Providers must show costs and charges online from April
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Contract-based DC schemes must publish the costs and charges for their funds online and provide illustrations on the compound effect of costs from April this year, the Financial Conduct Authority has said.
The rules require defined contribution providers to publish the costs and charges on members for the default fund as well as each self-select option. The information must be available online, updated annually within seven months, and members need to receive an annual communication about it.
Concessions on compound cost and timeline
Providers will also need to publish illustrations of the compound effect of these costs and charges for the default fund and some representative alternative funds; the FCA conceded that the latter should only be “a representative range” after it had received complaints that it would be far too onerous to calculate this for every self-select option.
Other industry concerns centred on the timeline for the introduction of these rules – some said they would need more time to get their IT systems into line, arguing that other new FCA requirements, from the Retirement Outcomes Review, are already putting strain on these.
The FCA has therefore agreed to phase these rules in so that for the first year, they only apply to a provider’s default arrangements, with a deadline for publication of 31 July next year, and the scheme governance year defined as the calendar year.
Separate transaction cost calculation for OTC bonds
Feedback obtained via a call for input in 2018 on the slippage cost methodology the FCA had proposed for calculating transaction costs has also been taken into account.
'Slippage’ is the difference between the execution price and the market arrival price of a security and therefore includes both the transaction costs incurred and any market movements while the transaction has been taking place, and is part of the Packaged Retail and Insurance-based Investment Products regulations.
“Some industry stakeholders expressed concerns about the slippage cost methodology, arguing that it can lead to potentially misleading information,” such as negative or very high transaction costs, the FCA said.
The FCA has found that such misrepresentation of transaction costs is largely down to errors made when applying the methodology but accepted “that price availability is variable across securities, in particular for over-the-counter transactions in bonds”.
It has therefore clarified that when calculating transaction costs for over-the-counter bond deals, “the best evidence that will be available for the market mid-price of the bond will be the average of the best bid and best offer obtained when seeking quotes from multiple counterparties”.
The new rules on costs and charges also require providers to disclose any anti-dilution benefit separately, as part of a breakdown of identifiable costs, while at the same time being obliged not to take them into account “if and to the extent that the benefit would take the total transaction costs below zero”.
Will members benefit from the new cost and charges disclosure rules?