FCA consults on plans to standardise pension investment transaction costs disclosures

The UK’s Financial Conduct Authority has today published proposed rules and guidance aimed at standardising the disclosure of the transaction costs incurred by pension investments.

In a statement, the regulator said that the proposal to standardise transaction costs disclosures would be in the best interests of independent governance committees (IGCs) and trustees, which currently are required to request and report on transactions costs as far as they are able, but that, at the moment, “asset managers are not required to provide full disclosure of these costs in a standardised form”.

Placing a duty on asset managers to disclose aggregate transaction costs to pension schemes that, directly or indirectly, invest in their funds, the FCA said, would “ensure that IGCs and trustees receive [the] information about transaction costs” that they need.

It said it’s also proposed that asset managers be able to provide a breakdown of transaction costs on request, “with the total broken down into categories of identifiable costs, which could include specific costs like taxes and securities lending costs”.

The consultation was welcomed by the Association of British Insurers.

The organisation’s head of conduct regulation, James Bridge, said in a statement on Wednesday: “Pension providers strongly support making investment costs fully transparent, which should be expressed in a meaningful and comparable way.

“We are working with wider industry, the [Department for Work & Pensions] and the FCA to give governance bodies oversight over the costs associated with investing.

“This is critical to ensuring savers can have confidence in workplace pensions.”

‘Slippage cost methodology’

In its consultation, the FCA recommends that those evaluating transaction costs make use of  a methodology for calculating them known as “the slippage cost”, which compares the price at which a transaction was actually executed with the price when the order to transact entered the market.

It notes that the time an order enters the market “should be captured by an order management system, and this time can then be used to identify the price of the asset”.

Companies that were unable to provide transaction cost information for all of the assets in a scheme would, the FCA notes, have to disclose this “clearly to the governance body, with an explanation of why it has not been possible to provide the information”.

The FCA said the proposed new rules would “deliver a high degree of consistency in how transaction costs are reported, and give governance bodies confidence that the information presented to them contains a comprehensive assessment of costs”.

FCA executive director of Strategy and Competition Christopher Woolard added that the proposals contained in the consultation would “allow IGCs 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”.

The consultation is open until 4th January 2017.

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