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Do investment firms need to be braver on fees disclosure?

FCA urges investment companies to be more upfront when disclosing costs and charges to clients

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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.

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Comments

There are 5 comments at the moment, we would love to hear your opinion too.

  1. Dominic Thomas 10th July 2015 at 5:33 pm

    I don’t really see what is wrong with Investment cost, Platform cost, Adviser charge (noting that a platform isnt relevant for everyone). All these elements can alter by changing any of them. The Adviser charge is generally the only one to have a single charge – say 1%, whereas the others get into the minutiae of what is under the bonnet, stamp tax, custody charge, audit cost, dealing charge blah blah… for understandable reasons (think Fiat 500 versus Lamborghini)… different buttons, speed, cost, design… however providing both platform and fund manager with some wiggle room, why not let them provide an all-in price that is their costed model.

    However, I can see the other point of view too. When I buy a car, I dont check the cost of the battery, the ABS, as separate items.. I buy the car, but if I want extras, they are priced and I choose them (or not). However, it seems to me that platforms or fund managers that see many of their functions as “extras” could price them as such, but frankly most of us expect this to be within their normal cost and are fed up to see extra charges for this or that. I assume that this has been made complicated due to concerns about competition and cross subsidy or appearing expensive for a Ferrari service.

    I dont really see why the FCA cannot take the lead on this and provide a standard format of costs. However I would fundamentally oppose further messing around with the impact of charges as due to the way that this has always been framed one is naturally left to question what could be achieved without charges…. well nothing! the impact of charges is only of use to an adviser comparing products, not a client considering solutions. Illustrations are well intended but read in isolation would discourage anyone from ever investing… or continuing to pay heed to the delusion that you get something for nothing.

    As usual, its another example of knowing the cost of everything and the value of nothing.

  2. Steven Farrall 11th July 2015 at 7:50 pm

    Indeed. We are about to disclose a 20% (ish) ‘RAT’ tax. And a 45% Government tax. We send clients a bill for £1000. 45% goes to the government, tax freedom day being late May early June. And then the full cost of regulationism is between 20% and 30% for all financial services businesses. That is both direct imprests and dead weight and consequential costs. Leave us about 35%. The next stage is to offer clients a choice. “Mrs Client. If you want full security for our advice then rather than pay the FCA £250 you can pay £2.50. Would that be of interest to you?” “Yes!!”. “The please just sign this disclaimer”.
    So, by the FCA’s own logic they’d be quite happy with that, wouldn’t they?
    What’s it like living on benefits chaps?

  3. Douglas Baillie 12th July 2015 at 1:05 pm

    Valentina’s article is well intended, but is woefully naive insofar as it demonstrates a lack of knowledge and understanding as to how financial advisers need to operate within the FCA rules.
    By far and away the greatest cost involved in preparing advice is the ‘information mining’ that is needed to discover and independently verify the prospective client’s existing circumstances, assets and investments and debts, otherwise known as ‘know your client’.
    This is particularly true when giving pension advice, where many people have four or more pre-existing pension funds from past and current employments, or other previous pension transfers that may or may not contain ‘safeguarded’ benefits that will need to be checked and analysed well before the advice stage even begins. This is very time consuming and expensive activity for the adviser and the staff, but is nonetheless totally necessary. Furthermore the quality and accuracy of the information provided by pension administrators is frequently woeful and incomplete often resulting in more delays and further requests for reliable information.
    Even when the requested data arrives it has to be disseminated and checked.
    Thereafter all of this needs to be simplified into a summary information document that will eventually become part of the suitability audit trail.
    It is simply not possible to estimate in advance what the costs of that will be, and very few people are willing to pay a fee up front for that essential service. And that is before any advice can be given for which there will be further fees.
    Please be aware that even at this stage, the prospective client can simply walk away and take that information elsewhere and go shopping around for advice.
    This also brings in the question of VAT, as the fees charged for information ingathering service is not VAT exempt unless and until it leads to the purchase of a financial product, which is never a forgone conclusion
    All of this has nothing whatsoever to do with advice fees, fund management charges, platform charges (if applicable), so it is virtually impossible to ever accurately pre-determine the total cost of advice in advance.
    Furthermore, very few clients ever understand, or even want to know the sheer depth of the work involved, and think that it is simple and easy. The reality is that doing the job properly is very expensive indeed, and very few are willing to pay.
    This problem is particulately challenging for investors with modest funds where the cost of advice is correctly perceived to be dispropoportionately high.
    I could not honestly say that I could begin to look at any case where the client has less than £100,000 to invest.
    I would like to know if any other advisers disagree.

  4. I don’t know how long David Geale has been with the FCA, and if I’m honest I don’t really care, but you can feel his attitude in how he delivers his statement, and then you see how institutionally prejudiced they (FCA) are, its us as an industry that gets it wrong 100% of the time (in their eyes) everything they say its expressed as “you” as in you need to work with us, you need to be bolder in disclosure, however when things are said in the context of the FCA it always “us” and “we” this maintains the illusion they are the good guys, the driving force, and we have to do what they say and woe be tied if you don’t. Remember FCA dogma cant be disproved.

    Its basic bad parenting, do as we say not as we do, and the one thing that highlights this more than anything is…… where is the bold disclosure from the FCA ? what exactly are we…. no our clients paying for ? how do you calculate your budget, salaries, bonuses, what if any cost saving exercises do you do (if any), what’s done about wastage ? what measures are in place to see if you are doing this effectively ? after all the biggest risk (I would argue) to the consumer is the FCA ! in terms of driving up cost and (yes) miss selling ! think of it terms of desperation of staying in business, cutting corners in procedures, paperwork, time and effort !

    All these things and more are evidence of the FCA being nothing more than a dictator to an industry born into financial slavery,

    Will they change ? be the good parent ? I very much doubt it, but one day they will trip and break their neck on their shoe laces, people like this always do ! and its sad but a lot of people will have been trodden in the sludge as they march on in the mean time. There is no distinction between good or bad, we are all equally bad, and you cant reason with that kind of prejudice.

  5. Personally I would like to see more information about fund charges rather than less (i.e. a headline OCF figure but an opportunity to drill this down further to see where the firm has spent most of its income). But then realistically I don’t expect an advice firm or an accountant to do this with their charges so why should the fund industry have to.

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