Proposed European regulation requiring additional disclosure will impose ‘significant’ costs on wealth management firms with ‘limited’ benefits to consumers, industry insiders have warned.
The rules, which will come into force in January 2017 as part of MiFID II, will mean private client investment managers have to disclose all costs to their customers. These will need to be presented as an aggregated cash amount or percentage and include initial and ongoing costs, transaction, custody and research costs, along with performance fees and exit charges.
Under the guidelines from the European Securities and Markets Authority’s (Esma), wealth and fund managers must also provide forecasts on the cumulative effects of costs on returns over time.
While transparency has been broadly welcomed by the industry, the value of this additional information has been called into question, particularly given the systems upgrades that will be needed to deliver it.
‘I believe the impact of the disclosure of costs will be significant across the industry,’ said Karen Bond, director at Walbrook Partners. ‘It will require firms to maintain their own data with far more granularity and collate it into yet more documentation requiring yet more explanation to clients.
‘It’s one of those deceptively simple suggestions which will impose a cost burden on firms with limited benefit to consumers. If firms already disclose overall costs to their clients – setting aside the definition of “total costs” within funds, which is always a good debating point – then it is unclear what they gain from a detailed breakdown of those costs.’
Fowler Drew director Stewart Fowler said pressure to report transaction costs has been building for some time and the issue is unlikely to go away. Brooks Macdonald chief executive Chris Macdonald said capturing this data will be ‘staggeringly complex’, and Fowler agrees the benefits will be limited.
‘It’s one of these things where lots of people are saying we need this, but people are asking for something without understanding it,’ Fowler said.
‘It could be reasonable just on the basis of accountability, but there has to be a benefit, because there is a cost.’
How much this cost will be is not yet known, but in a previous cost benefit analysis of MiFID II by research firm JWG, the overall expense of complying with the broader requirements of the directive would be £10 million for a large institution.
Guy Sears, director of risk, compliance and legal at the Investment Association, said how much its members have to pay will depend on a number of factors, including the frequency of the reporting requirements. He believes the additional cost burden will be limited by the amount of work that asset managers have already done to improve transparency, however.
‘We already have an in-house disclosure code for asset managers, we also have a change of the accounting standards. We’re just looking at what this will add,’ he said.
‘We’ll need to give some information on the spread and how this applies to funds. It applies to intermediaries, they will need that information. There’s a lot in place already in the funds area. I don’t expect it to be terribly expensive.’
But increased costs will trickle down the value chain, warns Uner Nabi, an executive director at EY. He points out that wealth managers will potentially face additional work when making recommendations, such as identifying similar products they are not recommending to compare their charges.
‘This is additional work and process. It means they need to be seeking this information from the manufacturer of the product,’ he said. ‘The cost is not just to the wealth managers and distributors but also the manufacturer in that they will have to provide this information.’
However, Hargreaves Lansdown head of communications believes that positives could come out of the regulation. He said since the unbundling of costs, fund managers’ ‘other costs’ have been rising as annual management fees have fallen.
‘One result of unbundling has been other costs going up and if people can see what everyone else is charging, the forces of competition might come in and costs come down,’ he said.
Industry Insiders' Views
Danny Cox, head of communications, Hargreaves Lansdown:
'One result of unbundling has been other costs going up and if people can see what everyone else is charging, the forces of competition might come in and costs come down.'
Guy Sears, director of risk, compliance and legal, Investment Association:
'There's a lot in place already in the funds area. I don't expect it to be terribly expensive. A lot of firms have spent money improving their disclosure with us over the years.'
David Cowell, founder, Myddleton Croft:
'Yet more useless paper for customers not to read. In 1985 our client agreement fitted on one side of A4 and people didn't read that.'
Karen Bond, director, Walbrook Partners:
'It's one of those deceptively simple suggestions which will impose a cost burden on firms with limited benefit to consumers.'