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FCA's cost proposals 'pragmatic' but 'not standardised enough'

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Proposed rules from the UK’s Financial Conduct Authority (FCA) on the disclosure of transaction costs for pension investors have been welcomed by the industry but with a call for even more standardisation.

The draft rules include obliging asset managers to reveal aggregate transaction costs to pension schemes investing directly or indirectly in their funds, as part of the overall aim to provide consistency across the market.

Graham Vidler, director of external affairs at the Pensions and Lifetime Savings Association (PLSA), said: “Understanding the costs associated with buying and selling investments forms an important part of ensuring value for money is secured for pension savers. A key component of this is consistent disclosure of investment costs by asset managers.”

Vidler added: “The PLSA welcomes the new duty the FCA is proposing to place on asset managers to ensure they are properly providing data to trustees and independent governance committees (IGCs).

“It will be important to ensure this duty is proportionate and builds on existing conversations already taking place in the industry to agree common definitions and methodologies.”

Peter Glancy, head of industry development at Scottish Widows, praised the FCA’s “pragmatic” approach.

“This will ensure the effect of all charges is determined and communicated, leaving scope for IGCs and trustees to have more detailed conversations in relation to the granularity of the make-up of the total costs,” he said.

“A quantitative analysis in conjunction with qualitative discussion is likely to be the best means of IGCs and trustees determining the extent to which transaction costs are influencing value for money.”  

He also said IGCs and trustees needed to have more specific information about the dilution effect of trading, and to know how far scheme members had benefited by revenues generated through stock lending.

As part of the draft rules, the FCA proposes a specific methodology for evaluating the slippage cost within transactions – broadly speaking, the difference between the price at which a deal is actually executed, and the price when the order to transact entered the market.

Glancy said: “We are pleased the FCA has developed a pragmatic approach to the calculation of a slippage cost, which considers the questions on the dilution effect, and that they also propose to show separately any revenue from stock lending that is not passed on to scheme members.”

However, Jacqui Reid, associate director at Sackers, said: “While it acknowledges the importance of a standardised approach to calculation, the FCA is not proposing a standard format for disclosure. In our experience, this is key.”

She added: “There is a balance to be struck between a form of disclosure that is meaningful enough for useful and direct comparisons across the market, but not difficult to decipher, and inefficient and costly for managers to implement.”

Richard Butcher, managing director at Pitmans Trustees, agreed: “We question whether the FCA has gone far enough with its proposals. While the FCA sets out a standardised method for calculating transaction costs, it does not set out a standardised method for reporting them.

“If disclosure can be bespoke, a risk is created that managers can spin the outcome and hide inconvenient truths. It also means trustees and IGCs cannot compare one manager with another – and an inability to compare undermines the point of disclosure.”

He also expressed concern about how the new rules fit in with the charges and governance regulations, which require trustees to consider “the costs incurred as a result of the buying, selling, lending or borrowing of investments”.

Butcher said: “What is proposed is that they see the amalgamated effect of these costs, not the costs themselves – or, at least, not all of them.

“While simplicity is often a virtue, I would argue that what has been proposed may not help trustees to comply with the law.”

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