By Jonathan Lipkin
The charges and costs transparency debate has gathered pace in recent months, with a range of cross-cutting work at the UK and European level.
– EU regulatory and supervisory authorities are taking forward implementation of the second Markets in Financial Instruments Directive (MiFID II) and the Key Information Document (KID) regulation for Packaged Retail and Insurance-based Investment Products (PRIIPs).
– In the UK, the Department for Work and Pensions (DWP) and Financial Conduct Authority (FCA) have released a call for evidence, with supporting research, in the context of UK pension reform.
In all of this, one key challenge is to join up UK and European disclosure requirements. With UK pension reforms moving on a different timeline to MiFID II and PRIIPs, it would be desirable to avoid a situation where there are different approaches for answering what are in essence similar questions.
The Investment Association recently published a position paper to set out thinking on how to move forward in this area. Our paper establishes a number of principles and a broad framework with a view to contributing and aligning the work across the UK and Europe.
The principles are intended to pave the way for better disclosure of both charges and transaction costs, with the ultimate goal of providing consistent and meaningful information, not just pure data.
However, this is not easy due to the wide range of products and underlying routes to investment exposure across multiple asset classes, and the fact that there are a mixed set of objectives:
– To inform purchasing decisions, especially in the retail market where the shape of the PRIIP KID is a key area of focus.
– To provide full accountability for services delivered by the asset management industry.
– To allow meaningful costs comparison across products, investment strategies and asset classes.
– To facilitate value for money judgements in the context of performance delivered.
The last point is particularly important, since neither quantum of transaction costs nor overall level of charges will necessarily help a client understand value for money in isolation from other information, notably performance and investment approach.
Our position paper does not offer all the answers on disclosure. But we have tried to set out an approach that can define key elements in a way that is both consistent for clients and reflective of the nature of different cost components within the value chain. Targeted disclosure documentation, whether for the retail or institutional markets, can then be designed to provide this information in a way that is most useful.
The direction of travel is clear. The asset management industry is becoming ever more visible, both in serving long-term saving and pension goals, but also in funding the wider economy. As part of that evolution, a key component in building trust and confidence will be improved disclosure.
Jonathan Lipkin is director of public policy at the Investment Association
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