Richard Butcher explains what is expected of funds following the FCAs consultation on disclosing investment transaction.

In the last few weeks, the Financial Conduct Authority (FCA) issued a consultation document on the disclosure of investment transaction costs.

This follows from the work they began early last year and a couple of items of forthcoming European legislation (both of which are likely to impact us whether we are in Europe or not).

It sets out a framework for regulated asset managers to disclose transaction costs and includes a standardised method of calculation.

Additionally, the consultation dovetails with the Charges and Governance Regulations 2015 and with the FCA's own Conduct of Business Sourcebook (COBS). So, what's this all about and what must trustees do in response?

Background
Transaction costs are defined in the regulations – and in a broadly similar way in the COBS – as the costs incurred as a result of the buying, selling, lending or borrowing of investments. They include items such as stamp duty and bid to offer spreads. The policy intent of disclosure is that this will facilitate a more open and therefore efficient market – allowing trustees and others to choose a fund manager who controls and optimises their costs.

The first thing to know is that the COBS do not apply to trustees, although they do apply, indirectly, to the independent governance committees that oversee workplace personal pensions and directly on most, but not all, fund managers.

The Charges and Governance Regulations do apply to trustees, but only in relation to the defined contribution (DC) schemes or sections they run.

DB trustees
Neither the COBS nor the regs apply to defined benefit (DB) trustees. In other words, DB trustees do not, technically, need do anything on transaction costs – although, of course, it is probably good governance that they do so.

DC trustees
The workload for DC trustees is a little more complex.

The first obligation for DC trustees is to ask their fund managers for transaction cost data. There is, currently, no corresponding obligation for the managers to provide that data.

Where trustees have asked for data but not received it, they must disclose this fact in their chair's annual statement and explain what they are doing to obtain that information in the future.

Where they have received it, they must assess the extent to which transaction costs represent good value for members and include in the chair's annual statement:

• An explanation of their assessment
• A statement of the levels of transaction costs applicable to the default investment strategy, and
• A statement of the range of transaction costs applicable to all investment funds that members' used during the year in question.

What's coming?
The FCA consultation proposes an obligation on regulated fund managers to provide information in response to a trustee request. It also, as mentioned previously, sets out a standardised way of assessing the impact of transaction costs. All of this is designed to make the trustees' job of assessment easier and more meaningful.

For PTL's initial views on the consultation, click here [http://ptluk.com/press-release-fcas-transparency-paper-good-start-stops-short-success-says-ptl]. The FCA consultation closes on 4 January 2017.

Written by Richard Butcher, Managing Director, PTL.