The UK’s asset management trade body has called for the country’s financial markets regulator to “immediately” drop the methodology it has mandated for the calculation of transaction costs for defined contribution (DC) workplace pension schemes.
The Financial Conduct Authority (FCA) should take “immediate unilateral action” to suspend the use of the methodology and replace it with a “half-spread measure”, according to the Investment Association (IA).
The calculation was introduced as part of the EU’s Packaged Retail Insurance-based Investment Products (PRIIPs) regulation.
Chris Cummings, the trade body’s CEO, said: “The FCA rightly called for evidence of investor detriment caused by the new rules. It has been delivered. The case is now proven and it’s time for action.
“We have offered pragmatic solutions to ensure customers are provided cost information that is reliable, clear and meaningful in order to make informed investment decisions because the asset management industry is committed to delivering crystal clear cost transparency.”
The association was responding to an FCA request for “input” on firms’ and consumers’ initial experiences with requirements introduced by the EU PRIIPs regulation, which came into force on 1 January this year.
Separate FCA rules, also effective from January this year, mean asset managers must be able to report transaction cost information to the governance bodies of DC workplace pension providers. The regulator mandated a “slippage cost” methodology based on the approach applicable under the PRIIPS regulation.
The IA said it was particularly important that the FCA not implement PRIIPs rules outside of its original remit, given that transaction cost information was beginning to be disclosed directly to pension scheme members. In February the Department for Work and Pensions brought in new rules requiring cost and charges information relating to DC workplace pensions to be made publicly available.
The slippage methodology calculates implicit transaction costs by comparing the price at which a transaction is executed with the mid-market price when the order to transact is authorised, which is sometimes also referred to as the arrival time.
According to the IA – which has flagged concerns about the methodology for some time – the slippage cost approach was flawed and resulted in the “widespread incidence of zero or negative transaction costs under slippage, which in turn reflects a wider distortion in all results”.
A fundamental issue, according to the asset management trade body, was that market movement was being introduced into the results.
In the IA’s view, implicit transaction costs should instead be calculated using a “half-spread measure” – the price halfway between the price at which a security or stock could be bought (offer price) and the price at which it could be sold (bid price). The difference between the bid and offer prices is the spread.