The FCA said the rules would align with incoming PRIIPs regulations
Firms will have to provide a breakdown of administration and transaction costs when requested by workplace defined contribution (DC) governance bodies from 3 January 2018.
Under rules announced by the Financial Conduct Authority (FCA) today, regulated firms managing money on behalf of DC schemes will need to supply information about transaction costs using the ‘slippage cost’ methodology, as well as information about administration charges and any other appropriate contextual data.
Where a firm does not have this information, it will be required to seek it from other firms, and if those are FCA-regulated they will also be mandated to provide it, the watchdog said in a policy statement.
The slippage cost methodology, first mooted last October, calculates fees by comparing the price at which a transaction was actually executed with the price when the order to transact entered the market.
Despite this method having previously been criticised, the watchdog said the calculation uses “actual transaction data” to identify “the loss of value from the consumer’s perspective”, and “reduces the risk that some costs remain hidden”.
The rules are designed to ensure all regulated firms that handle pension scheme funds, including asset managers, investment banks, and custodians, would be required to comply.
The watchdog said this would also allow trustees and independent governance committees (IGCs) to meet their duties regarding reviewing and considering whether these charges delivered value for money.
The regulator said it had considered requiring firms to provide the data “as a matter of course” but concluded this would lead to confusion as to when the rules would apply, particularly if a firm did not know it was handling pension investments.
The FCA said enforcing this approach would align UK regulation with the European Union’s Packaged Retail and Insurance-based Investments (PRIIPs) regulation, which comes into force at the start of next year.
It will also mean the regulator will comply with rules set out in the Occupational Pension Schemes (Charges and Governance) Regulations 2015, which required the FCA and the Department for Work and Pensions (DWP) to make rules regarding the publication and closure of transaction administration charges.
The announcement came after the financial watchdog consulted with the industry, receiving 43 responses, and last month appointed Dr Chris Sier to chair an independent working group to consider a template for transaction cost disclosure.
The FCA said it would also consult on how costs and charges should be disclosed and published to scheme members in the second quarter of the next year, with an attempt to echo a DWP consultation anticipated later this year.
Transparency Task Force (TTF) founding chair Andy Agathangelou welcomed the move as “spot-on”.
“Valiant volunteers within the TTF’s costs and charges team actively engaged with the FCA’s consultation team on this important issue and I am very pleased to see that the FCA have moved forward with an approach that will enable IGCs to properly scrutinise costs for the benefit of scheme members,” he said.
“Nobody should under-estimate the vital part that systematic cost control can have in driving better outcomes for pension savers, so this is another important step forward by the FCA, embracing the transformational power of transparency once again. The general direction of travel is spot-on.”
Although the rules do not define a standardised format for disclosing the information, the regulator said “we do not see a need to make rules to specify how information should be presented” to trustees and IGCs. However, it saw the “value of more consistent and standardised” disclosure to institutional investors, and said its working group would address this.
It also dismissed concerns over widespread gaming of the methodology, arguing “where a firm adopts a complex process in an attempt to game the rules, this should be capable of being identified during a due diligence exercise, which should reduce the risk of firms choosing to operate in this way”.
Nevertheless, if this is detected, the FCA said it would “take action as appropriate”.