A KiwiSaver provider says the regulator should have named and shamed the providers who were found wanting in a report revealing some providers are not living up to their promises when it comes to their investment management style.
But Liam Mason, director of regulation at Financial Markets Authority, says it was too early to draw a line and name the providers and it will be contacting those it has concerns about to ask for more information.
On Monday the FMA released an independent report by MyFiduciary which revealed not all KiwiSaver schemes are "true to label' in terms of the investment management style they deliver.
"Most providers who claim to be taking a 'passive' investment approach are in fact showing a low level of activeness based on the measures that we use. That said, a minority of providers who describe themselves as 'active' are not materially more active than passive providers," the report authors noted.
Active investment managers charge more in fees because they claim to be making active choices about where to invest the money whereas passive investment just follows a market index and is largely automated.
If a manager is promising to be active and is charging for that service but then manages the money in a passive way then consumers could be being ripped off.
Only four of 26 KiwiSaver schemes claim to be passively managed.
The report authors said they expected to find that less active providers would have lower fees on average than the most active providers.
Instead, they found there was no significant relationship between the level of active management employed by providers and the fees they charge.
They also said while investment management fees have fallen globally and KiwiSaver providers are now benefiting from economies of scale the cost savings are not being passed on to KiwiSaver members.
"We would have expected to have seen fee levels decline further than they have given the fall in input costs.
"Overall, our results suggest that value for money in some KiwiSaver products is not as high as it could be."
Sam Stubbs, managing director of Simplicity, a KiwiSaver manager which uses a passive investment style, said the report only spelled out what the industry already knew - that there was not a lot of downwards pressure on fees.
"The question has to be asked of the FMA - how long will they play nice guy on this? When will they take someone to court over unreasonable fees?"
Stubbs said he would have liked to have seen the report name and shame those providers who were charging high fees and not actively managing the money as promised.
He said the report showed market forces were not enough to bring fees down and now was the time for heavy regulation.
"They have to go to court."
Mason said it was a really useful report for the regulator but it needed to drill into why some passive funds were very active and similarly why a number of providers whose documents said they were active were not.
"It is too early to say 'you are not true to label'."
Mason said it needed to better understand from providers whether it was their disclosure that needed to change or their fees.
"This report doesn't answer that because it only gives the direction we need to go in next. If there is a fault here, it's that we published too early."
Mason said it had been talking about the need for members to see value for money for some time but every time it talked about fees it had received push-back from the industry that fees were higher because of the service providers offered which included active management.
But the report showed there was no correlation between higher levels of active management and fees.
Mason said one of the most active providers was also one of the cheapest in terms of fees.
The regulator would now be talking to those providers it had concerns about and would also release guidance on investment management styles and disclosure to help clarify it for the industry.
Mason said it would also feed into its work on reasonable fee guidance.
All KiwiSaver providers have an obligation to only charge reasonable fees but exactly what is defined as "reasonable" has never been spelled out before.