Christopher Woolard, Executive Director of Strategy and Competition at the FCA, said that its new rules are “an important part of a package of measures that, combined, aim to achieve a fair, transparent, open and accountable market”.*
What are the potential effects of these changes?
The introduction of these new regulations is likely to make it easier for investors, advisers and competitors to compare investment products.
Earlier this year, ratings agency Moody’s published its research into the impact of MiFID II. It said it expects the new rules of cost disclosure to result in an increase in competition and further downward pressure on investment fees. In turn, Moody’s also expects to see the migration to cheaper passive investments continue and for lower fees to spur some consolidation in the industry. 1
The introduction of the new cost disclosure rules has not been without criticism. The overlapping timescales for the different regulations means they will take several years to bed down and allow funds to become truly comparable. In addition, different disclosure rules require charges to be broken down in different ways, so the additional transparency adds a further complexity to anyone wishing to compare investment charges.
There has also been specific criticism of the way the new PRIIPs regulations require costs to be calculated. In July, the FCA launched a review of the impact of the PRIIPs regulations, with chief executive Andrew Bailey saying “I am concerned about PRIIPs. It carries the risk of it leading to literally accurate disclosure which is not providing useful context”. 2
Meanwhile, the FCA’s requirement for an AAV statement may change the focus of fund manager disclosure, with perhaps less focus on price paid. The new AAVs are not just about cold, hard numbers, but mix qualitative factors in with the quantitative ones, including levels of service, performance, comparable rates, economies of scale and class of security.
The impact of charges over time
The central point of the European and UK regulators is that raising awareness of the level of fund charges should encourage investors to take greater account of charges when considering where to invest.
The fact that high charges eat into investment returns over the long term is hardly a revelation. However, the difference in total returns due to charges can be an eye-opener for investors. In 2013, a study carried out by the Department for Work and Pensions (DWP) into the level of charges in workplace pensions highlighted the impact that higher charges can have.
The DWP’s figures show that over a working life of 46 years, a pension investor contributing an initial £100 a month (rising by 4% a year), and experiencing annualised investment growth of 7% a year would pay 13% of the total value of their fund if they paid an annual management charge (AMC) of 0.5%. This rises to 24% of the fund if the AMC is 1% and 34% for an AMC of 1.5%.