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FCA unveils draft rules to clarify deal costs for pension funds

The Financial Conduct Authority (FCA) in the UK has unveiled a set of draft rules and guidance aimed at standardising the way the transaction costs pension investors have to pay are disclosed.

Fee transparency has recently been the subject of hot debate in the country’s pensions and investment sphere.

Christopher Woolard, executive director of strategy and competition at the FCA said: “IGCs (independent governance committees) are already seeking to make pension schemes work better for their members. 

“The proposals we are announcing today will allow IGCs to see fully the transaction costs that their funds pay and enable them to make better decisions about how they get value for money for their members.”

As things stand, the UK financial regulator said IGCs and trustees were required to request and report on transactions costs as far as they could, but that asset managers were not required to disclose these costs fully in a standardised form.

The FCA said it was now proposing to place a duty on asset managers to reveal aggregate transaction costs to pension schemes investing directly or indirectly in their funds. 

In the proposals – which are now out for consultation until 4 January 2017 – the FCA also says asset managers should give the breakdown of transaction costs on request, with the total broken down into categories of identifiable costs.

These could include specific costs such as taxes and securities lending costs, it said.

“The proposed new rules,” the FCA said, “will deliver a high degree of consistency in how transaction costs are reported and give governance bodies confidence the information presented to them contains a comprehensive assessment of costs.”

To make sure there is consistency across the market, the regulator said it was proposing that the calculation use a methodology for evaluating transaction costs, called the slippage cost. 

This, it said, compares the price at which a deal is actually executed with the price when the order to transact entered the market. 

The time an order enters the market should be recorded by an order management system, the FCA said, so it could be used to identify the price of the asset. 

“Firms that are unable to provide transaction cost information for all of the assets in a scheme will have to disclose this clearly to the governance body with an explanation of why it has not been possible to provide the information,” the FCA said.

In August, the founding chairman of the Transparency Task Force, Andy Agathangelou, described the opacity of fees in the asset management industry as a “festering sore on the face of financial services”.

Jonathan Lipkin, director of public policy at the IA (Investment Association), said the FCA’s announcement provided “clarity” over its thinking regarding the workplace pensions market.

“Our goal here is consistent and complete reporting for all client groups, implementing both UK and EU regulatory change,” he said.

“We will therefore continue the work being undertaken with the IA Independent Advisory Board to ensure we can deliver meaningful disclosure in tandem with new FCA rules.”

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