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After UK failure to act, the EU is dragging fund managers towards full cost and fee transparency

Eradicating the scandalous issue of hidden costs and fees across the European fund management and pensions industry has gained considerable traction and support over the past years in Brussels, but there is still much to do, writes Gina Miller.

When we launched the True and Fair Campaign two and half years ago we were a lone voice calling for transparency and change that would result in a fairer deal for savers. Our demand that the fund management industry reveals 100% of all the costs and fees levied for managing savers’ money has been met with ridicule, derision and even anger; although it is widely accepted that costs have the single biggest impact on returns. Indeed, the UK’s Investment Management Association (IMA) denied there was any such issue as hidden costs and fees!

As the debate on this topic has ignited the IMA and many in the industry have since changed their tune and pledged to act to address this fundamental consumer issue. Yet we are still waiting to see the detail of this action and hidden costs and fees remain as much of an issue for investors today as they have ever been.

However, where the UK’s fund management industry has failed to act, the European Union (EU) has stepped in to the breach. Significant progress has been made by a number of institutions to bring in landmark changes to the EU financial services sector in order to improve transparency and investor protection rules inter alia under MIFID II and PRIIPs. Under the new MiFID II regime investment companies will be obliged to disclose the TOTAL cost of their investments, including all intermediary levels from start to finish of the investment journey, annually or on request by consumers. Likewise, PRIIPs Regulation has endorsed the swift take-up of an online fund calculator to assist consumers discover the real costs of potential investments for themselves.

Under the PRIIPs regime, the European Commission is required, within four years of the Regulation’s entry into force, to conduct a market survey into whether these tools are available online in each Member State. It must also determine whether they provide reliable and accurate computations of aggregate costs and fees for all products within the scope of the Regulation. If the survey concludes that no such tools exist or that existing tools do not enable retail investors to understand the aggregate amount of costs and fees of PRIIPS, the European Commission is obliged to assess the feasibility of EBA, ESMA and EIOPA, through the Joint Committee. It must then develop draft regulatory technical standards setting out the specifications applicable to such European level tools.

This seemingly simple result in MIFID II has major ramifications. Presenting 100% of all costs and fees, and allowing savers to compare these outgoings against the likely returns delivered by the products, prior to purchase, is a major step forward for consumer empowerment and protection.

Every other industry operates a total cost ‘ticket price’ in one number. Understanding how much something costs and what it will delivers for the customer is considered a basic consumer right elsewhere; not a revolutionary idea. Yet the level of debate and angst that campaigning for this basic right has generated would suggest the fund management industry begs to differ.

Proposing a Total Cost of Investment number has attracted brickbats from those who would prefer that consumers only had partial transparency on costs and fees. Their main argument is that it would be very difficult to provide full disclosure of fees and costs is completely untrue as the vast majority of this information is already known and recorded by the firms. It is simply a matter of building new systems to present the information in an understandable format which is not overly time consuming and easy to update.

There is even an attempt by the industry to argue that the principles embedded in MIFID II could be still subject to further changes in the Delegated Act, which we find totally outrageous and it would question the fundamental principle of legal certainty. We have to hope that the Delegated Act on MIFID II expected in 2015 will give savers 100% transparency on all costs and fees – something they have every right to demand and expect.

In terms of savers and investor’s consumer protection, this will not be the final piece of the jigsaw as the Shareholders Rights Directive is the next battlefield. We feel that there is a genuine threat that the disclosure requirements, especially those imposed on asset managers vis-à-vis institutional investors, will be heavily opposed.

Article 3h of the Shareholders Rights Directive states that Member States ensure asset managers disclose on a half-yearly basis the following information:

(a) whether or not, and if so how, they make investment decisions on the basis of judgements about medium-to long-term performance of the investee company, including non-financial performance;

(b) how the portfolio was composed and provide an explanation of significant changes in the portfolio in the previous period;

(c) the level of portfolio turnover, the method used to calculate it and an explanation if the turnover exceeded the targeted level;

(d) portfolio turnover costs;

(e) their policy on securities lending and the implementation thereof

We believe there is increasing political support for full disclosure in Europe. The new Commission and the recently elected Parliament are holding the keys for this to become a reality for investors and for giving investors both from the UK and the rest of Europe the crucial information they require to make the best possible choice for their hard eared money.

It takes resolute willpower to ignore the artificially attractive but fundamentally flawed messages from the industry and their trade bodies that they are capable of putting their houses in order. But protecting 500 million consumers across Europe against anti-consumer practices in the investment industry is a fight worth winning.

Gina Miller is founder of the True and Fair Campaign and SCM Private

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