FCA lights the way on transparency

The tussle over transparency took a nasty turn in the summer, when the Investment Association brought out a research paper brandishing hidden fund fees as the (non-existent) “Loch Ness monster” of the industry.

It was not long until campaign group the Transparency Task Force's founder Andy Agathangelou retorted by saying that the statement revealed the “Jekyll and Hyde” character of the IA's efforts to tackle the problem and the conclusions drawn in the study.

FCA takes stand with 'slippage costs'

The dispute is set to end as the FCA has unexpectedly issued a consultation paper, with responses due by January 4 next year, in which it proposes “to place a duty on asset managers to disclose aggregate transaction costs to pension schemes that, directly or indirectly, invest in their funds”.

It has also proposed to make asset managers provide a breakdown of transaction costs on request.

According to the proposals, aggregate transaction costs would be standardised to allow schemes to make comparisons, leading to net savings to industry of about £24m over the next five years.

They would be based on what the FCA terms “slippage costs”, which defines the transaction cost as the difference between the asset value immediately before an order is placed and the price at which it is actually traded.

With this approach, “there is no need to engage in complicated calculations or to make estimates”, the FCA stated.

Industry welcomes proposals

The proposal has been widely welcomed, including by the IA.

A spokesperson said: “The IA membership is fully behind the IA’s work and looking to it to help deliver a solution that gives clients meaningful disclosure whilst ensuring firms meet their regulatory obligations.”

However, Agathangelou said that while many IA members might be supportive, others “will be nervous and anxious about what this is going to mean for their businesses”.

He said the industry has been waiting for signs as to how serious the FCA is in bringing about greater transparency through regulation.

“We could not get a better possible clue – a great big flashing neon light – that the FCA is serious about making changes that are there to help consumers get better value for money.”

Data is no replacement for judgment

The rules, if implemented, will make it easier for trustees and independent governance committees to provide value for money for members, said Agathangelou.

He said that sometimes, data is requested by trustees and IGCs but "they don’t get accurate data; sometimes they ask for it and they don’t get any data at all because they literally are not being given what they need; sometimes they get the data in such a terribly non-standardised way it’s very difficult to turn it into intelligible information”.

However, others questioned whether the proposed new rules would make the value-for-money judgment any easier.

Richard Butcher, managing director at professional trustee company PTL, welcomed the proposals, but said: “It’s all very well having data, and even comparative data to put it into context, but that still doesn’t let you assess whether it represents value or not.”

He also questioned how the proposed rules would compare with European regulations currently in the making.

Even as the UK is set to leave the EU, the directives on Markets in Financial Instruments II and Packaged Retail and Insurance-based Investment Products will still determine what regulatory framework asset managers who are active in Europe will be gearing their systems towards.

More complicated than that?

Butcher also said the way of calculating aggregate transaction costs could be more complex than it appears at first glance.

“On the face of it slippage costs looks conceptually simple, I just wonder if an execution might be more complicated than that… if it was this simple we’d have done it donkeys’ years ago.”

The calculations proposed by the FCA were also raised by Laurie Edmans, IGC chair at provider Zurich, who said: “Perhaps the method for arriving at implicit cost is a blunt instrument, and maybe something more sophisticated would be feasible.”

However, he said that overall it was a desirable move.

Others highlighted that any data will need dissecting.

“Clearly this information will need careful evaluation as different investment strategies and approaches necessarily incur very different levels of transaction costs,” said David Felder, director at professional trustee company Law Debenture, noting that the proposal “is a proportionate and workable measurement framework”.