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A Call to Arms

28th February 2023

We have been calling for a more transparent and fair fund cost disclosure regime for over a year now. Last month I wrote a lengthy Crescendo highlighting the key issues (see here).

I highlighted the HM Treasury’s consultation (see here) but I should have also highlighted the FCA’s Discussion Paper 22/6 on a Future Disclosure Framework (see here).

Our time is now. The deadline for submitting to the HMT consultation is March 3rd, while the deadline to participate in the FCA’s Discussion Paper is March 7th.

There is no need to answer every single question in each – submitting answers to only questions you feel most comfortable answering or feel strongest about will suffice. But if you agree with us that the current disclosure regime is unfair and untransparent, the time to act is NOW. We will not get a better opportunity than this.

The government is not only revoking PRIIPs but also consulting more widely – in parallel with the regulator – on the entire cost disclosure regime. Both the government and the FCA are to be applauded for taking the opportunity provided by the UK’s exit from the EU to revisit these rules.

In summary, the below lays out why we believe it is crucial we engage with these initiatives (much of which I have stated before, but it bears repeating here):

-There is a clear market failure and barrier to competition created by the current rules.

  • Investment Companies are not currently competing on a level playing field with equivalent structures on the continent.
  • The cost disclosure regime will disincentivise asset allocators to purchase investment companies and thus starve areas of the UK economy (such as renewable energy) from much needed productive capital.
  • The regime currently favours mass-produced low cost funds that only invest directly into liquid securities. Fund of funds are not being compared fairly by using a one-number OCF that includes synthetic costs.
  • The disclosure rules are being applied inconsistently – very few single strategy funds disclose investment company costs, no passive funds do, and many active fund of funds are not. Those funds that are disclosing these costs are being made to look too costly. There is no level playing field across open-ended funds either.

-The combination with Consumer Duty is exacerbating the issues.

  • Consumer choice is being hampered by platforms decisions to cut off access to funds investing in investment companies or even investment companies themselves.
  • Consumer Duty rules are trying to enable consumers to easily compare funds on costs using all available information on costs in a consistent way. That is currently impossible under the current regime.

-We should not forget transactions costs.

  • Implicit transactions costs are far too confusing, make no sense, can result in nonsensical negative costs and have different calculation methodologies.
  • Dilution levies can be used to reduced transactions costs for open-ended funds but not for investment companies.
  • We need a far simpler definition, rather than, as with OCFs, an attempt to disclose everything in one all-encompassing (and wrong) number.

We also applaud the IA and the AIC for their willingness to engage. We have been delighted with their constructive approach to the problem and willingness to listen and work together.

I have also been pleased to have been able to engage directly with consumer groups. It is stark how little trust there is within our industry. We must build that trust and end the Pavlovian reaction to an OCF higher than 0.5% as somehow ripping off the consumer.

If we as an industry do not engage with the HMT consultation or the FCA Discussion Paper the chances of nothing changing will be high. WE MUST ACT NOW.

Please get in touch with either myself, David Appleton (Senior Investment Director, Brooks Macdonald) or James de Bunsen (Portfolio Manager, Janus Henderson Investors) if you’d like further guidance or help in engaging.

Ben Conway – Head of Fund Management

For professional advisers only. This article is issued by Hawksmoor Fund Managers which is a trading name of Hawksmoor Investment Management (“Hawksmoor”). Hawksmoor is authorised and regulated by the Financial Conduct Authority. Hawksmoor’s registered office is 2nd Floor Stratus House, Emperor Way, Exeter Business Park, Exeter, Devon EX1 3QS. Company Number: 6307442. This document does not constitute an offer or invitation to any person, nor should its content be interpreted as investment or tax advice for which you should consult your financial adviser and/or accountant. The information and opinions it contains have been compiled or arrived at from sources believed to be reliable at the time and are given in good faith, but no representation is made as to their accuracy, completeness or correctness. Any opinion expressed in this document, whether in general or both on the performance of individual securities and in a wider economic context, represents the views of Hawksmoor at the time of preparation and may be subject to change. Past performance is not a guide to future performance. The value of an investment and any income from it can fall as well as rise as a result of market and currency fluctuations. You may not get back the amount you originally invested. FPC880.

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