Asset managers will be required to disclose transaction costs on group pension investments in a standardised format under proposed rules published by the FCA today.
The FCA has set out rules for asset managers to enable independent governance committees (IGCs) and trustees to report on costs and charges more effectively.
Firms who are unable to provide transaction cost information for all of the assets in a scheme will have to disclose this clearly to the governance body with an explanation of why it has not been possible to provide the information, which is expected to in turn have a duty to disclose that in their report.
The FCA has opted for a ‘slippage cost’ approach to assessing costs rather than a volume-weighted average price (VWAP) approach. The regulator’s proposed approach, which calculates the transaction cost as the difference between the price at which an asset is valued immediately before an order is placed into the market and the price at which it is actually traded.
The FCA was not persuaded by some respondents to its call for evidence who argued that a cost could only exist if a specific party could be seen to benefit from it. It also rejected the view of respondents that argued that costs should only be disclosed if they are under the manager’s control. Instead it says that being able to control the level of a cost does not change the fact that it is a cost. The regulator argues that one significant advantage of its approach is that it is not necessary to break down implicit transaction costs into other elements. Asset managers who want to increase the efficiency of transactions may prefer to analyse the various components that make up the transaction cost, but it is not necessary to do so to come up with a cost that could be disclosed, it says.
The FCA says the VWAP approach is perceived as being more open to gaming, and transaction cost analysts do not see it as a reliable measure of trading performance, particularly when used without other approaches.
The regulator is not planning to make asset managers report on spreads to assess transaction costs at this stage because of the complexity this would cause. Spreads vary over time, and can often be hypothetical, says the FCA.
The FCA estimates that initial reporting costs will be around £150,000 per independent asset management firm and £250,000 per insurance firm. It assumes that around ten insurers also have asset management subsidiaries and that the reporting costs will be shared across these businesses. This gives an estimate of one-off costs associated with reporting of £13.5m. Its cost benefit analysis says each basis point reduction in active trading costs would provide a benefit to consumers of around £11m per annum and each basis point reduction in passive trading costs would lead to a benefit to consumers of roughly £2m per annum.
The consultation closes on 4th January 2017.
FCA executive director of strategy and competition Christopher Woolard says: “The proposals we are announcing today will allow IGCs to see fully the transaction costs that their funds pay and enable them to make better decisions about how they get value for money for their members.”
Investment Association director of public policy Jonathan Lipkin says: ” The asset management industry is committed to introducing full charges and costs disclosure across all investment products and services. The work to make that happen is well under way, and has already resulted in a new template for Local Government Pension Scheme reporting.
“This morning’s consultation provides clarity on FCA thinking regarding the workplace pensions market. Our goal here is consistent and complete reporting for all client groups, implementing both UK and EU regulatory change. We will therefore continue the work being undertaken with the IA Independent Advisory Board to ensure we can deliver meaningful disclosure in tandem with new FCA rules.
Scottish Widows head of industry development Peter Glancy says: “For us, we believe that there are three key questions which IGCs and Trustees need to have answered on behalf of members. To what extent has the dilution effect of trading been justified by the upside for members through the re-shaped portfolio? To what extent has the dilution effect of trading been minimised through efficient and effective execution? And to what extent have scheme members benefited by revenues generated through ‘stock lending’?
“We are pleased that the FCA has developed a pragmatic approach to the calculation of a slippage cost which considers the first two questions and that they also propose to show separately any revenue from ‘stock lending’ which is not passed on to scheme members.
“This paper only covers workplace pensions. The obvious question is what will close the disclosure gap for individual pensions.”
Hargreaves Lansdown senior pension analyst Nathan Long says: “Until now information has been hard to come by often with no standardised way of calculating all costs. If implemented these rules will promote transparency within workplace pensions and may ultimately act to reduce some costs from fund management. Analysing transaction costs alone though is not enough. The costs will differ based on different styles of fund management and types of assets invested in. What really matters to investors is the returns after all costs have been accounted for, fortunately this information is already in the public domain. The skill here lies in analysing which strategies offer value for money now, and which may continue to do so into the future. Greater disclosure of transaction costs alone will not solve this.’
