UK fund charges comparison remains impossible nearly 1.5 years after RDR

30 May 2014

This week there has been increased talk of the need for a level playing field to be created for comparing fund charges following recent publication of the FCA’s Thematic Review into Clarity of Fund charges.

Since Daniel Godfrey stepped in as chief executive of the Investment Management Association (IMA) back in October 2012 the issue of finding a way of effectively disclosing fund management charges has been rarely out of the financial trade news. Now that disclosure associated with pensions and regulated financial advice has been all but sorted out as a result of RDR; fund charges transparency remains one major area where the FCA has not yet arrived at firm rules.
A thematic review (TR14/7) by the regulator however has been published this month and both the IMA and the FCA broadly favour phasing out disclosing of annual management charges (AMCs) in isolation. The FCA’s view was that AMCs alone do not provide investors with a clear, combined figure for charges as they exclude administration charges and expenses taken from funds.

About a quarter of UK funds today show Total Expense Ratios (TERs) which include the following costs:
1. AMC
2. Depositary fee
3. Custodian fee
4. Audit fee
5. Registration, regulatory and similar charges
6. Performance fee

Both the IMA and the FCA also appear to be in agreement that the investment world needs to move to what is called Ongoing Charges Figures (OCF) which takes into account all of the above charges except the Performance Fee.

Although there is broad agreement amongst the trade body, regulator and advisory communities that a more complete understanding of all charges is badly needed it is clear that to date the fund management community remains divided and inconsistent in their response (to say the least). Market research providers like Morningstar and FE Analytics are pushing for OCF disclosure on funds they provide data on but remain frustrated in their endeavours to lay out the desired level playing field, by the fact that many firms refuse to put OCF fees into their metadata (a kind of information feed or data stream which is ‘scraped’ by these firms prior to tables being updated). Many fund managers ask them to simply collect OCF information from key investor information documents. This is of course laborious and difficult work which often reveals further data discrepancies.

The OCF will in theory tell investors, in pounds and pence per unit, how much profit (or loss) they’ve made and how much it has cost them – so it comes somewhere near the pensions’ Key Features Illustration (KFI) Effect of Charges disclosure. However there are still significant gaps of information when you look deeper.

OCF does not offer entry or exit charges paid directly by the investor. Nor does it include interest on borrowing, brokerage charges or dealing costs. There are even more granular charges associated with transactions such as bid-ask spreads, undisclosed revenue, acquisition costs, custodial charges…I could go on.
The fact that the IMA is planning to merge with the ABI Investment Affairs unit also enthuses few arguing for greater transparency. Although a positive spin has been put on it by Mr Godfrey there is a danger that this merger could strengthen the hand of an already mighty (and mighty wealthy) industry which is apparently charging on average 58% more than their US equivalents.

Many in the industry are now openly declaring that the whole system is a mess and that the FCA must mandate investment management disclosure requirements sooner rather than later. Will this go further than OCF to demand full Total Cost of Ownership (TCO) figure for all funds? No one knows.

But it is clear that fund charges transparency is going to be one of the FCA’s most significant challenges in the next couple of years. And if current resistance is anything to go by, it may well take longer than two more years to deliver it.

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