FCA uncovers significant calculation errors in Kids

FCA uncovers significant calculation errors in Kids

The Financial Conduct Authority (FCA) has uncovered investment providers are making significant calculation errors when pulling together transaction costs for key information documents.

In a 23-page paper published by the FCA today (26 July), the regulator revealed details around the issues it has already uncovered with investment providers having to make sense of Mifid II and Packaged Retail and Insurance-based Investment Products (Priips) regulation.

In the paper, titled Call for Input: Priips Regulation – initial experiences with the new requirements, the regulator stated it had reviewed funds which are disclosing transaction costs under Mifid II in key information documents (Kids). 

The requirements under Mifid II are less prescriptive than under Priips in relation to the methodology for calculating these costs and the regulator found most funds are reporting small positive transaction costs.

About 5 per cent of funds reported zero transaction costs and a small number of funds reported negative transaction costs of less than minus 0.1 per cent. 

The regulator stated while negative transaction costs are not necessarily inaccurate, when it reviewed example portfolios it "found significant calculation errors".

When these were corrected by the watchdog, the FCA found overall portfolio transaction costs for these portfolios were positive. 

That means, the FCA found some firms are failing to properly disclose costs to investors as required under the Priips legislation. 

The FCA stated it would get firms to address these errors but used the paper published today (26 July) to ask investment providers to reveal their concerns with the calculation methodology. 

The regulator stated subject to the feedback it gets, and if appropriate, it will consider running workshops to support firms with their compliance activities in relation to these requirements. 

However where the FCA spots non-compliance with the requirements, the regulator stated it will consider appropriate supervisory and enforcement action.

Francis Klonowski, who runs financial advice firm Klonowski & Co in Leeds, said: "The reality is most advisers and clients don’t look at Kid documents. 

"I recommend investment trusts to my clients, but I also have a number of clients who knew about investment trusts before they ever met me, and they don’t look at them either. One client in particular reads extensively, but he doesn’t read the Kid document, he just wants to have trust that I do the job."

The regulator also revealed it had received industry reports suggesting there was uncertainty over whether products, such as UK real estate investment trusts and certain foreign exchange contracts, are in or out of the scope of Priips.

The FCA asked to know more about these scope issues from providers, distributors and investors, to assess their nature, extent, and possible impacts on the behaviour in the markets. 

Investment providers are also asked by the FCA whether the methodology prescribed for describing performance could be misleading investors.

Today’s call for feedback on how Priips rules are working in practice comes after Simon Fraser, who chairs two investment trusts, including the £4.2bn Foreign and Colonial investment trust described Kids as creating a "future mis-selling scandal".