It’s now 14 months since the EU directive MiFID II came into effect, requiring retail investment firms to be fully transparent about the cost of using their products. Time.
But, right across Europe, the industry is dragging its feet. Now the UK regulator, the Financial Conduct Authority, has issued a report on a detailed review it has carried out into how much progress has been made.
The FCA selected 50 firms for its sample set, and found that:
— firms knew about their obligations for disclosing costs and charges, but interpreted the rules in a variety of ways;
— they were better at disclosing the costs of their own services than at disclosing relevant third-party costs and charges; and
— some firms were not sharing their costs and charges with each other to meet their obligations to provide aggregated figures to clients.
The FCA was especially critical of asset managers. It found problems with the way some fund houses calculate transaction costs and how prominently and clearly they disclose them.
Investors confused and misled
The report concludes that “asset managers may be communicating with their customers in a manner that is unfair, unclear or misleading and as such, investors can be confused and misled as to how much they are being charged”.
The FCA is particular concerned about the failure to disclose transaction costs in full. The law requires that where transaction costs are likely to have a material impact on returns, these should be disclosed within the ‘objectives and investment policy’ section of the Key Investor Information Document, or KIID. But in the vast majority of instances sampled, there was no such disclosure. In one extreme case, a 4% (yes, four per cent) per year transaction cost charge was omitted from the KIID.
The regulator also found that the costs quoted in marketing materials were often significantly lower than those quoted in the KIID. Even where all the information was provided, it was often difficult to find and to understand. “This is especially concerning,” the report says, “where these additional charges have a significant impact on the overall cost of investing and therefore a material effect on returns.”
Time for action
So, what are we to make of this latest update from the FCA? To be honest, I’m running out of things to say about the failure of asset managers to comply with the law, and the unwillingness of regulators, including the FCA, to back up words with action.
In the final paragraph of the report the FCA states: “We encourage firms to review how they are disclosing their costs and charges and also how they calculate transaction costs.” The emphasis is mine. I’m sorry, but the time for encouragement is over. Surely the prime responsibility of the FCA is to ensure that the firms it’s supposed to police are abiding by regulations designed to protect the consumer? Forget encouragement. What consumers need from the FCA now is enforcement.
How are consumers supposed to form a judgement as to the value provided by a particular product if they don’t even know how much the product is going to cost them? It’s hard to imagine another industry getting away with anything quite like this.
The FCA report on disclosure of costs is in two parts. You can read both parts here:
MiFID II costs and charges disclosures review findings
Review on disclosure of costs by asset managers
Related post:
Has MiFID II been kicked into the long grass?
Robin is a journalist and campaigner for positive change in global investing. He runs Regis Media, a niche provider of content marketing for financial advice firms with an evidence-based investment philosophy. He also works as a consultant to other disruptive firms in the investing sector.
