Investment and fund management industry is pressed to reform its disclosure of costs and charges, and is challenged to consider their level.
Driven by political, regulator, investor and media attention, costs and chares sit at the top of the reform agenda in the investment and fund management industry. New rules are on the horizon for industry commission practices and a number of regulators continue to scrutinize the level of charges and their disclosure, as well as disclosure of remuneration of senior management and portfolio managers.
IOSCO has provided good-practice guidance for fees and expenses of collective investment schemes. Many of the good practices focus on disclosure to investors. The report includes a section on the calculation and disclosure of transaction costs, for example. Both regulators and firms increasingly regard IOSCO’s output as setting the “pass” mark for good operational behavior.
ESMA has signaled it is ready to act. It believes more can be done to improve the efficiency and transparency of the investment fund sector and is working to improve the information available to investors. Improving the information available to investors will help them choose funds that offer them value for money, it says. However, simple and meaningful disclosures remain elusive.
As KPMG predicted last year, closet index tracking became one of the hottest European regulatory topics of the year and could have significant reputational repercussions for the fund industry. ESMA analysis in 2016 found that between 5 percent and 15 percent of UCITS equity funds could potentially be closet trackers – funds that charge an active fee but do little more than hug a benchmark. ESMA suggested that further investigation be conducted by national regulators.
Some regulators have now singled out individual funds. Others have forced firms to alter their fund documentation but have not named them. However, the methodology for identifying closet tracking funds is questioned by both the industry and some regulators.
The regulatory debate on the level of fund management fees is widening. In December 2016, the wide-ranging interim report of the UK FCA’s Competition Division’s review of the UK asset management industry included a number of damning findings and proposed a series of “remedies.”
The report said that active funds rarely outperform and are guilty of “considerable price clustering”. It was critical of the industry’s failure to promote passive products to retail investors and seems to suggest that active funds are appropriate only if there is no passive vehicle that can offer similar exposure. This stance is at odds with other regulatory approaches and some expert opinion.
One of the FCA’s proposals is for an all-in fee that would indicate all the charges investors will pay, including transaction costs incurred when a fund manager trades. Some of the FCA’s proposed “remedies” are in line with the thrust of regulations under PRIIP KID and MiFID II, but others indicate that the FCA is prepared to consider more detailed or, perhaps, different solutions.
Meanwhile, national regulators are taking markedly different approaches to the composition and level of remuneration by firms of their senior management and portfolio managers.