The FCA is urging the financial services industry to be “braver” when disclosing costs and charges to investors.
In a discussion paper on consumer communications published last month, the FCA said it remains concerned consumers are paying more than they expect because of the opaque nature of some costs. The regulator also warned that many investors find it difficult to compare costs and charges.
But how far should firms go in the pursuit of greater transparency?
The industry has historically blamed burdensome regulatory requirements for huge volumes of complex information sent to investors. Critics have long called for firms to consolidate costs and charges disclosure to a single, uniform figure so consumers can better compare different providers and products.
Working with the regulator
Speaking to Money Marketing, FCA director of policy David Geale says firms should be bolder when redesigning customer communications.
He says: “The basic principle is that people need to understand what it is they are buying and what risks they are taking. But that will not happen if they have to read 50 pages of terms and conditions, which are not effective for the firm, from a regulatory perspective or for customers.
“What we’ve asked firms to do is be a bit braver. They can come to us and talk about things they want to do, and then hopefully we can work together and focus on what people really want and need.”
Investment Quorum chief executive Lee Robertson agrees more can be done to make fees clearer to investors.
He says: “Fees need to be presented to consumers with nothing hidden, and with each element of the service broken down and disclosed.
“We need to be able to demonstrate the impact of those fees to investors. There are hundreds of ways to get there but the industry has struggled to agree a way forward.”
Robertson says it is hard for the public to understand charges because different firms present fees in different ways, while dealing and trading costs “are not discussed at all”. He says the regulator’s intervention suggests current fee disclosure methods “aren’t working well”.
“The FCA is bringing some pressure to make sure clients understand the impact of what they have to pay. We all know high charges really impact performance but we are not sure clients understand that.”
The regulator has suggested firms use graphics to help consumers understand the cumulative effect of charges on the value of their investment over the long-term.
Morningstar head of research for EMEA Chris Traulsen says providing context for customers when disclosing costs and charges will help them understand the value they are getting from their fund manager.
He says: “One way to help investors understand fees would be to say how that number relates to the sector average. That way, investors would know if they are paying more or less than others in that category.”
Traulsen says the way com-panies disclose costs and charges has been influenced by regulatory requirements.
“If you are in an industry and you are required to put fees in a partic-ular place in a particular document, you do that and you assume your job is done.
“But there is no doubt the financial services sector could do more.”
The regulator should be more prescriptive when setting out how firms describe certain charges, he adds.
Clarity on fee descriptions
Traulsen also calls for clarity from the regulator on fee descriptions and what these are called.
“The regulator has no judgement on what different charges are called, so one of the problems is that a management fee for one firm might not be the same for another.”
However, including too much information could “abstract consumer understanding of costs” as most of consumers are not engaged, says Hargreaves Lansdown head of pensions research Tom McPhail.
“We seem to be moving towards an consensus of transparency in terms of charges and moving away from the old annual management charges measures, but there is still some lack of consistency across the market.
“We know investors need to know how much they are paying for their investments and what they are getting for that money. But we also know that a lot of investors actually don’t want to know a lot of the details. They want the relevant numbers but not necessarily all the details behind the numbers.”
Campaigners have been scathing in their criticism of a perceived lack of action by the FCA and the industry on charges disclosure. SCM -Private founding partner Gina Miller says without a “mandated disclosure format”, consumers will be faced with a complex web of different costs and charges.
She says: “How does that help a client? You can have anyone coming up with their own interpretation of the fees. Why is the FCA not working on one unified format? The context of cost disclosure is very important.
“People don’t want to see the complicated information behind that cost – they just want to see one figure.”
According to SCM research, 89 per cent of investors want to see one figure in pounds and pence, as well as a percentage, to show the fees they are going to pay for their investments.
Miller says: “People suspect there are other things around fees but they don’t have the knowledge to ask that question. Ultimately most people can’t find more information because they don’t know what to ask.”
How the FCA wants firms to boost transparency over costs and charges
– Inform the consumer clearly at the point at which it becomes apparent that an additional charge may be incurred, and not exclusively at that point.
– Quantify or express in monetary terms where limits or caps apply, giving consumers a better understanding of the effect of costs at the time of sale.
– Create a generic timeline with payment points noted against the various stages of the investment.
– Present graphically how the cumulative effect of charges can affect the value of the consumer’s investment over the long-term.
– Illustrate how fees and charges compare with other products available on the market.