RegulationOct 30 2014

Schemes will have to disclose transaction costs: FCA

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The Financial Conduct Authority has proposed that the charging cap for default funds used for auto-enrolment should have three exceptions, including transaction costs, however the regulator warned this will be subject to further consideration on how charges are disclosed.

The FCA’s consultation paper outlines proposed new rules for the 0.75 per cent charge cap and for banning certain charging practices. It proposes that the charge cap will apply to all charges and deductions made from members’ pension funds.

The FCA said while this will exclude transaction costs, including those related to investments held in underlying funds, it will be subject to further consideration by the Department for Work and Pensions and the FCA “in relation to how they are disclosed going forward”.

Transaction costs include dealing charges, bid-offer spreads, transaction taxes, foreign exchange commissions and fees relating to stock lending or stock borrowing.

It is unsurprising that transaction costs will be excluded from the charge cap as the government’s own scheme the National Employment Savings Trust charges an annual management charge of 0.3 per cent but also levies an initial ‘contribution charge’ of 1.8 per cent.

Many believed its total costs would see it fall foul of any maximum threshold.

Another exclusion is where a member explicitly agrees to non-standard services being provided and in these cases, additional charges are allowed. The FCA cited as an example drawdown arrangements to access their benefits from the scheme or pay separate premiums to receive life cover.

The regulator said it would not want to prevent members from having these arrangements by including them within the charge cap.

The third exception is in respect of charges incurred in complying with a court order and costs incurred in pension sharing.

The regulator also said that the 0.75 per cent charging cap will push more people into the National Employment Savings Trust as those small employers who cannot find a provider to take them on will go into Nest.

The paper said: “To some extent the expected benefits could be offset by a potential reduction in the choice of providers, particular for smaller employers, who will be less attractive at a lower charge rate.

“Smaller employers may need to change provider where their existing provider is unable (or unwilling) to offer a small scheme below the charge cap. However, due to the Nest, there will not be any problem of employers not being able to find a charge cap compliant scheme.”

The FCA’s proposed rules for the charge cap and other provisions, if made following consultation, will come into force on 6 April 2015. Firms will be expected to comply from that date.

The consultation closes on 31 December 2014.

donia.o’loughlin@ft.com