The UK’s Financial Conduct Authority (FCA) has issued new rules requiring defined contribution fund managers to disclose all transaction costs on workplace pensions.
The new rules issued by the financial regulatory body, which will go into effect Jan. 3, 2018, force firms managing money on behalf of defined contribution workplace pension plans to disclose administration charges and transaction costs to the governance bodies of those plans.
“By setting out a methodology for calculating transaction costs in a consistent way, and by placing obligations on firms to respond to requests for information about costs,” said the FCA in its policy statement, the new rules “will enable the governance bodies of these schemes to meet their obligations to review and consider the value for money of transaction costs and administration charges.”
The firms must provide information about transaction costs calculated according to the “slippage cost” methodology, information about administration charges, and appropriate contextual information. According to the FCA, the slippage cost methodology uses actual transaction data to assess transaction costs, unlike other methodologies that use standardized data.
“Reporting actual costs should enable governance bodies to understand the costs that have been incurred in their scheme and should incentivize asset managers to transact more efficiently,” said the FCA. “We consider that any methodology that uses standardized data to estimate costs risks creating the wrong incentives for firms.”
The FCA said it conducted a study to review how competition is working in the asset management market, and concluded that investors’ awareness and focus on charges is “mixed and often poor.” It also concluded that costs that are complex or costly for the asset manager to control, such as transaction costs, are not controlled as effectively as other costs.
In response to this, the FCA appointed a chair to establish a working group of industry and investor representatives to create a template for disclosure of costs and charges to institutional investors. The FCA also said it will require a methodology that calculates implicit costs as well as explicit costs.
“Both implicit and explicit costs impact on the returns that investors receive,” said the FCA. “If governance bodies only receive information about explicit costs, they will only get a partial picture of the total costs.”
The FCA received 43 written responses to its consultation on the new rules from industry bodies, firms, pension plan governance bodies, consumer representatives, and “expert commentators.” It said the respondents largely agreed with the key elements of the proposed rules. It also said that the majority of respondents agreed that the regulator should not define a template for disclosing costs, although a few respondents felt that this was necessary.