This statement relates to concerns raised about costs and charges disclosure in the PRIIPs Key Information Document (KID), the UCITS Key Investor Information Document (KIID) and MiFID II requirements. It sets out our interim measure, pending broader reform possible through legislative change, to provide for some disaggregation of costs and charges disclosure. These actions should give investment companies greater ability to explain their costs and charges to help consumers make better informed investment decisions.
We understand some firms are concerned that, for a minority of investment products, the required costs and charges disclosure may not result in representative cost information being published.
Specifically, this concern has been raised in the context of listed closed-ended funds. These are pooled investments but are also bodies corporate and so have some features of companies as well as of funds. This can affect their cost base, as some costs incurred by listed closed-ended funds can in some cases be equivalent to costs incurred by commercial companies. Commercial companies are not subject to these costs and charges disclosure requirements.
Further concerns have been expressed about how the costs that listed closed-ended funds are required to disclose are then aggregated into other products, such as multi-asset funds that may invest in them.
What drives current cost disclosures?
It is important that consumers can have confidence that costs are clearly and accurately disclosed. This instils trust in the market, facilitates competition, and supports consumers in their decision making.
Currently, there are several requirements in place, deriving from retained European legislation, that impose specific cost disclosures on investment products and their managers/distributors and restrictions on the extent to which additional information can be included. Those that sit in retained EU law (REUL) are:
PRIIPs KID
The Packaged Retail and Insurance-based Investment Products Regulation[1] (PRIIPs) and the related Regulatory Technical Standards[2] (RTS) require PRIIPs manufacturers to prepare and publish a stand-alone standardised document (the KID) for each investment. Shares in listed closed-ended funds are a type of investment that is covered by PRIIPs. The regulation contains prescriptive requirements as regards to the length of the KID, the order in which information may appear in the KID, and the precise content of the information presented in the KID.
Article 8.3(f) of the PRIIPs Regulation requires all direct and indirect costs borne by a retail investor, including one-off, recurring and incidental costs, to be disclosed in an aggregated figure to show the compound effect of the total costs on the investment. This is supplemented by the PRIIPs RTS, which sets out prescriptive methodologies for the calculation of these costs and lists specific costs that must be included.
The prescriptive methodologies in the PRIIPs framework do not account for potentially relevant nuances in certain product characteristics. Concerns have been raised that for listed closed-ended funds, this has resulted in the inclusion of charges that are more akin to corporate costs than investment costs.
UCITS KIID
The UCITS KIID requirements are applicable to UCITS funds. A multi-asset fund that may invest in a listed closed-ended fund would typically be set up as a UCITS.
In relation to the UCITS KIID, the Regulation specifies the form and content of the document containing key investor information for UK UCITS and sets out that no other information or statements may be included. This is specified in article 3 of the Key Investor Information Regulation.
MiFID II
MiFID II requires investment firms recommending or marketing an investment to provide the retail investor with disclosure of aggregated one-off and ongoing costs and charges relating to the financial instrument before point of sale (and if the firm has an ongoing relationship with the client, an annual disclosure of costs incurred). Effectively this requires distributors to also use the PRIIPs figures in the listed closed-ended fund disclosure in their own cost disclosure.
Longer term reforms
As part of the Treasury’s Smarter Regulatory Framework (SRF), REUL will be replaced with firm-facing rules set by the FCA. Consumer disclosure for investment products is a priority area, and the repeal of PRIIPs has been prioritised by government in the SRF process. The Treasury issued draft legislation on the repeal and replacement of the PRIIPs regulation in November 2023.
To get ready for the SRF, we published DP 22/6[3] in December 2022 setting out our view of good disclosure so that we could get early input to enable us to move more quickly once broader reform is possible through legislation and the SRF. We will issue feedback on responses to DP 22/6 and consult on new disclosure rules in the first half of 2024. The government has also committed to repeal the relevant provisions in MIFID, which will allow us to holistically reform retail disclosure.
As part of this reform, we will assess what cost information supports retail investors in their decision making and will consider the purpose and usefulness of aggregating a range of costs and charges into a single figure. We recognise that there may be instances where disaggregation increases transparency, provides more useful information to retail investors and improves competitive pressures. Any future changes we make will be informed by consumer research, so as to deliver a regime that meets the needs of consumers.
Short term measures- forbearance to enable additional disclosures
As set out above, the current cost disclosure requirements are set out in legislation, in REUL. This limits the FCA’s ability to disapply the current rules or make changes until the relevant requirements are transferred to us through legislation. However, we want to ensure the best possible transparency to consumers within that context and take account of the concerns raised.
Work on longer-term reforms is underway. Until that longer-term work has been finalised, where listed closed ended funds and funds that invest in them (or manufacturers of such funds) are concerned that the costs required to be disclosed in key information documents do not appropriately reflect the ongoing costs, they can provide additional factual information (as well as the aggregated figure) such as the breakdown of costs to put the aggregate number in context. For example, a listed closed ended fund may give a better explanation of costs that are clearly corporate costs. As a result, a fund of fund might seek to explain how its own aggregate figure is affected by the investment company’s cost.
Listed closed ended funds and other funds that invest in them (or manufacturers and distributors of such funds) can also reflect such explanations in other consumer facing communications.
In considering the presentation of the information, firms should also consider their Consumer Duty[4] obligations.
If entities provide further factual information such as a breakdown of the costs to put the aggregate number in context, or include this information in their wider communication documentation, we confirm that we will not take enforcement action to the extent that the firm contravenes the restriction on adding further information to the UCITS KIID or the prescriptive requirements of the PRIIPs KID. This also extends to materials issued by MiFID firms that distribute PRIIPs or UCITS. Firms must continue to comply with other relevant rules and requirements. These include the Consumer Duty and, where this does not apply, Principle 7, which requires firms to ensure communications are fair, clear and not misleading, and the requirements in COBS 2.1.1R to act honestly, fairly and professionally in accordance with the best interests of clients.
This statement should not be read as providing an indication about the outcome of the wider analysis and what the future regime may require.
Any future changes that we consider are required, including a withdrawal of this measure if we deem it necessary, will be communicated in a fair and transparent way, with reasonable notice.
The aim of this forbearance statement is to give greater flexibility for costs to be explained, including putting aggregate costs in context – pending more substantive change which will be possible through legislation which will give the FCA power to change the rules more substantively.
We have worked with relevant trade bodies in preparing this notice. This statement will give trade bodies the ability to modify or issue guidance that will support a meaningful approach to calculating component charges.