On 28 February 2019, the FCA published its key findings of supervisory work to assess the effectiveness of disclosure by asset managers and intermediaries to their retail customers. The FCA’s work was prompted by new disclosure requirements on costs and charges introduced by MiFID II and PRIIPs, which came into effect in January 2018.
Review of disclosure of costs by asset managers
The FCA’s review identified that most asset managers calculate transaction costs in accordance with the relevant rules. However, there were problems with the way some asset managers calculate transaction costs and how prominently and clearly they disclose them.
Other findings in the review as regards transaction costs:
- incorrectly applying the PRIIPs requirements: some firms are incorrectly using the arrival price methodology when calculating transaction costs for primary issues;
- using the anti-dilution levy incorrectly: this tool should only be used to reduce dilution. However, the FCA identified instances where its use was artificially reducing transaction costs at the expense of customers who subscribe into or redeem out of a product;
- ineffective oversight of outsourced arrangements: the FCA identified a few instances where firms were failing to effectively oversee an outsourced activity for calculating transaction costs; and
- transaction costs in underlying funds disclosed under ‘other ongoing costs’ for UCITS products: some UCITS which invest in other collective investment schemes disclose the charges for the trading of these underlying funds under their ‘other ongoing costs’. They therefore do not disclose separate transaction costs. While this approach is consistent with existing guidance, it helps explain why some UCITS products are reporting a transaction cost figure of zero.
Another problem the review found was that asset managers generally do not disclose all associated costs and charges and these are therefore not sufficiently clear to the end investor. Where full cost disclosures are made, there are inconsistencies between different documents and websites, and customers can therefore find the information difficult to understand.
Other findings in the review as regards costs disclosure:
- the impact of material portfolio transaction costs in UCITS is not reflected in the KIID; the UCITS KII Regulation means that where portfolio transaction costs are likely to have a material impact on returns, as a result of the strategy adopted by the product, these should be disclosed within the ‘objectives and investment policy’ section of the KIID. However, in the vast majority of instances the FCA sampled, this is not shown;
- marketing communications for UCITS can provide information in addition to that specifically required by the KIID: UCITS providers should assure themselves that, where significant costs and charges are not included in wider marketing material, this omission does not risk being unfair, unclear or misleading, even where those specific charges are not required in the KIID under the UCITS KII Regulation;
- PRIIPs KID disclosures being contradicted in other communications: the FCA found that asset managers are providing disclosures in other marketing communications (such as factsheets and websites) which show lower levels of costs and charges than the KID. They could therefore contradict and undermine the importance and impact of the costs and charges in the PRIIPs KID, contravening the PRIIPs Regulation;
- even when all costs are disclosed, they are still confusing: the FCA found instances where all related charges were made available but were disclosed in a way that requires unreasonable levels of effort from customers to both find and understand; and
- unclear terms: some UCITS product providers still prominently refer to the annual management charge, despite being told in 2014 (Thematic Review 14/7: Clarity of fund charges) that using this figure in such a way could be considered misleading.
The FCA concludes that asset managers may be communicating with their customers in a manner that is unfair, unclear or misleading and as such, investors can be confused and misled as to how much they are being charged
The FCA states that it is concerned by its findings and warns that it expects to see improvements in the coming weeks and months. It gives the following examples:
- UCITS product providers must comply with all relevant requirements. They can publish further information about relevant costs and charges in other communications, such as factsheets and websites. Where these charges differ significantly from those in the KIID, these differences should be clearly explained;
- where portfolio transaction costs are likely to have a material impact on returns as a result of the strategy adopted by the product, in compliance with the UCITS KII Regulations, this needs to be disclosed in the ‘objectives and investment policy’ section of the KIID;
- costs and charges disclosures in materials outside the KID (ie on factsheets and websites) should not contradict, or reduce the significance of cost information in the KID. Firms should consider whether the absence of, or presentation of charges figures which are significantly lower/different than those contained in the KID, meet this requirement; and
- transaction cost calculations should comply with the relevant requirements. In particular, firms should review their practices on subscribing to new issues and the arrival price methodology as well as anti-dilution levies.
Firms are encouraged to review how they are disclosing their costs and charges and also how they calculate transaction costs. Further FCA action in this area could include more detailed investigations into specific firms, individuals or practices.
Review of disclosure of costs by retail intermediaries
The FCA’s work focussed on retail intermediaries, such as wealth managers, direct-to-consumer platforms and advisory firms who all distribute products to end consumers. The FCA found that all the firms under review were aware of the rules and their responsibilities to disclose all costs and charges to customers and the FCA saw examples of good practice that exceeded compliance with the relevant rules.
Examples of good practice include:
- firms providing training for staff to ensure they understand how their firm has implemented the costs and charges disclosure requirements. The FCA saw examples of firms testing their staff’s understanding of these rules as part of their cycle of regular ongoing training sessions;
- firms that offered non-MiFID products were often applying the MiFID II disclosure standards to these products to give customers a clear and consistent illustration of costs; and
- technological innovation including interactive sliding scales showing the impact of charges on investments over adjustable investment amounts and timescales.
However, the FCA also found that firms interpreted the rules inconsistently, making like-for-like comparisons of costs and charges difficult. Firms involved in the design, manufacture and distribution of products need to work together to ensure all costs and charges are disclosed properly to customers.
The FCA states that it expects all firms to review their own costs and charges disclosures to ensure that they are satisfying all relevant requirements for their ‘ex-ante’ costs and charges disclosures, and ensure they are complying with the relevant rules. The FCA adds that firms should be particularly alert to the need to disclose all ‘transaction’ and ‘incidental’ costs and charges to customers. Firms are reminded that all communications to customers about their MiFID business must be fair, clear and not misleading.
PRIIPs Feedback Statement
The FCA has published a Feedback Statement summarising the responses to its earlier call for input on the PRIIPs Regulation.
In terms of next steps, the FCA advises that it will continue to work closely with the European Supervisory Authorities and the European Commission. It does have significant concerns about potentially conflicting requirements or lack of clarity about the scope of application of PRIIPs requirements. The FCA will consider the extent to which domestic interpretive guidance could mitigate concerns around performance scenarios, summary risk indicators and the scope of the PRIIPs legislation.
FCA consultation on publishing and disclosing costs and charges to workplace pension scheme members and amendments to COBS
The FCA has published Consultation Paper 19/10: Publishing and disclosing costs and charges to workplace pension scheme members and amendments to COBS (CP19/10). In CP19/10 the FCA sets out proposed rules to require scheme governance bodies to disclose costs and charges information on an ongoing basis to scheme members, to meet the duty the Pensions Act 2014 places on the regulator. It also sets out some amendments to our COBS 19.8 rules, based on feedback to the FCA’s Call for Input: PRIIPs Regulation – initial experiences with the new requirements. The deadline for comments on CP19/10 is 28 May 2019.