UK watchdog to force transaction costs disclosure for DC schemes
Asset managers will be obliged to provide transaction cost data to UK defined contribution (DC) funds from the start of next year under new rules published today.
The Financial Conduct Authority said governance boards responsible for DC pension schemes will be able to request data from providers regarding transaction and administration costs from 3 January 2018.
The regulator also set out how asset managers should calculate and report such costs.
The move is designed in part to align DC reporting with disclosure rules included in EU regulations such as the Markets in Financial Instruments Directive (MiFID II) and the Packaged Retail and Insurance-based Investment Products regulation (PRIIPs).
It also follows the FCA’s Asset Management Market Study, which introduced a requirement for governance committees to assess value for money from DC providers.
In today’s policy statement, the UK regulator said asset managers, investment banks and custodians would all be required to provide information to independent governance committees when asked. However, it emphasised that the onus was still on trustees and governance committees to request the data as part of their assessment of a provider’s value for money.
The FCA said it would introduce a “slippage cost” method for calculating transaction costs – the same technique used in PRIIPs and MiFID II. In its industry consultation the FCA’s proposal proved divisive, with some respondents arguing for a calculation based on the trading spread of a fund’s units, but the FCA opted to stick with its original plan.
The regulator said: “The slippage cost methodology calculates transaction costs as the difference between the price at which a transaction was executed, and the price when the order to transact was transmitted to a third-party… It identifies the loss of value, from the consumer’s perspective, that happens when a transaction takes place. It includes a comprehensive measure of implicit costs. This means that it provides an overall picture of the costs incurred and reduces the risk that some costs remain hidden.”
The FCA added that the reporting of actual costs, rather than estimated costs, “should enable governance bodies to understand the costs that have been incurred in their scheme and should incentivise asset managers to transact more efficiently”.
The regulator rejected the spread-based proposal, saying there was no standardised way of calculating such data.
“If spread were used to estimate implicit transaction costs, there is a risk of creating incentives for the fund manager to change their judgements about what the fund spread should be,” the FCA said.
The FCA’s paper also set out a number of rules regarding the calculation of costs in specific asset classes, such as bonds and property.
Respondents to the FCA’s consultation in October last year said the industry would have to carry out “significant work” in order to comply, and there could still be inconsistencies in price reporting.
Maria Nazarova-Doyle, head of DC investment consulting at JLT Employee Benefits, said: “While it may not be a straightforward undertaking for the asset managers, it should be seen as a positive development in the longer term. Those managers who diligently apply best practice and offer better value for money will be recognised for their efforts. Greater transparency will not only improve trust in asset management, but also drive greater competition and a better functioning market.”
The FCA’s policy statement is available here.