Costs and Charges: Regulators Move Into Top Gear
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Costs and charges: regulators move into top gear Evolving Investment Management Regulation 2017 KPMG International kpmg.com 1 Evolving Investment Management Regulation: Succeeding in an uncertain landscape This article forms part of the Evolving Investment Management Regulation report, available at: kpmg.com/eimr Driven by political, regulator, investor and media attention, costs and charges now sit squarely at the top of the reform agenda in the investment and fund management industry. If there was any doubt about the importance of the issue, recent moves by IOSCO and ESMA have removed it. Within Europe, the implementation of MiFID II will bring about fundamental changes to industry commission practices, and a number of other countries, too, have introduced new rules in this area. A number of regulators continue to scrutinize the level of charges and their disclosure. “Closet tracking” remains under the spotlight and the UK, for example, is applying more intensive scrutiny to the level of charges for “active” fund management. Disclosure of the remuneration of senior management and portfolio managers continues to attract regulatory attention. © 2017 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. Evolving Investment Management Regulation: Succeeding in an uncertain landscape 2 transaction. There is less agreement IOSCO guidance on whether implicit costs can be likely to be seen measured retrospectively. Estimating transaction costs in advance is even as cast in stone more prone to variation. There is a risk that predictions of costs could IOSCO’s Investment Management turn out to be so inaccurate as to Committee in August 2016 provided be misleading, and even illegal in good-practice guidance for fees and some jurisdictions. expenses of collective investment These statements are in sharp schemes (CIS). The guidance is not contrast to the EU’s rules for the intended to form comprehensive PRIIP KID on the calculation of future requirements or to impose obligations transaction costs for funds. on national regulators, but both regulators and firms increasingly regard IOSCO’s output as setting the “pass” mark for good operational Efficiency and behavior. transparency – The guidance covers regulated open- ended funds, and closed-ended ESMA sets funds whose shares are traded on the tone a regulated market, and both fees paid directly by investors to the CIS ESMA has signaled it is ready to act. operator or its agent or associate, It believes more can be done and fees or expenses paid out of fund to improve the efficiency and assets. transparency of the investment fund IOSCO describes the latter as falling sector and is working to improve the into four broad categories: information available to investors. 1. Remuneration of the manager, ESMA Chair, Steven Maijoor, speaking including the method of in November 2016 at EFAMA’s calculation of performance fees Investment Management Forum, highlighted that ESMA is committed 2. Distribution costs to building on regulatory and 3. Other fund operating expenses, technology initiatives to achieve such as custody, fund accounting better outcomes for investors. or administration costs 4. Transaction costs associated with ESMA says improving the information purchases and sales of portfolio available to investors will help them assets, including securities choose funds that offer them value for lending and repo and reverse repo money. MiFID II requires information transactions. about third-party payments to be The report makes no observations on provided to clients. This would show regulatory or other expenses that may investors what they indirectly pay for be paid out of fund assets. the services they receive, allow them to understand the total costs and be Many of the good practices focus on able to compare between different disclosure to investors. Information services and financial instruments. should be disclosed to both Additionally, ESMA believes a prospective and current investors stronger focus on cost disclosure and in a way that allows them to make inducements should lead to more informed decisions about whether competition among service providers they wish to invest in a CIS and and, potentially, reduce fees. accept the costs of doing so. This focus on costs and charges The report includes a section on builds on a speech earlier in the year the calculation and disclosure of by Mr. Maijoor. In June 2016, he said transaction costs. IOSCO notes fund managers should bring down the industry consensus that charges on retail funds to align them explicit transaction costs should more closely with fees levied on be determined accurately after the institutional investors. © 2017 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. 3 Evolving Investment Management Regulation: Succeeding in an uncertain landscape ... retail investors According to Fitz Partners, a research Payments to are not enjoying firm specializing in fund charges, the divergence of fees charged to distributors – the lower fees retail and institutional investors is charged to seen in both active-managed and a global issue index-tracking products. For instance, professional the average ongoing charge for an In Europe, MiFID II bans commissions clients for similar institutional cross-border equity paid to independent financial advisors products. fund is 0.98 percent, compared with and wealth managers, while payments 1.92 percent for the retail share class. to other parties must pass a “quality Similarly, a retail investor purchasing enhancement” test of the service an index tracker will pay an average received by the client. However, as we 0.43 percent, compared with just noted last year, implementation is likely 0.27 percent for institutional clients. to be patchy at first. Indeed, we see differences in approaches already. Mr. Maijoor said that despite “big demand” for cheaper investment In Sweden and Denmark, for products, European retail investors are instance, the regulators considered not enjoying the lower fees charged to a wider ban on inducements paid professional clients for similar products. to advisors to retail clients, which “We know that the costs of asset would have stopped banks from management products in Europe on accepting payments from third-party average are higher than in the US,” he investment managers. This would go said. “Some of that relates to scale.” further than MiFID II by extending the prohibition against accepting benefits The European Commission has from third parties to cover all advisory signaled it is ready to back ESMA. In services, regardless of whether they February 2017, it launched a study of are independent, as is already the European fund fees and investment case in the UK and the Netherlands. performance. Sven Gentner, head of However, neither Sweden nor Denmark the Commission’s Asset Management proceeded with a fuller ban. Unit, said it is “keen to advance the policy agenda” on fees. The study’s The long lead-time (seven years findings, which will be published by and counting) for the creation and the end of 2017, will “inform policy implementing of MiFID II has given decisions”, he said. European investors regulators elsewhere plenty of time to should be able to compare investment consider the implications for their own products easily but there is evidence jurisdictions. In many cases, they have “this is not the case”. decided on a similar path, albeit with slightly different approaches. In Switzerland, the Swiss Financial Services Act – which will come into force in 2018 at the earliest – includes rules on suitability and appropriateness when providing investment advice or portfolio management, information, documentation, accountability, transparency and due diligence for client orders. © 2017 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. Evolving Investment Management Regulation: Succeeding in an uncertain landscape 4 Brexit, Swiss politicians are wondering In a separate move, SEBI is pushing In Japan, draft “Principles for if MiFID II-style regulation is the right managers to merge funds with similar Customer-Oriented Business way to go, given that the EU is less investment strategies in an effort to Conduct” were published by receptive to granting market access to halve the number of funds offered by the Working Group on Financial third countries. It is just possible that domestic managers, and so improve Markets