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Paul Lewis: If acronyms solved problems, the industry would be squeaky clean

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’ programmeYou can follow him on Twitter @paullewismoney



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There are 17 comments at the moment, we would love to hear your opinion too.

  1. If PL was an acronym it would be Puerile Literatus

  2. Nicholas Pleasure 29th January 2018 at 3:42 pm

    The worst acronyms are PIA, FSA and FCA, which have each failed clients and advisers in ever more spectacular and costly ways.

    Your article, Paul is a lengthy demonstration that the regulators fail to regulate in any meaningful way. The worst parts of our industry are always two steps ahead, whether they be sneaky fund managers hiding their fees or fraudulent UCIS floggers investing someones SIPP in the UAE Sandpit Fund.

    They are great at wasting hours of our time with acres of paper and undecipherable paragraphs but they fail to really change much for the better.

  3. I would have a concern that if we focus too much on cost then consumers will learn the price of everything but the value of nothing.

    However, as things stand, that is not the case.

    They do not know how much of their hard earned money funds the FCA.

    They do not know how much of their hard earned money bankrolls FOS.

    They do not know how much of their hard earned money goes to pay for PI cover which may actually be discontinued just when they need to rely on it.

    They do not know how much of their hard earned money the FSCS will take to compensate victims of hare-brained investments which their own adviser would never recommend in a month of Sundays.

    Those figures should not be hidden either.

  4. Actually it’s quite an accurate article. Investment companies have been objecting to being forced to disclose their charges for decades.

    If you want to buy a particular fridge, you know exactly what price each shop will sell it for. It shouldn’t be rocket science for the cost of an investment to be properly stated. Yes, some costs will fluctuate in the future, as you can’t predict exactly what next year’s trading costs will be, but the firms know what last year’s trading costs have been, but until MiFID II, only a handful would tell you. Know we know why – because so many have been hiding behind an artificially low headline figure.

  5. I’ve been saying this for twenty years (IBSTFTY)

  6. Here’s a question, so do we get bogged down on cost or value. My wife has a pair of wellies that cost over £100. They fit her legs and feet perfectly, are comfortable and seem to be well made.

    I watch the BBC nearly every day, pay my licence fee but don’t have any idea as to what Paul Lewis, Steve Wright in the afternoon or Carol the weathergirl gets paid.

    I’ve just returned home from a rather depressing clinic at my local CAB where for the record my work is pro bono. They have had to issue redundancy notices because of funding issues.

    In my time I’ve had several examples of where someone calls pensions advisory service, is referred to MAS who then refer to CAB (i.e. me) who pays regulatory fees to fund the others.

    So, how much has The PIA, PRA, FSA, FCA, MIFID, RDR, MAS, PAS, BBC, VAT, EU actually cost and what is the impact on my wealth before I start to invest if I can afford to do so? Nice work PL if one can get it.

    Surely the net return is the point and by the way I quite like low cost means of gaining a market return.

    • Nicholas Pleasure 29th January 2018 at 5:22 pm

      I think that’s the point. How can you know what is a low cost means of gaining a market return if half the cost is hidden?

      It’s like your wife discovering that her £100 wellies actually cost her £130, but she only finds out when she gets them home.

      If fund X costs £500 but has consistently outperformed fund Y that costs £300 then you might consider the extra £200 to provide value. I cannot see how you can judge value without price.

    • Check twitter. I’ve disclosed by BBC pay, my overall taxable income, and even last year my tax return.

  7. One of the ebst things that could be done, is the banning of jargon which results in something becoming unclear, unfair and totally miselading.
    The worst word of jargon in the industry which is proving most costly to the innocent is “SIPP”. They are and shoudl always be referred to as SELF invested personal pensions and Financial Servcies Compensation Scheme (FSCS) protection shoudl not apply where someoen “self investes”. The FSCS shoudl spend their money along with whatever MAS is called now shouting to the rooftops that caveat emptor applies to SELF investment in unregulated investments.
    Personal pensions, Individual Savinsg Accounst etc, should only be allowed to hold reguleted investments covered by the FSCS for product AND advice failings.

  8. While Paul often makes valid points, the headline writers seem to let him down.

    Pray tell which industry, profession or business is squeaky clean?

    Much of the complication I’m afraid can be laid at the feet of the regulators.

    Key Features, KIDS and all the other so called disclosure documents that banally tell you that if the investment makes 5% you will get £x. (If my Grandmother would have had a beard, she would have been my Grandfather). Charges are lost in the small print and if you are constructing a portfolio of (say) 15 funds, the client is swamped with bumpf that he/she doesn’t read.

    When it comes to costs no one (including the Regulator) has the will or the imagination.

    Platforms produce valuations. How hard would it be to put the fund management charge for the given period, next to the valuation of each fund. At the bottom is the total added to which is the platform charge and the adviser charge. Is that really to difficult to achieve?

    • Transact allows for the adviser to print charges paid to the adviser, to Transact and so on. We include this in our periuodic reports top our clients now as a matetr of course so they know how much trhey have paid to us over the period for all our work and how much they have paid Transact. Very transparent.
      Example below just pasted, but appears laid out nicely on report:
      Adviser Annual Payment £185.39 £828.16
      Buy Payment £642.77
      Transact Annual Commission £92.85 £168.81
      Brokerage £19.29
      Buy Commission £33.67
      Wrapper Administration Charge £23.00
      Other PTM Levy £0.64 £29.29
      Stamp Duty £28.65

  9. You have only scaratched the surface.
    Try doing the CII exams. Much of the text becomes unintelligible to even practitioners- it’s horrid. Perverse.

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