The Investment Association is calling for views on a proposed industry code on disclosure of charges and transaction costs, as some have stressed the importance of making such data easy to interpret.
In recent months there has been an increased focus on improving transparency in the investment management industry. While the Financial Conduct Authority’s proposals for transaction cost disclosure have been welcomed by many, some of the FCA’s views have clashed with those of the IA, which has previously deemed hidden fund fees non-existent.
'Meaningful and comprehensive disclosure'
“The consultation and proposed code is the next step in the IA's and the industry’s work to ensure its clients have both meaningful and comprehensive disclosure of costs and charges across all client types,” Jonathan Lipkin, the IA’s director of public policy, said.
A balance needs to be struck between providing useful, comparable information and overloading users with too much data that clouds good decision-making
Richard Dowell, Cardano
He said the association is working to create a data delivery framework that both fits into the upcoming regulatory landscape of Markets in Financial Instruments Directive II, Packaged Retail and Insurance-based Investment Products and UK pension reporting requirements, and provides data on charges and transaction costs in a clear and consistent manner.
The consultation, which was published on Monday, states that the code aims to “go beyond product charge and transaction cost information to provide data on areas such as portfolio turnover, which can help provide more of a context for such information”.
Some specific questions have been set out to avoid an "excessively technical" consultation process, and the IA seeks comments and contributions from consumer, industry, government and regulatory bodies. It closes on May 19 2017, and a final set of proposals will be published in Q3 2017.
Regulatory uncertainty
Given the lack of clarity surrounding certain aspects of EU legislation at the time of publication of the consultation, the IA has noted that Brexit “may lead to divergent approaches in the longer term” when it comes to transparency.
However, it believes that enough is now known about the regulatory direction of travel to move ahead with a proposed new framework, according to the consultation.
While the IA has said that the ultimate goal of the code is for it to achieve regulatory recognition in the FCA’s Conduct of Business Sourcebook rules, the FCA’s director of strategy and competition Christopher Woolard has recently made it clear that the UK financial watchdog will not feel bound by any of the industry's suggestions.
The FCA, which did not comment on the proposed code and publication of the IA’s consultation, is due to publish a final report on its Asset Management Market Study in the summer.
It also recently consulted on transaction cost disclosure in workplace pensions, and plans to publish a policy statement in the second quarter of 2017.
Increased focus on costs
James Trask, investment partner at consultancy LCP, said that any progress on making transaction costs more easily understood by trustees is to be welcomed.
“I do fear, however, that until the FCA publishes the full results of its asset management study trustees will not devote time familiarising themselves with new disclosures that may have to change again soon,” he said.
FCA throws cold water on IA input ambitions
The Financial Conduct Authority’s director of strategy and competition Christopher Woolard has said he does not want to be bound by industry initiatives in making new rules for asset managers.
Trask noted that the ongoing shift from defined benefit to defined contribution is “rightly placing more emphasis on keeping costs down, to the benefit of the individual saver”.
He added that “shining a light on all the underlying costs of investing will, I hope, put even more pressure on fund managers to bring costs down. In a world of low prospective returns, minimising the proportion of returns that disappears in charges is vital”.
Many mainstream funds’ disclosure has been improving, but some alternative funds are “particularly opaque” with regard to charges, said Trask.
He added that he “would like to see the standardised template on charges cover private market funds as well as mainstream funds”.
Communicating cost disclosure
Richard Dowell, head of clients at consultancy Cardano, said standardising disclosure on investment charges and costs is one example of how the industry can be made more transparent.
FCA lights the way on transparency
‘A big flashing neon light’ marking the direction of travel on transparency has been lit by the Financial Conduct Authority with its proposal to make asset managers disclose transaction costs to defined contribution schemes.
He said it is important for that disclosure to be “in a form which makes it easy for the investor to interpret and effective for them to use”.
Dowell added that “a balance also needs to be struck between providing useful, comparable information and overloading users with too much data that clouds good decision-making”.
In addition to disclosure on cost, clear and consistent disclosure on performance is very important, and “both are needed to ensure investors can make a fully informed decision, and not just focus on one or the other”, Dowell added.
