Fees are the price of professional management, and over twenty years they can consume a large share of an investor’s return. The Capital Market Act 2015 does not cap fees. Instead it controls where they may be written down, what they may be paid for and how they may be raised.
Fees must be in the deed
Where the trustee has any rights to be paid fees out of scheme property, or to be indemnified out of scheme property for liabilities or expenses incurred in performing its duties, those rights “(a) shall be specified in the trust deed; and (b) shall be available only in relation to the proper performance of those duties, and any other agreement or arrangement has no effect to the extent that it purports to confer such a right”.
Three consequences follow. First, a fee that is not in the registered deed cannot lawfully be taken from the fund, however it is described in a management agreement, a side letter or a board resolution. Second, the deed is a public document, approved and registered by the Securities Commission (section 208) and lodged with the Registrar of Companies (section 209), so the fee structure is open to inspection. Third, the fee is earned only by “proper performance”. A trustee that breaches its duties under section 191 is not entitled to be paid for the period of the breach and may have to repay fees already taken. Section 191(1)(i) separately requires that all payments out of scheme property are made in accordance with the deed and the Act.
The fees you will see
| Fee | What it is for | How it is usually expressed |
|---|---|---|
| Entry (service) charge | Issuing units and paying selling agents | Percentage added to the issue price |
| Annual management fee | Selecting and managing investments | Percentage of net asset value per year, accrued daily |
| Trustee fee | Custody, administration, compliance, the register | Percentage of net asset value or fixed amount |
| Exit charge | Redeeming units | Percentage deducted from the withdrawal price |
| Performance fee | Returns above a stated benchmark | Share of outperformance |
| Expense recoveries | Audit, valuation, legal and brokerage costs | Actual cost, under the indemnity |
Section 211(6) uses the terms “service charge” and “annual management fee”, and refers separately to the trustee’s remuneration, which reflects the three main heads. The deed should state the maximum of each.
Raising fees needs members’ consent
A deed may be changed only by a supplementary deed approved and registered by the Commission (section 211(1)). Most changes can be made on the trustee’s own certificate that members are not materially prejudiced (section 211(4)(b)). Fees are the exception. Section 211(6) requires that a supplementary deed which would increase the maximum service charge or annual management fee, or the maximum payment out of scheme property to the trustee by way of remuneration, be accompanied by a resolution under section 211(4)(a): a resolution “of not less than two-thirds of all unit holders or members” at a meeting convened under Division 5. Read literally that is two-thirds of all members, not merely of those voting, which is a demanding threshold; whether it is measured by head or by units held is not spelled out. See amending the deed.
Paying fund managers and other agents
The trustee may appoint a fund manager, custodian or administrator (section 190(2)), and their fees are typically paid out of the trustee’s own fee or under an indemnity in the deed. The trustee remains liable to members for what its agents do, “even if such duties or functions were performed fraudulently or outside the terms of their engagement” (section 190(3)). Where an agent holds scheme property and is liable to indemnify the trustee for loss caused by the agent’s wrongful or negligent act, any amount recovered under that indemnity forms part of the scheme property (section 190(5)); the trustee cannot keep it. See trustee and fund manager.
What went wrong at the Pacific Balance Fund
The risk of a trustee that also manages the fund paying itself too much is not theoretical. In a 2019 Gazette notice the Securities Commission reported that a review had found the trustee of the Pacific Balance Fund, Melanesian Trustee Services Ltd, had paid itself significant fees. When the Commission revoked MTSL’s licence by letter of 9 August 2023, its stated grounds, as recorded in Melanesian Trustee Services Ltd v Securities Commission [2023] PGNC 356; N10524, included that MTSL “was excessively paid as fund manager of a passively managed fund” and had received fees of K180 million between 2010 and 2022. MTSL disputed the findings and appealed; the litigation is described in the 2023 licence revocation case. Whatever the outcome, the episode shows why section 210(3) ties fees to proper performance and why the Commission may take administrative action, including ordering restitution, against a licensed person whose conduct jeopardises clients’ interests (section 445).
Find the total annual cost as a percentage of the fund, including management, trustee and recoverable expenses, and compare it with the fund’s stated investment approach: a passive fund tracking an index should cost far less than an actively managed one. Check whether the trustee and the fund manager are the same company or related, how performance fees are calculated and whether they can be earned while the fund is losing money, and what the deed says about the maximum fee. Members can challenge fees by resolution (section 223), by complaint under the deed’s procedure (section 210(1)(c)) and, where fees were taken in breach of duty, by action under section 262.
Sources
- Capital Market Act 2015 — ss 190, 191(1)(i), 208, 209, 210(1)(c), 210(3), 211, 223, 262, 445
- Melanesian Trustee Services Ltd as Trustee for Pacific Balance Fund v Securities Commission of Papua New Guinea [2023] PGNC 356; N10524
Before relying on anything here, read the current text of the Capital Market Act 2015 and check for later amendments. If a decision matters to you, get advice — start with the Office of the Public Solicitor, or find a firm in the law firms directory.