FIMC has responded to the FCA’s consultation on simplifying the disclosures made to consumers intended to help them understand the impact of costs on their investments. The response can be found here: FIMC submission FCA CP26-24 simplifying consumer investment disclosure final
Understanding the impact of costs is very important. Two things determine the outcome consumers receive from investing. The investment returns and the costs extracted by investment firms (and others in the supply chain such as investment platforms and advisers). Good future investment performance cannot be predicted from past performance. But, we do know that the more costs are extracted by investment firms, the more a consumer has to invest to produce the same outcome. It is essential that the FCA drives down investment costs.
We agree with the FCA’s general approach that all ongoing costs should be disclosed. We also agree that the disclosure should be simplified as far as possible as separate rules for different type products just add unnecessary complexity. We also very much agree with the FCA’s general efforts to streamline the rulebook and the principle of combining and consolidating relevant rules for all investment business as long as this does not inadvertently result in losing important consumer protections.
But we disagree with some of the FCA’s detailed proposals. We have seen real progress in reducing costs in the market for investment products over recent years. However, a number of recent initiatives threaten to reverse that progress. The FCA’s and TPR’s Value for Money (VFM) agenda will create opportunities for active managers to extract higher costs[1] as will the drive to persuade pension funds and others to invest more in opaque, poorly regulated and governed, risky private assets which offer questionable value.
The proposals in CP26/24 will provide firms with significant discretion on disclosing costs pre-sale making it difficult for consumers to compare costs, and recognise how much potential value is likely to be extracted through high charges and fees. This is likely to weaken competitive pressures on the market to the disadvantage of consumers. We do not agree that one-off product costs should be shown separately.
The FCA should be very prescriptive in how firms explain how performance fees work including: which benchmarks/hurdles have been chosen and why; how and when performance fees apply including whether costs will be reduced for underperformance; and the potential upsides and downsides of performance fees including clear warnings on any additional market risks to be taken in pursuit of outperformance.
However, relying on disclosure is unlikely to protect investors from the potential detriment created by performance fees. The FCA should be prescriptive on the basis for calculating the gross pre cost ‘outperformance’ against which performance fees are calculated including time periods and appropriate benchmarks/hurdles.
Moreover, if the FCA allows fund managers to receive explicit performance fees for outperformance over a specified period then, by rights, the FCA should require firms to reduce charges if the fund underperforms against a benchmark or just performs in line with the benchmark.
Ongoing costs of CEIFs, which are deducted from the Net Asset Value (NAV) of the fund, should be added together with other ongoing costs. These costs may well be borne indirectly but these still form part of the overall investment management costs levied by the relevant manager and should be communicated in a consistent way to consumers.
The FCA also wants to allow firms significant discretion and flexibility on disclosing post-sale costs. Allowing so much discretion will result in inconsistencies of presentation not ‘dynamism’ and ‘innovation’ on disclosure and will make it more difficult for consumers to compare on a like-for-like basis.
We strongly disagree with removing the requirement for a cumulative illustration pre-sale. Consumers should be given a realistic assessment of the potential value firms/distributors could extract from their funds and how much charges/fees are likely to reduce investment returns pre-sale as well as being told the impact post-sale. The FCA should stipulate projected investment returns to be used and require firms to show the net reduction in yield caused by the impact of all end-to-end charges over the appropriate period in a prescribed template (in effect, reintroducing the approach dropped in 2021). The cumulative amount of charges and fees extracted should also be shown in monetary terms. Firms/distributors should include benchmarks such as a model portfolio comprised of low cost passive funds and ‘risk free’ deposit accounts.
We agree that up-front disclosure on cash interest should be improved. But, limiting this to requiring firms to notify or explain to consumers what their policies are is unlikely to be enough. Firms should be required to explain to consumers in simple pounds and pence terms the financial cost of practices such charging fees on customers’ cash and passing on interest earned in full and retaining some or all of the interest on their customers’ cash holdings instead of charging a fee on it.
We strongly disagree with the FCA’s proposals on pensions business. The FCA rightly sees the case for pre-and post- sale consistency around disclosure of charges and fees on investment products. The case for meaningful post-sale disclosure is arguably even stronger with pensions given the central role they play consumers’ long term financial security. If consumers are to make effective, informed decisions about retirement planning they need access to clear information post-sale to keep track of the impact of the value extraction caused by high charges and fees on those retirement plans.
We urge the FCA to treat pension schemes, local authorities, and charities as equivalent to retail clients and provide them with the same protections. The decisions made by trustees and local authority representatives can affect the financial wellbeing of large numbers of individuals. They may well have access to professional advice from consultants and advisers. But, that is all the more reason to ensure they have robust protections given the conflicts of interest in the supply chain when advisers and consultants are involved. The VFM agenda and the push to get institutions such as pension schemes to invest more in private assets increases the risks of poor outcomes.
[1] The VFM initiative will allow investment firms and advisers to elevate the importance of investment performance (even though future performance cannot be predicted from past performance) and distract attention from the importance of charges and fees. FCA/TPR Consultation CP26/1 The Value for Money Framework: Response to consultation, further consultation and discussion paper | The Financial Inclusion Centre