On 28 February, the Financial Conduct Authority (FCA) released the findings of its review into asset manager transaction costs.

The review looked at how asset managers calculate and disclose transaction costs and how effective overall cost disclosures are. It was carried out following the FCA’s Asset Management Market Study, which found that ineffective cost and charges disclosures was one cause of weak price competition in the sector.

Here we summarise the review’s findings and suggest the remedies investment managers should put in place to tackle the problems identified.

Who is the review relevant to?

A number of EU directives and regulations govern the way asset managers calculate and display costs and charges. The review is relevant to:

• UCITS (undertaking for collective investment in transferable securities scheme) managers and their key investor information documents (KIIDs)
• Any firm that operates relevant non-UCITS retail schemes (NURS) and NURS-KII documents
• Key information documents (KIDs) produced by fund managers for other funds under PRIIPs
• Disclosures in any other marketing material, some of which may be subject to MiFID II

What problems did the FCA uncover?

The review found issues with:

• The way some firms calculate transaction costs
• How prominently and clearly firms disclose these costs
• The fact that asset managers generally do not disclose all associated costs and charges
• Inconsistencies between different documents and websites, making costs difficult for consumers to understand

The FCA concluded 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 review was carried out via two separate workstreams:

• A sample of firms’ actions in looking at transaction costs, and
• A desk-based review of effectiveness and consistency, looking at 26 product cost disclosures across a variety of sources

The findings of the transaction costs workstream

The first workstream asked 16 small, mid-sized and large asset managers to explain how they were calculating transaction costs and provide the regulator with the underlying data they used in their calculations.

The products reviewed fell under a range of regulation; some were ones for which manufacturers are now producing PRIIPs KIDs and some were products for which a UCITS KIID was being prepared.

The work found that most of the asset managers calculated transaction costs in compliance with the relevant requirements.

There were, though, problems with several of the firms and products sampled, which increased the risk of the firms understating the cost of investing and therefore the risk of customers being misled.

Specifically, firms were:

• Incorrectly applying the methodology required by PRIIPs
• Incorrectly using the anti-dilution levy, resulting in incorrect transaction costs being applied
• Failing to properly oversee outsourced arrangements, where they outsource or offshore transaction cost calculations
• Reporting transaction costs for underlying funds incorrectly for UCITS products

The findings of the ‘effectiveness and consistency of cost disclosures’ workstream

A number of regulations (PRIIPs, MiFID II etc) cover the information firms should disclose and the format for disclosing it. The FCA recognises that the ‘interaction between them in terms of detail is not always seamless’.

What they do have in common, though, is an aim ‘to ensure that investors are presented with information that is sufficiently clear and complete, so they can take informed investment decisions’.

The work here found that:

• There are inconsistencies between the different materials that communicate costs. For instance, UCITS KIIDs were found to omit transaction costs, although there is a need to include them where they are likely to have a ‘material impact on returns’
• Additional materials – for instance marketing materials for UCITS, which can contain additional information to that required in the KIID – do not always include all the information they can. Firms should be sure that if they don’t include any significant costs and charges in marketing materials, they do not risk being ‘unfair, unclear or misleading’
• Communications sometimes contradict each other. For instance, in the case of PRIIPs KIDs, some asset managers are providing disclosures in other marketing materials that show lower costs and charges than the KID
• Even when all costs are disclosed, this can be unclear and confusing
• Some UCITS product providers are still referring to the AMC, despite this being ruled in 2014 as potentially misleading

What should firms do to respond?

The FCA says that it wants firms to ‘take a holistic approach to disclosing costs’. While firms need to comply separately with relevant UCITS, PRIIPs and MiFIDII requirements, ‘they should also aim for effective and consistent costs and charges disclosures, so they are clear, fair and not misleading’.

In practice this means:

• Consistency. Make sure all your materials quote the same costs and charges. This can be a challenge when you are producing multiple documents, with the FCA finding that websites, printed materials and required documents like KIDs are too frequently contradicting each other.

Explore whether an online slide library could help you. Creating a searchable library of pre-Compliance-approved wording, data and other content can deliver consistency, as well as saving significant time when producing and approving materials.

• Prominence. The FCA has prescriptive rules on the prominence of disclaimers and disclosures – make sure you and your Marketing team are familiar with them in order to comply.
• Outsourcing. Firms need to understand the FCA’s rules on outsourcing. One issue mentioned was firms’ failure to properly oversee those carrying out calculations on their behalf.
• Clarity. Encouraging firms to be clear, fair and not misleading in communications with customers is a key aim of the FCA. Make sure your costs and charges disclosures are clear; think about the intended audience and ensure that the wording you use is appropriate.

Make sure your costs and charges disclosures comply with FCA requirements

The review shows that – even where firms are well intentioned – the methods they use to calculate costs, discrepancies between their various communications materials, and the way costs information is written can lead to confusion and misunderstanding.

Going back to basics and looking at the issues outlined above is a good way for firms to start tackling the challenges of good costs disclosure.

You may also want to re-familiarise yourself with the rules around treating customers fairly. If this is something you would like to know more about, you can contact us to see how we may help.