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Price of freedom

New FSA rules allow unit trusts and Oeics to be singleor dual-priced. The rules, which came into force earlier this month, effectively allow unit trusts to continue to use either pricing method at the same time as introducing dual-pricing for Oeics.

This is a welcome end to what was a period of uncertainty for UK investment managers brought about by the omission of dual-pricing provisions from the first version of the revised rules for collective investment schemes. Confusion over whether all funds would be compulsorily required to move to single-pricing made little sense given that singleand dual-priced funds have co-existed since 1997, when single-pricing was introduced, without significant detriment or confusion for investors. There was no reason why the two methods could not continue to operate simultaneously.

Both pricing methods have advantages in terms of transparency and fairness to investors. With an estimated one-quarter of investment funds still operating dual-pricing, it would not have made sense to enforce mandatory single-pricing. Moreover, it could have cost the industry an estimated 13m, as noted by the FSA in its consultation paper.

But how on earth did we find ourselves in this situation? Before single-pricing was introduced for Oeics in 1997, there was much debate about which method was better. Advocates of single-pricing focused on the fact that the UK was the only European country with dual-pricing, causing problems for those wanting to sell UK funds in other countries. They also believed simplicity was the key and that having two different pricing methods was confusing.

Advocates of dual-pricing believed it was a fairer way of working out the price as it was matched more closely to the underlying value of the assets in a fund. It was also considered a better investor protection measure against dealing costs when a fund experienced big purchases or redemptions.

It was decided that the newly introduced Oeic would use single-pricing. The FSA then decided not to mandate that all investment funds should be single-priced but to see what was the experience with Oeics, albeit with the expectation that there would eventually be a move to single-pricing. So we found ourselves in the position where two systems existed together for years without apparent investor detriment or confusion.

The issue reared its head again in 2003, ahead of the introduction of Coll, when the FSA reviewed the rules for authorised investment funds with the intention of making them principles-based and streamlined. Unfortunately, the future of dual-pricing was not addressed. There was only provision for single-pricing. This meant all authorised investment funds would have to move to single-pricing by February 2007, when Coll became mandatory. The question for the FSA then became whether there was market failure such that single-pricing would have to be imposed. The answer was that there was none.

This led the FSA to decide it was better to allow flexibility rather than recommend one method over another. The result is that fund managers are to be allowed to choose the best pricing method to meet the needs of their own investors – a victory for common sense and a good example of an inclusive and consultative approach to regulation by the FSA.

Mona Patel is head of communications at the Investment Management Association


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