UK Watchdog Lays Down Transaction Cost Rules

Asset managers must calculate and communicate transaction costs to pension investors, says the UK’s Financial Conduct Authority.

The UK regulator has proposed a uniform template for calculating transaction costs incurred by asset managers.

The Financial Conduct Authority (FCA) today laid out a plan to ensure the governance committees of defined contribution (DC) pensions had access to data on transaction costs incurred by funds.

It recommended that asset managers compare the mid-market price of a security with the execution price to determine total transaction costs. This data can then be amalgamated and passed on to pension funds to help them regularly report the costs members have incurred.

“The proposals we are announcing today will allow independent governance committees to see fully the transaction costs that their funds pay and enable them to make better decisions about how they get value for money for their members,” said Christopher Woolard, executive director of strategy and competition at the FCA. 

In its consultation paper, the FCA detailed how it envisaged its proposal applying to various asset classes, including currencies, derivatives, and illiquid assets.

“From a practical perspective, this approach requires data that are widely available for most assets and can be independently audited,” the FCA said in its consultation. “There is no need to engage in complicated calculations or to make estimates.”

If managers cannot access an intraday or opening price for a less liquid asset, the previous closing price could be used, the regulator said.

In its accompanying cost analysis, the FCA estimated that the asset management industry would incur one-off implementation costs of £13.5 million ($17.2 billion). However, the standardization of cost disclosure would save the industry £24 million over the next five years, the regulator said.

The Investment Association (IA), the asset management trade body, earlier this year appointed an independent advisory board to devise a “next-generation disclosure framework” for transaction costs, led by NEST CIO Mark Fawcett and including Railpen CEO Chris Hitchen.

“Our goal here is consistent and complete reporting for all client groups, implementing both UK and European Union regulatory change,” said Jonathan Lipkin, director of public policy at the IA. “We will therefore continue the work being undertaken with the IA independent advisory board to ensure we can deliver meaningful disclosure in tandem with new FCA rules.”

The FCA’s proposal comes amid a wide-ranging market review of asset management announced last year. It has already announced plans to scrutinize investment consultants that offer outsourced-CIO services, and criticized some managers’ lack of oversight of legacy products.

In May, the FCA hired Daniel Godfrey, the former chief executive of the IA, as a consultant on a short-term contract to advise on the review.

Read the FCA’s full proposal, “Transaction cost disclosure in workplace pensions.”

Related: UK Watchdog Turns Spotlight on OCIO & Transaction Costs: The Cause of Crowding?

| Nick.Reeve@strategic-i.com | (44) 207 397 3827