Mifid II needs to be much more than just another acronym that conceals the real charges picture
It started with a Kiss. Ever since that useful acronym “Keep It Simple Stupid” became the key to designing warplanes in 1960, the financial services industry has been searching for new ones to enable it to do just the opposite. Unlike jet fighters, complexity rather than simplicity is what keeps investment fund margins in the stratosphere.
Attempts began in 1994 with key features documents. Eight years after the Financial Services Act 1986, and as the £12bn pension misselling scandal came to an end, the newly formed Personal Investment Authority set out is plans for a KFD showing investors the charges that would be levied and the effect on their returns over 25 years.
Better than nothing. But not a lot. Because within days of it being announced, investment firms all over the land began to find ways to hide the charges and make the costs they revealed, and the stated effect on investment returns, far less than the actual amounts which disappeared. Really? Yes. I first suggested financial services firms had a “taking-money-off-customers-without-them-noticing” department in March 2006.
It went well. The annual management charge omitted more than a third of the easily identifiable costs, which were generally hidden by taking them directly off the investment return before the investor (or anyone else) could see what they were. In October 1997, the FSA was created and within four years it took over the PIA.
After complaints that the AMC did not actually show the AMC, some funds decided they would publish the TER – an interesting acronym because it was neither a total nor an expense nor a ratio. That was followed by the ongoing charge figure – keep up, OCF. While this was going on, the FSA introduced the RDR on 31 December 2012. That, of course, banned commission on investment and pension products, and was so successful that, in 2016, advisers still earned a quarter of their revenue – £843m – from, er, commission on investments.
The FSA was replaced by the FCA on 1 April 2013.
Meanwhile, to make sure that its three acronyms earned their keep, firms used AMC, TER and OCF interchangeably in the same document. The FCA mandated that the OCF should be used as the headline charges figure in the key investor information document. KIID? Yes. KIID had replaced KID – key information document – “for the purpose of facilitating comparisons” between different offers. The extra “I” would make all the difference. I kiid you not. If flinging acronyms around could really solve problems, the financial services industry would be cleaner than squeaky.
The year 2014 was also when the FCA finally passed new rules to make investment providers reveal the kickback they got from platforms which carried their products. Although they were allowed to continue hiding that information from existing clients for another two years.
If anyone doubts a key feature of the way investments work is concealing charges,
I refer them to the FCA’s Asset Management Market Study 2017 Interim Report Annex 7 Box 1: Industry approach to charges disclosure. Which can be summarised as “hiding stuff”.
It found that the AMC omitted seven costs and as a result understated the real charges by a third. The study admitted its analysis left out the cost of buying, selling, lending or borrowing shares or other investments, which the industry insisted was just far too difficult to estimate. The FCA agreed.
January 2018. New year, new acronyms. Mifid II (the II not being the KIID’s II but the Roman numeral 2 – and incidentally, the II in the middle of Priips, which also began this month, stands for something else again). Mifid II will apply right along what those who profit from it call the investment value chain. From the adviser at the front via the platform in the middle to the investment fund at the back.
Charges must be clear and expressed not just as ad valorem percentages (that translates roughly as “rip off”) but also in pounds and pence. It must break the costs down into elements such as adviser fees, fund charges and, yes, those pesky transaction costs. Turns out it can be done despite the industry’s 30-year protestations that it was too difficult. Mifid II began on 3 January. A couple of weeks on and the Retail Innovations Units has begun to find ways to make comparisons between different firms more difficult. First draft was to use non-standard growth illustrations. I expect more to follow.
After decades of producing more concealers than L’Oréal the industry still believes it is worth it. Making Mifid II work is the FCA’s job. Though it has already said, for now at least, it will not interfere. Here is its statement to the BBC Money Box programme. “It was generally accepted among those who responded to our consultation that ideally firms would calculate and disclose costs and charges information using consistent and comparable formats and methodologies” but “we concluded that it was not appropriate to develop a standardised format for the disclosure of costs and charges at the current time.”
It may change its mind. After all, Mifid II is not just any acronym; it is a European acronym.
Paul Lewis is a freelance journalist and presenter of BBC Radio 4’s ‘Money Box’ programme. You can follow him on Twitter @paullewismoney