ASIC Corporations (Registered Schemes and CCIVs—Differential Fees) Instrument 2017/40

Differential fee arrangement is defined in section 4 as an arrangement for charging, rebating or waiving fees (including entry, exit and periodic fees) on a basis that differs from that applying to other members who hold interests of the same class (for schemes) or shares of the same class referable to a sub-fund (for CCIVs). The definition is broad: it covers any variation in fee treatment, not just higher or lower fees, but also rebates and waivers. The instrument does not prohibit uniform fee increases; it prohibits unequal treatment within a class. The exemption only applies to differential fee arrangements that meet the specified criteria.

Permitted criteria for registered schemes (subsection 5(2)) and CCIVs (subsection 7(2)) are nearly identical. They are:

(a) Total value or number of interests/shares held by the member (or the member and associated persons) in the scheme/CCIV, other schemes/CCIVs operated by the same responsible entity/corporate director or a related body corporate, or other financial products issued by them. This allows loyalty discounts, volume discounts, and cross-product aggregation.

(b) Total period of time during which the member (and associated persons) has held interests/shares in the same set of products. This permits tenure-based fee reductions.

(c) Employee status, provided employee members (as defined) hold no more than 5% of the total voting power of the scheme or sub-fund. This prevents employee fee concessions from being used to control voting outcomes.

(d) Acquisition under a switching facility where the member first withdrew from another fund operated by the responsible entity or related body corporate. This allows fee incentives for internal switches.

(e) Savings to the scheme or CCIV resulting or reasonably expected from lower cost of servicing the member, where the fee benefit is no greater than a reasonable estimate of the saving or expected saving. This is the cost-justification criterion.

Individual negotiation with wholesale clients (subsections 5(3) and 7(3)) allows any fee differential for a wholesale client that results from individual negotiation. This is broader than the subsection (2) criteria, requiring only that the member is a wholesale client (defined by section 761G of the Act) and that negotiation occurred. No cost justification or objective criterion is needed. This effectively permits market pricing for wholesale clients.

Associated person is defined broadly in section 4: spouse, parent, child, brother, sister, a company with no member other than the member or those relatives, a regulated superannuation fund with no member other than the member or relatives, a trust with no beneficiary other than the member or relatives, or an entity controlled (including jointly controlled) by the member or those relatives. This expands the aggregation of holdings and tenure for criteria (a) and (b), potentially allowing a member to qualify for lower fees based on family holdings. It also creates complexity: the responsible entity must verify the structure of trusts, companies and super funds to determine if they satisfy the “no other beneficiary” condition. The definition is deliberately narrow; for example, a family trust with multiple beneficiaries would not count.

Employee member is defined for schemes as a member who is also an employee of the responsible entity or a related body corporate; similarly for CCIVs with the corporate director or its related body corporate. The employee voting cap of 5% (criterion (c)) applies only to this category. If employee members hold more than 5% of voting power, they cannot receive differential fees based on employee status. However, they could still qualify under other criteria, such as cost savings or wholesale client status.

The instrument does not define “related body corporate”; it relies on the Act’s definition in section 50. This means the aggregation can extend across an entire corporate group, which may incentivise fund managers to cross-subsidise across products but also raises compliance burdens.

The primary duty bearers are responsible entities of registered managed investment schemes and corporate directors of CCIVs. These entities must decide whether to implement differential fee arrangements, and if so, ensure compliance with the criteria and conditions. The instrument imposes no direct duties on the fund itself (the scheme or CCIV) as a separate entity, but the directors and officers of the responsible entity or corporate director bear liability if the conditions are breached.

The exemptions affect members of registered schemes and shareholders of CCIV sub-funds. Members who qualify for lower fees benefit directly. Members who do not qualify may be unaffected if the condition “no adverse effect” is met, but they may indirectly bear higher fees if the cost of subsidies to other members is recovered elsewhere. The condition that differential fee arrangements must not “adversely affect the fees paid or to be paid by any member of the scheme who is not entitled to the benefit” (sections 6(2) and 8(2)) is a key safeguard. However, “adversely affect” is not defined; a plausible reading is that the fees of non-benefiting members cannot be increased as a direct result of the differential arrangement. If the responsible entity recovers forgone revenue through higher base fees for everyone, that could violate the condition. The condition likely requires that the differential fee arrangement be funded by cost savings or by the responsible entity’s own margins, not by cross-subsidisation from non-benefiting members. This imposes a structural constraint but also creates ambiguity about what constitutes adverse effect in practice.

Wholesale clients are a distinct category: any differential fee arrangement with them is permitted through individual negotiation, without needing to meet the objective criteria. This gives responsible entities and corporate directors wide latitude to negotiate bespoke fee arrangements for large investors, but only if the client qualifies as wholesale under the complex asset and product tests in section 761G. Retail clients cannot be offered individually negotiated differential fees; they must fall within the subsection (2) criteria.

Associated persons as defined are indirectly affected because their holdings and tenure can be aggregated with the member’s to qualify for fee benefits. This may encourage members to structure their investments through family trusts, companies or super funds that meet the restrictive definition (no other members or beneficiaries). The narrow definition may drive transaction costs for members seeking to aggregate.

Employees of the responsible entity or related body corporate can receive fee concessions, but only if their voting power is capped at 5%. This may affect employee share schemes or employee investment offers. The cap likely prevents employees from using their collective voting power to influence scheme decisions, which is a sensible safeguard, but it also limits the extent of employee benefits.

The instrument also affects compliance professionals, including lawyers, accountants and auditors, who must advise on whether a proposed differential fee arrangement fits within the permitted criteria and whether the disclosure and non-discrimination conditions are satisfied. Regulators (ASIC) are affected in their enforcement role.

The instrument imposes three key conditions on the exemption. These are not free-standing duties under the Act but conditions that if breached, cause the exemption to no longer apply, potentially exposing the entity to liability under the original equal-treatment provisions.

Disclosure condition (sections 6(1) and 8(1)): The responsible entity or corporate director must ensure that a statement of the basis on which the differential fee will be calculated and which specifies the fees that members will have to bear (for subsection (2) arrangements) or a statement that a differential fee arrangement is in place (for subsection (3) arrangements) is disclosed in a clear, concise and effective manner. Disclosure must be made to existing members by no later than the date of the first communication to all members after the arrangement is first offered. It must also be included in any Product Disclosure Statement (PDS) in use during the period the arrangement is offered. This is a timing condition: disclosure cannot be retroactive. For ongoing arrangements, the PDS must continuously disclose. Failure to disclose means the exemption is lost, and the differential fee arrangement may be invalid.

Non-adverse effect condition (sections 6(2) and 8(2)): The arrangement must not adversely affect the fees paid or to be paid by any member not entitled to the benefit. This is a substantive condition, not just disclosure. It requires a factual analysis: does the arrangement cause any non-benefiting member to pay more than they otherwise would? This likely prevents cross-subsidisation. However, it does not prohibit the responsible entity from raising fees for all members for reasons unrelated to the differential arrangement (e.g., increased costs). The condition only bites if the adverse effect is caused by the differential arrangement. Proving causation could be difficult in practice.

Non-discrimination condition (sections 6(3) and 8(3)): Where the arrangement is based on subsection (2) criteria (not individual negotiation), the arrangement must be applied without discrimination to all members who satisfy the criteria. This means the responsible entity cannot cherry-pick which qualifying members get the benefit; it must be offered uniformly. For example, if the criterion is “total value of interests over $1 million”, all members meeting that threshold must receive the same fee benefit. The responsible entity cannot offer a better deal to one large member than to another who also meets the criteria, unless the better deal arises from individual negotiation under subsection (3). This condition prevents arbitrary or favour-based fee discrimination within the same criterion.

The instrument also confers a right on the responsible entity or corporate director to administer differential fee arrangements without contravening the equal-treatment provisions, provided the conditions are met. No new rights are created for members; members have no statutory right to demand differential fees. However, if a responsible entity voluntarily offers such an arrangement, the conditions give members a form of quasi-contractual expectation: the arrangement must be applied non-discriminatorily and not adversely affect others.

The instrument itself does not create civil or criminal penalties. It is an exemption; the penalty for non-compliance is that the exemption is lost. If a responsible entity or corporate director administers a differential fee arrangement that does not meet the criteria or conditions, then paragraph 601FC(1)(d) or paragraphs 1224D(2)(b)/(3)(b) apply as if the exemption never existed. The entity would be in breach of the Act’s equal-treatment requirement.

That breach carries significant consequences under the Act. Section 601FC(1) is a civil penalty provision (see section 1317E). A contravention can attract a penalty of up to the greater of 10,000 penalty units or three times the benefit obtained and detriment avoided (section 1317G). For a corporation, that is currently $3.13 million per contravention (penalty unit $313, as indexed). Individuals (directors) can be liable for up to $939,000. In addition, ASIC may seek disqualification orders, compensation orders, or infringement notices. For CCIVs, similar penalty regimes apply under the Act’s provisions relating to corporate directors.

ASIC can also take administrative action: it may suspend or cancel an Australian financial services licence (AFSL) or the authorisation of a responsible entity or CCIV if it has reason to believe the entity is not complying with the law. The instrument does not change ASIC’s enforcement powers; it merely narrows the scope of the underlying prohibition.

Practical enforcement risk: The most likely scenario for breach is inadvertent non-compliance with the conditions, especially the non- discriminatory application condition. If a responsible entity offers lower fees to members who meet a certain criterion but fails to apply it to all qualifying members, the exemption fails and the entity faces liability for treating members of the same class unequally. The disclosure condition also poses risk: if the PDS does not adequately describe the basis of calculation, the exemption may be lost even if the fees themselves are justified.

The instrument’s conditions are stricter than the typical contractual freedom in other industries. A fund manager cannot simply decide to charge a loyal customer less; it must meet specific criteria and disclose them. The penalty for getting it wrong is severe: retroactive invalidation of the differential fee arrangement and exposure to civil penalties for the entire period it was in place.

The instrument operates under the Corporations Act 2001, specifically the managed investment scheme and CCIV provisions. It modifies those provisions but does not affect other laws.

Corporations Act provisions: The instrument exempts from paragraph 601FC(1)(d) for schemes and paragraphs 1224D(2)(b) and (3)(b) for CCIVs. It does not exempt from other duties under section 601FC (e.g., the duty to act in the best interests of members, to exercise due care and diligence, or to ensure proper records). A differential fee arrangement that benefits some members at the expense of others may still breach the best interests duty if it cannot be justified. The instrument’s cost-savings criterion (subsection 5(2)(e) and 7(2)(e)) aligns with the duty to act in members’ interests, but the other criteria (size, tenure, switching) might not. The responsible entity must still comply with the overarching duties.

Chapter 7 (financial services): The instrument interacts with the disclosure regime in Part 7.9 (PDS requirements). The disclosure condition requires the differential fee arrangement to be disclosed in the PDS. This means the PDS must contain the basis of calculation and the fees that members will bear. The ASIC Instruments generally interact with the PDS content rules; the instrument does not override them but adds an additional requirement.

ASIC Act and ASIC policy: The instrument is itself an ASIC legislative instrument. ASIC may issue regulatory guidance on how it interprets the conditions, for example, what constitutes “clear, concise and effective” disclosure or “reasonable estimate” of cost savings. Practitioners should consult ASIC’s regulatory guides, though none are referenced in the instrument.

Competition and Consumer Act 2010: Differential fee arrangements that discriminate among retail clients may raise concerns under the Australian Consumer Law (ACL) if they involve misleading conduct or unconscionable conduct. The instrument does not provide any exemption from the ACL. For example, if the disclosure is inadequate or the fee differential is hidden, a member may claim misleading or deceptive conduct under section 18 of the ACL.

Superannuation Industry (Supervision) Act 1993 (SIS): The definition of “associated person” includes a regulated superannuation fund with no member other than the member or relatives. This means super funds that are not self-managed (i.e., APRA-regulated funds with multiple members) are excluded. The instrument does not affect SIS duties; a trustee of an SMSF that is a member of a managed investment scheme may be able to aggregate its holdings with its individual member for fee purposes, but only if the SMSF has no other members. This creates a distinction between SMSFs and large super funds, potentially distorting investment choices.

Tax laws: The instrument does not affect taxation. Differential fee arrangements may have tax implications for members (e.g., rebates may be assessable income, or fee waivers may reduce cost base). This is outside the instrument’s scope.

Common law: The instrument does not override contract law. A responsible entity may still enter into contracts with members that provide for differential fees, but if those contracts breach the Act (absent the exemption), they may be void or unenforceable. The exemption does not validate a contract that otherwise would be illegal; it only removes the statutory prohibition.

The instrument was originally made as ASIC Corporations (Registered Schemes,Differential Fees) Instrument 2017/40 on 10 March 2017 and commenced on 11 March 2017. It applied only to registered schemes.

On 15 November 2022, Instrument 2022/0940 amended it significantly. The amendments:

• Changed the name to include CCIVs: from “ASIC Corporations (Registered Schemes,Differential Fees) Instrument 2017/40” to “ASIC Corporations (Registered Schemes and CCIVs,Differential Fees) Instrument 2017/40”.
• Amended section 1 (name) and section 3 (authority) to add reference to subsection 1243(2) (the CCIV exemption power).
• Repealed section 2 (which had been a placeholder repealing section under the Legislation Act 2003).
• Substituted the definitions of “differential fee arrangement” and “employee member” in section 4 to cover both schemes and CCIVs. Previously they referred only to registered schemes.
• Amended the headings and text of section 5 to add references to CCIVs, though section 5 itself remained about registered schemes. The amendment added “Registered schemes -” to the heading and inserted references to CCIVs in the criteria (e.g., listing “other managed investment schemes operated by the responsible entity or a related body corporate” which was already there; the amendment appears to have been clarifying or aligning language).
• Added new section 7 (CCIVs - differential fees) and section 8 (Conditions) mirroring the scheme provisions for CCIVs verbatim.

The endnotes show the instrument history: two compilations, with the second compilation reflecting the 2022 amendments. The instrument is a living instrument; further amendments could occur.

The 2022 amendments were likely driven by the introduction of the CCIV regime into the Corporations Act in 2022 via the Treasury Laws Amendment (Corporate Collective Investment Vehicle) Act 2021. Without the amendments, CCIVs would have been unable to offer differential fees under the new regime. The timing suggests ASIC acted promptly to provide the same exemption as for schemes.

The instrument itself has not been the subject of any reported litigation. The endnotes do not list any court cases, and the instrument is relatively new. However, the underlying provisions (sections 601FC and 1224D) have been litigated in other contexts. For example, the meaning of “members of the same class” and “equal treatment” has been considered in managed investment scheme cases. The instrument’s exemption means that differential fee arrangements are not automatically void; instead, their validity depends on compliance with the conditions.

Potential future litigation may arise if ASIC takes enforcement action against a responsible entity for non-compliance, or if a member challenges a differential fee arrangement as exceeding the scope of the exemption. Key legal questions that could arise include: What constitutes “adversely affect the fees” of non-benefiting members? Is the condition a strict liability test? What is a “reasonable estimate” of cost savings? Can a responsible entity rely on the exemption if it has not strictly complied with the disclosure timing? These questions have not yet been tested.

The instrument is an exemption from a civil penalty provision, so a court would likely interpret the conditions narrowly, as the exemption is a departure from the default rule of equal treatment. The burden would be on the responsible entity to prove that the arrangement fits within the exemption and that all conditions were satisfied.

Given the significant penalties, responsible entities are likely to be cautious, reducing the incentive to push boundaries until authoritative guidance or case law emerges.

Timing of disclosure: The disclosure condition requires that existing members be informed “by no later than the date of the first communication by the responsible entity to all members after the date when the differential fee arrangement is first offered” (sections 6(1)(c) and 8(1)(c)). If the responsible entity sends out a quarterly statement, and the differential fee arrangement starts on 1 March but the first communication to all members is not until 30 June, can they rely on the exemption during the gap? The instrument does not say “prior to”, only “by no later than”. A literal reading suggests the arrangement can be offered before disclosure, as long as disclosure occurs by the first post-offer communication. However, that would mean members could already be paying differential fees without knowing the basis. This is a potential compliance risk; ASIC may take the view that disclosure should be contemporaneous with the offer. The safer approach is to disclose before or at the same time as the offer.

Meaning of “clear, concise and effective”: This phrase appears in section 1013D (PDS content) and is frequently litigated. Courts have interpreted “clear, concise and effective” to require that the statement be readily understandable by a reasonable person and not contain immaterial information. For differential fee arrangements, the responsible entity must state the “basis on which the differential fee will be calculated” and “specifies the fees that members will have to bear”. If the basis is complex (e.g., a formula involving multiple factors), the disclosure may be lengthy and lose clarity. Over-disclosure can be as risky as under-disclosure.

Employee voting cap: The employee status exception applies only if employee members hold no more than 5% of the total votes. If a responsible entity offers employee fee concessions to a group that, combined, holds 5.1% of voting power, the entire employee-based differential fee arrangement becomes invalid. The 5% threshold is not per employee but total employee members. Moreover, the cap applies only to the arrangement based on employee status. Employee members could still qualify under other criteria (e.g., aggregate holdings) without the cap applying. However, if they receive the benefit under the employee criterion, the cap must be satisfied. The responsible entity must monitor voting power continuously.

Cost-savings criterion is tricky: Subsections 5(2)(e) and 7(2)(e) allow fee benefits up to a reasonable estimate of the saving or expected saving from lower servicing costs. This requires the responsible entity to calculate cost savings associated with specific member characteristics. Common examples: lower transaction frequency, electronic communications, or lower call centre usage. The estimate must be reasonable; it cannot be arbitrary. If ASIC later challenges the estimate as unreasonable, the exemption is lost. The condition does not require the savings to be realised, only “reasonably expected to result”. This gives some flexibility, but the expectation must be objectively reasonable. There is no safe harbour.

Non-discrimination within criteria: The condition that the arrangement be applied “without discrimination to all members who satisfy the criteria” (sections 6(3) and 8(3)) means the responsible entity cannot impose additional requirements beyond the criteria. For example, if the criterion is “total investment over $500,000”, the responsible entity cannot require members to also attend an information session to qualify. The criteria are exhaustive. Also, the condition only applies to arrangements under subsection (2) (objective criteria), not to individual negotiation with wholesale clients under subsection (3). This creates a bifurcation: wholesale clients can get bespoke deals, but retail clients on objective criteria must get uniform treatment.

Cross-product aggregation: The criteria allow aggregation of holdings and tenure across the responsible entity’s or related body corporate’s other managed investment schemes, CCIVs, and financial products. This could be operationally complex: the responsible entity must know the holdings of each member across multiple products issued by related entities. Privacy laws (Privacy Act) may restrict sharing of information between related bodies corporate unless the member consents. The instrument does not override privacy laws; the responsible entity must obtain the member’s consent to aggregate across products, or rely on an exception. Failure to do so could mean the aggregation is not valid, and the member might not qualify for the fee benefit. This is a hidden compliance trap.

A responsible entity or corporate director considering differential fee arrangements should implement a structured compliance program covering the following steps:

1. Determine which criterion applies: For retail members, the arrangement must fit one of the five criteria in subsection 5(2) or 7(2). For wholesale clients, individual negotiation under subsection (3) is simpler but still requires disclosure and must not adversely affect other members. Document the criterion and the justification.

2. Verify the conditions are met:

   • Disclosure: Prepare a statement of the basis of calculation and the fees that members will bear (for subsection (2) arrangements) or a statement that a differential fee arrangement exists (for subsection (3)). Ensure the statement is clear, concise and effective. Include it in the PDS and update the PDS promptly. Schedule the first communication to all existing members: it must be by no later than the first post-offer communication. If that communication is not imminent, consider issuing a standalone communication to avoid delay.
   • Non-adverse effect: Conduct an analysis showing that the differential fee arrangement will not cause any non-benefiting member to pay higher fees than they would otherwise. This may require modelling of fee revenues and costs. Document the analysis.
   • Non-discrimination (subsection (2) only): Ensure that all members who satisfy the criteria receive the same fee benefit. Establish a process to identify qualifying members and apply the arrangement consistently. Monitor for new members who meet the criteria and apply the arrangement to them prospectively. Do not impose additional conditions.

3. Define the criteria precisely: For objective criteria, define them in a written policy. For example, if using total investment value, specify how it is measured (e.g., dollar value of units held as at the last business day of the quarter). For the cost-savings criterion, prepare a detailed estimate with supporting evidence (e.g., cost of servicing different channels). For employee status, ensure the entity tracks voting power of employee members and caps it at 5% (including any associated persons who are also employees? The definition of employee member is limited to the individual, but associated persons are separate; the voting cap applies only to “employee members” as defined. However, if an employee’s spouse also holds units and is not an employee, that does not count toward the cap, but if the employee controls a company that holds units, that company may be an employee member? The definition in section 4 says “a member of the scheme who is also an employee”. The entity membership is separate from the employee individual; it is not an employee. So only natural persons who are employees count. The cap is limited to the votes of those natural persons. This is manageable.

4. Update PDS and offer documents: Include the differential fee statement in the PDS. If the arrangement changes, the PDS must be updated. For ongoing arrangements, ensure the PDS is always current.

5. Implement monitoring systems:

   • For non-discrimination: maintain a register of members who meet each criterion and the fee benefit they receive. Audit periodically.
   • For voting cap: calculate total votes of employee members regularly. If the cap is breached, cease offering differential fees under the employee criterion. Seek legal advice on whether existing arrangements become invalid.
   • For cost-savings: periodically reassess whether the expected savings are still reasonable. If costs change, adjust the fee benefit accordingly or cease the arrangement.

6. Seek legal advice: Given the complexity of the associated person definition, the cross-product aggregation issues, and the potential privacy overlap, legal review is essential. The instrument does not provide a safe harbour for mistakes; the exemption is lost if conditions are not strictly satisfied.

7. Keep records: Retain all documentation of the basis for the arrangement, the disclosure timing, the non-adverse effect analysis, and the non-discrimination monitoring. In the event of an ASIC inquiry, contemporaneous records will be critical.

8. Consider alternative structures: If the proposed differential fee arrangement does not fit neatly within the criteria, consider creating separate classes of interests (if possible under the scheme constitution) or restructure the fund into separate sub-funds. That would avoid the need for this exemption, though it carries its own complexities.