FCA under fire for 'bonkers' conflict in fund fee rules

FCA under fire for 'bonkers' conflict in fund fee rules

The lack of clarity on the rules about how transaction costs of a fund are calculated is “bonkers” and the Financial Conduct Authority (FCA) must provide guidance, according to Bella Caridade-Ferreira, founder of Fundscape.

Two recently introduced regulations - the Packaged Retail and Insurance-based Investment Products rules and the Markets in Financial Instruments Directive II - require investment funds to declare the transaction costs of the fund.

But each set of regulations includes a different methodology for how the charges should be calculated.

Contradictions between the two calculations have led to "chaos", as fund houses don’t know which method to use and find each yield wildly different result, according to Ms Caridade-Ferreira.

She urged the FCA to act to provide clarity for the industry.  

She said: "There is no straightforward guidance. It is completely mad, the rules are diametrically opposed to each other on this, so a fund is completely in the dark about what to do."

One fund manager told FTAdviser she lost as much as 10 per cent of the assets under management in her open-ended fund as a result of this confusion.

Judith MacKenzie, who runs the £30m Downing UK MicroCap Growth fund, said around £3m was pulled out of her fund by advisers and wealth managers after the calculations showed the fund was costing investors five times more than was actually the case.

Intermediaries, many of whom had been invested in the fund for a long time, told Downing they felt they would not be able to justify the level of charges to their client, so pulled out.

Ms Mackenzie said the method used to calculate the transaction costs involved picking a random day in a particular month, and looking at, among other things, the difference between the price at which the fund is bought, and sold -  known as the bid/offer spread.

A fund which trades in less liquid assets - like Ms Mackenzie's - will have a wider bid offer spread, as it trades less frequently.

Using this method, as described in the Priips regulations, Ms Mackenzie’s fund had transaction costs of about 4 per cent, which, when added to the 1 per cent cost of owning the fund, made it appear the Downing UK MicroCap Growth fund was costing 5 per cent a year for investors to own, five times more than the manager argues is actually the case.

When Ms Mackenzie’s authorised corporate director (ACD), which administers the fund, then did the calculation using the methodology described by Mifid, which yielded a transaction costs number of 0.03 per cent, a fraction of the Priips-based figure.

Both the methods comply with the rules prescribed for fund managers.

The FCA’s position is that the disclosure of transaction costs must happen, but that no methodology is described.

The regulator was approached for comment on the confusion resulting from the different calculations but declined to do so.

Neil Woodford's fund house, Woodford Investment Management, has also previously criticised the transaction cost reporting requirements.