporated by reference, the issuer must enable consumers to obtain a hard copy of the information, free of charge, upon request and the shorter PDS must disclose this right and include a telephone number to enable such information to be requested. The shorter PDS can also facilitate access to information incorporated by reference electronically, for example by reference to a website link.

Where information is incorporated by reference, the shorter PDS must include prominent warnings at each place where the matter has been incorporated notifying the consumer that the incorporated information should be read before making a final investment decision, how the information can be located and that the information may change between the time of reading the shorter PDS and when the investor submits an application. Information which is incorporated by reference must be publicly available, and making a hard copy available to consumers free of charge satisfies this requirement.

For the information which is actually incorporated by reference, that document must include a statement confirming it is part of the relevant PDS and identifying the PDS (unless it applies to more than one PDS).

Can a shorter PDS refer to information which cannot be incorporated by reference?

Yes. A shorter PDS can refer consumers to other information (for example performance information or financial statements) which is not allowed to be incorporated by reference. However, such material does not form part of the shorter PDS, and therefore is not subject to the PDS liability and enforcement provisions of the Corporations Act. Accordingly, such information will be subject to the provisions of the Corporations Act and ASIC Act dealing with misleading and deceptive conduct.

Are there other matters to be aware of?

Yes, the regulations provide that:

• a shorter PDS may not be combined with an Financial Services Guide, and
  
  
• a supplementary PDS cannot be utilised for a shorter PDS. The Government expects that the general nature of the information required to be included in a shorter PDS will not need to be updated frequently (as it will be the information incorporated by reference which is updated from time to time). Consequently, where a shorter PDS needs to be updated, this must be done by the issue of a new document rather than a supplementary shorter PDS.

Further information

For further assistance or enquiries, please contact:

Financial Services Group contacts

Sean Robertson on 07 3233 8860
Tony Stumm on 07 3233 8885
Tim Wiedman on 07 3233 8716.