U.K. Regulator Zeroes In On Asset Managers’ Fee Disclosures

The Financial Conduct Authority reviewed how investment firms disclose costs and charges to clients.

Illusration by II/Chris J. Ratcliffe/Bloomberg

Illusration by II/Chris J. Ratcliffe/Bloomberg

The United Kingdom’s Financial Conduct Authority is cracking down on how the asset management industry discloses its fees.

The FCA on Thursday announced the results of a review of how investment firms disclose their costs and charges to clients. Based on the findings, the regulator concluded that asset managers have failed to make the costs of their products sufficiently clear to their clients.

The FCA said the review was prompted by new European regulations, including MiFID II and PRIIPs. The second Markets in Financial Instruments Directive forces firms to disclose fees in their marketing materials, while the Packaged Retail and Insurance-based Investment Products rule requires the creation of key investor information documents.

“MiFID II and PRIIPs brought enormous change to how firms operate and the information they are required to give their customers,” said Andrew Bailey, the chief executive of the FCA, in a statement. “While awareness of the rules appears good, we found that firms take inconsistent approaches, risking confusion for customers, who may be misled about how much they are being charged.”

According to the review, asset managers are by and large attempting to comply with the new rules, but are still failing to disclosing all the associated costs and charges of their products in a clear way. The FCA said that while these costs and fees may be addressed in some investor documents, they are not consistently reported.

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The FCA reviewed a sample 16 firms to determine how they complied with both MiFID II and PRIIPs. The group also engaged in a second, separate review of the effectiveness and consistency of 26 product cost disclosures, it said.

Through the review, the regulator identified a few specific areas that asset management firms were struggling with.

Some investment firms, per the FCA, have been using the incorrect methodology to determine the transaction costs of primary issues of securities, effectively making it seem as if there was a negative transaction cost when that is not the case.

The FCA also found that managers have been using the anti-dilution levy incorrectly. Normally, this tool would ensure that transaction and redemption costs are only charged to clients who are engaging in those activities, rather than spreading them across all clients. However, the FCA said some firms are using the levy in way that has artificially reduced reported investment costs.

Some asset management firms have opted to outsource their cost calculations to other providers, the FCA reported. While the practice is okay, the FCA identified instances where asset management firms did not practice effective oversight of their providers.

At the conclusion of the report, the FCA recommended that asset managers take these common errors into consideration and review their own cost disclosure practices.

“We encourage firms to review how they are disclosing their costs and charges and also how they calculate transaction costs,” the regulator said.