Under proposals detailed by the watchdog last week, asset managers would have to disclose aggregate transaction costs to pension schemes investing, directly or indirectly, in their funds, as well as provide a breakdown of such costs when requested.
In the retail space such progress has appeared far off. Transaction costs are set to be disclosed as part of the Packaged retail and insurance-based investment products (Priips) key investor document (Kid). However, while these should come into force next year for some products, and in 2019 for Ucits funds, there is limited agreement on how effective the current definition of transaction costs will be for end investors.
Similarly, the Mifid II regulation, to be implemented in 2018, will rely on the Priips Kid rules regarding transaction cost disclosure, compounding the effects.
However, after the FCA set out its own work for institutions, the pace of change for retail investors could accelerate. The regulator has even stormed ahead of the industry’s own work on the matter. Investment Adviser understands that the independent advisory board appointed by the Investment Association (IA) to work on full cost disclosure still has some work to do but will release its framework shortly.
Commentators suggested the UK regulator may have forced the hand of fund houses and set a direction of travel for the retail space.
“In my view, the FCA is grabbing the wheel from the industry on the basis that they have no confidence it will deliver what’s needed in an acceptable timeframe,” former IA chief executive Daniel Godfrey said. “I think the principles will feed into retail funds in the end.”
Mr Godfrey, who acts as a consultant for the regulator, added that two “pieces of the puzzle” to be addressed on this front concerned the disclosure of both explicit and implicit transaction costs.
“Both of these could be articulated to retail fund investors in a reasonably simple fashion,” he added.
Graham Bentley, of the investment consultancy gbi2, defended fund houses for any hesitation around such disclosure, but warned pressure could now mount for them to take action.
“If you think about all the things fund managers are having to be concerned with that are ancillary to the job of running money, you can understand that there are bigger fish to fry,” he said.
“Then the regulator says ‘You may have [bigger fish] but you have got to do this’. They have to do it because there’s a different [emphasis] on their priorities. It’s just about finding yourself in a position where you are being pushed to do it and told to get on with it.”
The FCA’s move on transaction costs comes after it used its third Mifid II consultation paper, published in late September, to propose that fund management firms pay for research – either directly or using a research payment account funded by a specific charge to investors – as part of the general shift towards full cost transparency.
While some have welcomed the prospects of a more determined drive for transparency, KPMG regulatory specialist Julie Patterson warned that consistency was key.
“The best outcome would be a sensible and consistent methodology across the piece, and not different approaches in different bits of legislation or by different regulators,” she said.
Key numbers
January 4 2017: Deadline for responses to the FCA's transaction cost disclosure consultation
£24m: How much the FCA estimates setting out a standard way to disclose transaction costs will achieve in net savings for the industry over the next five years
