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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