The FCA has found some firms are not properly disclosing costs to investors as required under new Priips rules.
The FCA today published a call for input on the new Priips rules asking for feedback on the scope of the legislation and the contents of the Key Information Documents required.
The call for input says: “We have been undertaking supervisory work to better understand any issues with transaction cost reporting. We have reviewed example portfolios and have found significant calculation errors.”
It adds: “When these are corrected, overall portfolio transaction costs for these portfolios are positive. That is, we have found that some firms are failing to properly disclose costs to investors as required under the Priips legislation. Where we find issues during our supervisory work, we get firms to address them.”
The regulator is aware of firms’ concerns about using the “slippage methodology” in calculating transaction costs. Slippage is the difference between the price when a trade is executed and the “arrival price” when the order is given to the market.
The call for input says firms have also raised concerns about disclosing negative transaction costs.
It says: “Negative transaction costs are not necessarily inaccurate. Transaction costs represent the loss of value to the consumer that happens when a transaction takes place, for example the bid-offer spread or commission costs. But there can also be a gain in value in some circumstances, for example if the investor is able to buy at the bid price or sell at the offer price.”
The FCA says issues it identified during its supervisory work included situations where the arrival price was incorrectly adjusted for corporate actions, where the arrival price is in a different currency from the transaction price, and where the transaction price for a bond includes accrued interest but the arrival price does not.
It wants to hear from firms about their experiences and any concerns with the calculation methodology.
The call for input says: “Subject to our findings, and if appropriate, we will consider running workshops to support firms with their compliance activities in relation to these requirements. Where we see non-compliance with the requirements we will consider appropriate supervisory and enforcement action.”
Since 1 January, Priips legislation has meant advisers now have to publish a standalone, standardised key information document for their clients including performance scenarios, risks, and the total cost of products.
Trade bodies and investment firms raised several concerns about the KIDs, particularly with regard to investment trusts.
A number of analysts described the potential returns in the standardised KID format for investment trusts as “overly optimistic” and several board members at Baillie Gifford’s investment trust clients took their concerns to the FCA in letters.
The Investment Association and Pimfa have both called for reviews of the KIDs, with the IA criticising their design and saying they are misleading.
FCA chief executive Andrew Bailey has also been clear he is concerned about Priips.
The call for input also asks for feedback on the scope of the Priips legislation.
The document says: “We are aware there is some industry uncertainty about the scope of the Priips regulation – in particular, whether certain products are in or out of scope.”
It says the main confusion relates to corporate bonds, UK real estate investment trusts and some foreign exchange contracts.
The FCA paper says: “We would be interested to know whether there are any other products about which firms are unclear as to whether they fall in or out of the scope of the Priips regulation. We would also like to know about any difficulties firms may have faced in seeking to resolve the uncertainty.”