The FCA has now completed six market studies over the past four years. Interim reports for the first five received between 30 and 60 formal responses. Its sixth, the asset management study completed today (June 28), received more than 150.
That volume of correspondence indicates just how high the stakes were for fund firms. In the face of this considerable lobbying, little appears to have changed since the interim report. But there are a number of nuances which are worth further consideration, particularly with regard to the study's headline recommendation: the “all-in” fund fee.
Prior to the final report, there was plenty of speculation as to whether the FCA would stick to its guns on this issue. The truth is that it had no option but to do so, and asset managers have known for some time that the changes were coming.
That’s because the bulk of these requirements, including the need to detail transaction costs, are already scheduled to be enforced in six months’ time via the introduction of Mifid II and Priips.
This point is seemingly not well recognised by many industry analysts. Nor did the UK regulator itself acknowledge how Mifid and Priips would affect charging disclosure in its interim report. It does so in the final version – director of strategy and competition Christopher Woolard said this morning the FCA had received “far greater clarity” on the two EU regulations in the course of conducting the study.
Two caveats: Mifid II only applies to intermediated investors, and Ucits funds have a two-year exemption from Priips. But once calculations are made for one set of investors they may as well be extended to others. And Ucits managers will still need to provide comprehensive charging details to Priips distributors who buy their products. So the FCA choosing to extend the all-in fee requirement to all investors makes little practical difference.
The UK regulator has also said firms must estimate transaction costs on forward-looking basis. But there is little sign of a crackdown on the sticking point in all fund fee disclosure discussions - how exactly to account for these transaction charges. The costs entail not just the explicit fees incurred when trading, but also implicit costs such as the difference between bid and offer prices for a given security.
Despite the noises made in its interim report, the FCA has not yet taken a firm stance on the subject.
What do Mifid and Priips say? Both state that firms must disclose implicit costs, but there are differences: only Priips requires firms to include the impact of price moves between an order being made and a trade being fulfilled.
Importantly, regulatory consultants suggest Ucits funds will be able to ignore this requirement, even when obliged to provide their charges to those who are bound by Priips. The FCA did not seek to override this provision in its final report - not yet, at least.
For now, it has opted for more study: of how best to disclose these costs to retail investors, and how to standardise disclosures for institutional investors.
Plenty of other proposals also require further work, such as the idea to introduce independent directors to fund boards, and ideas for improving benchmark disclosure. Of these potential reforms, the most significant change of tone is on trail commission.
Investment Adviser noted last November, at the time of the interim report, that the regulator may be reconsidering its stance on the subject. Asset manager lobbying appears to have paid off in this regard. Several providers do have large books of business paying trail, but we have seen before how scrapping this can allow fund firms to cut costs for both investors and themselves by removing the commissions paid to advisers. The FCA has acknowledged that reopening the debate “could have a significant impact”. It has done so nonetheless.
