On 13 May 2014, the FCA published the findings from its thematic review on whether UK fund providers are sufficiently clear in the way they communicate fund charges to retail clients.
The FCA concluded that UK firms should not use the annual management charge (AMC) as the most prominent charge on marketing and other fund literature because it did not accurately reflect the total charges payable by a client, and as such could place those firms who use the on-going charges figure (OCF) at a competitive disadvantage. Instead, the OCF figure should be given prominence resulting in greater consistency between the marketing literature and web site information, and KIIDs, which require the use of the OCF.
The IMA has endorsed the FCA’s view on this point stating that:
“The IMA’s guidance has long been that member firms should not refer to the AMC in marketing literature, but should exclusively refer to the OCF. The OCF provides a common standard for all the known costs and charges that a fund will bear in a single comprehensive ratio that is easy to understand and to compare. This is in stark contrast to the AMC because a range of other costs can be borne by the fund, making the AMC a poor reflection of the total cost at worst, and a poor basis for comparison at best.” (Daniel Godfrey, IMA Chief Executive)
The IMA’s position reflects its September 2012 recommendations for enhanced disclosure of fund charges and costs. These have been strengthened further by the new May 2014 amendments to SORP, which will apply to annual report and accounts published after March 2015. It is expected that following consultation by the FCA, COLL will be updated in Q4 2014 to refer to the new SORP. The amended SORP will require authorised funds to include a disclosure table as part of their annual report and accounts setting out in “pounds and pence” (i) the performance per unit, (ii) the charges per unit for managing and operating the fund (equivalent to the OCF), and (iii) the direct transaction costs per unit incurred when the manager bought and sold holdings on the fund’s behalf, in order to provide investors with a greater transparency as to costs.
The FCA has not proposed making amendments to the current rules to compel all firms to use the OCF instead of the AMC. However, we believe that the FCA’s expectations will be that firms review their prospectuses, as well as their fact sheets and other marketing literature, including information displayed on web sites, to ensure that the OCF figure is given sufficient prominence. The latest guidance does not, therefore, mean that the AMC figure and other charges will become redundant and must be deleted from prospectuses - rather it seems that any marketing materials and prospectuses will need to be reviewed and likely amended in such way as to achieve improved clarity and ensure that clients’ attention is drawn first and foremost to the OCF figure.