FCA forces asset managers to disclose transaction costs

Law & Regulation

By Alex Warnakulasuriya | September 22, 2017

The Financial Conduct Authority continued its transparency reform this week, with the release of a policy statement requiring greater transaction cost disclosure for workplace pensions.

In October last year, the regulator consulted on transaction cost disclosure in workplace pensions – at the same time as working on its extensive market review of the asset management sector, which concluded in late June. The policy paper published this week is a response to the October consultation.

From January 3 2018, companies managing capital on behalf of defined contribution workplace schemes will have to provide information about transaction costs, administration charges and appropriate contextual information.

Transaction costs will be calculated according to the so-called 'slippage cost' methodology, which accounts for the difference between the expected cost of a trade and the actual price paid. This allows observers to capture market movements during the trading process.

There’s no reason that, for instance, final salary pension schemes shouldn’t get access to that information

Donny Hay, PTL

The new rules will accompany next year’s implementation of the EU's second Markets in Financial Instruments Directive and the Packaged Retail and Insurance-based Investment Products regulation, as pressure mounts on asset managers to deliver greater transparency.

The methodology does not matter

While experts were united behind the FCA’s objectives, the report stated that “respondents were divided about the methodology” proposed to calculate transaction costs.

Concerns were raised over the ability of the slippage cost to account for implicit transaction costs. Some respondents mooted the use of an alternative approach, based on the spread of the fund, to calculate costs. The FCA has rejected this idea.

Andy Agathangelou, who chairs campaign group the Transparency Task Force, dismissed the importance attached to the method used to account for transaction costs.

“The precise methodology used doesn’t actually matter at this stage,” he said. “We’re going to be moving from an environment of totally inadequate cost disclosure to what will be really good cost disclosure,” he said.

CMA reveals scope of investment consultancy investigation

The Competition and Markets Authority published details on Thursday setting out the scope of its investigation into the investment consultancy market following the FCA’s referral.

The CMA issue statement highlights demand-side and information issues, conflicts of interest and barriers to entry and expansion. It also seeks views on a number of potential remedies, including:

Requiring consistent reporting of fees charged compared with those quoted or estimated
Requiring consultants to report the performance of their manager recommendations based on standardised performance metrics
Introducing mandatory tendering for consulting, fiduciary management services and/or mastertrusts
Ensuring trustees have responsibilities for obtaining value for money from investment consultants
Prohibiting investment consultants from providing fiduciary management/mastertrust services
Bringing the supply of investment consultancy services and fiduciary management services within the FCA’s regulatory perimeter
Imposing measures to ensure there is stronger separation of different business areas within consultants
Imposing limits on the value of hospitality that consultants are allowed to receive from asset managers
Imposing an outright ban on hospitality

Information that may be difficult to provide currently will become easier to disclose through iteration and the development of automated processes, Agathangelou predicted.

Standardise where possible

The respondents to the policy statement largely opposed a template for disclosing costs. Nevertheless, the regulator has set up a working panel with a view to developing such a template.

The FCA acknowledged that standardisation might “present some operational issues" but said: "Standard cost templates should facilitate the process of amalgamating costs in relation to underlying investment vehicles.”

Joe Dabrowski, ‎head of governance and investment at the Pension and Lifetime Savings Association, agreed with the need to standardise transaction cost disclosures.

“Having a standardised model is ideal,” he said. “Too much nuance” over the presentation of transaction costs would “make it much more obscure for consumers to see what’s going on”.

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It is conceivable that automation, provided by a handful of technology suppliers, might lead to further, self-regulated standardisation within the industry.

Dabrowski was sympathetic to the idea, but said legislated standardisation remains the way forward.

“It’s not that dissimilar in principle between that and how the pension dashboard might look, in terms of: if there’s a single way you could look [at information]," he said, but added: "It would typically be easier if you have the standard format.”

Will final salary schemes be next?

The FCA’s proposals require schemes to provide transaction cost information to relevant governance bodies of DC schemes.

A number of respondents to the consultation called for greater access to cost information, while others raised concerns over fund managers’ capability to fulfil this new obligation.

Donny Hay, client director at professional trustee company PTL, was satisfied with the outcome of the consultation and expected this momentum to disseminate across the pensions landscape.

“You always have to start somewhere,” he said. “I expect that this will spread to other areas. There’s no reason that, for instance, final salary pension schemes shouldn’t get access to that information.”