The FCA has accused asset managers and retail investment firms of communicating charges in a way that is ‘unfair, unclear or misleading’, meaning investors ‘can be confused and misled as to how much they are being charged’.
In one case it found an asset manager had omitted a 4 per cent a year transaction cost that from the UCITS Key Investor Information Document (KIID).
It found some retail investment firms were prominently advertising low costs while disclosing higher aggregated costs in less visible parts of their website. It says such a practice is unlikely to meet the requirements that marketing material be fair, clear and not misleading. It found other firms marketing their costs and charges as lower than out-of-date industry averages.
The regulator said the firms in its sample of retail investment firms were not interpreting the rules consistently, but most of them had given this serious consideration and were trying to comply with them.
The FCA reserved its fiercest criticism for asset managers, saying it found instances where asset manager factsheets or websites did not mention costs. When they did, they often gave the ongoing charge figure, which omitted transaction costs, performance fees and borrowing charges which are shown in the Key Information Document (KID). In one example, total charges in the PRIIPs KID equated to around 3 per cent per annum but the only costs given in the factsheet was the 1.2 per cent annual management charge (AMC).
Publishing the findings of its supervisory work into the effectiveness of disclosure by asset managers and intermediaries, the regulator said that while most asset managers calculate transaction costs in accordance with the relevant rules, it found problems with the way some calculate transaction costs and how prominently and clearly they disclose them.
Even when all costs are disclosed by asset managers, they are still confusing, the regulator says. It says ‘in instances where all related charges are made available, they are often disclosed in a way we believe requires unreasonable levels of effort from customers to both find and understand’. They are commonly located in separate pages or documents on a firm’s website, which the FCA described as ‘especially concerning where these additional charges have a significant impact on the overall cost of investing and therefore a material effect on returns’.
The regulator found some asset managers were incorrectly applying PRIIPs requirements, using the anti-dilution levy incorrectly, and were being ineffective in their oversight of outsourced arrangements.
The review found 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 sampled, this is not shown. In one extreme case, a 4 per cent per annum transaction cost charge was omitted from the UCITS KIID.
FCA chief executive Andrew Bailey says: “MiFID II and PRIIPs brought enormous change to how firms operate and the information they are required to give their customers. While awareness of the rules appears good, we found that firms take inconsistent approaches, risking confusion for customers, who may be misled about how much they are being charged.
“Certain aspects surrounding compliance with PRIIPs may risk not leading to good consumer outcomes and we are working with EU institutions to address these. We are aware that many firms are finding aspects of the calculations difficult or are making inaccurate calculations. We will work with firms to help them ensure their reporting is accurate.
“We are aware of public claims of an intent deliberately not to comply with the new rules. While we have found some areas of non-compliance with the new rules the claims which have been made regarding this are not supported by the evidence in important respects.”
Investment Association chief executive Chris Cummings says: “The new MiFID II and PRIIPs regulations represent an ambitious and wide-ranging set of changes that seek to bring greater transparency to large parts of the financial services industry. Asset managers are fully committed to implementing them, alongside the new Cost Transparency Initiative, of which the IA is a founding partner. Where problems exist, especially in relation to the methodologies, we are committed to working with the regulator to ensure that we can move to a solution that ensures we are able to provide customers with reliable, clear and meaningful information.
“It is especially important to note that the FCA have found no evidence to support the claims that firms are deliberately not complying with the regulations.”
The FCA said it expects to see improvements in the coming weeks in the following areas:
- 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.
- In compliance with the PRIIPs Regulation, 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.
- 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.