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Asset managers must explain fund charges better, says regulator

Out-Law News | 15 May 2014 | 10:15 am | 2 min. read

The costs of investing in certain investing funds have not been explained clearly enough to consumers by some fund managers, the UK's City regulator has said.

The Financial Conduct Authority (FCA) praised some good practices it had seen in the way some businesses in the industry do explain charges to consumers, but identified other areas in which practices must improve.

"FCA director of supervision, Clive Adamson, said: “We believe that it is important for investors to clearly understand and compare charges across the market as this, together with fund performance and risk profile, are the key areas that they should look at. We are therefore today encouraging all firms to respond to our findings and adopt the clarity and consistency we believe to be important.”

According to the FCA's new report on the clarity of fund charges (13-page / 117KB PDF), published following a thematic review of the market, some businesses are not presenting consistent information on charges that apply to fund investments.

It said some marketing material relied on by businesses operating in the sector refer to an 'annual management charge' (AMC) being applied to funds, whereas other documents refer to an 'ongoing charges figure' (OCF). The lack of consistency "may confuse investors and hinder their ability to compare charges", the regulator said.

The FCA said that for UCITS investment funds in particular, the use of OCF across all marketing material "is likely to help investors understand and compare charges". It said platforms and financial advisers should refer to the OCF when displaying details about UCITS funds. UCITS refers to Undertakings for Collective Investment in Transferable Securities and focus on transferable and relatively liquid assets.

Just displaying information about the AMC that applies to funds may not be sufficient to inform investors about the full range of charges that can apply to their investments, the FCA said.

"The AMC is widely quoted in marketing literature and is deducted directly from investors’ funds," the FCA said. "This charge goes to the asset manager to cover ongoing management. It is taken to pay for the cost of the manager’s investment management services, such as research analysis and portfolio management. However, running a fund requires many activities in addition to this, such as keeping a register of investors, calculating the price of the fund’s units or shares, and keeping the fund’s assets safe."

"Each of these activities can be charged separately to funds. This can result in a complex charging structure. Initial charges and performance fees add to the complexity of charging structures and retail investors may not be able to estimate the potential cost of a performance fee," it said.

"Using the AMC as the headline charge figure on marketing material does not provide investors with a clear, combined figure for charges as it excludes additional charges and expenses that are taken from funds. Additional ongoing charges can add significant amounts to the cost of a fund and we saw some small funds with charges of up to 0.9% in addition to the AMC," it said.

The regulator said that businesses that fail to explain fund charges clearly to investors run the risk of failing in their duty to act in customers' best interests. This is because investors need to "know what they are paying for" and be able to "compare funds". Communications of the charges that apply must be "fair, clear and not misleading", it said.