FILE PHOTO: A maintenance worker cleans the entrance area of the headquarters of the new Financial Conduct Authority (FCA) in the Canary Wharf business district of London April 1, 2013. REUTERS/Chris Helgren/File Photo
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The UK regulator has rebuffed calls from asset managers to push for changes to new EU cost disclosure rules, saying that the extreme results thrown up by the regulation are a result of poor compliance.

The Financial Conduct Authority said on Thursday that it had uncovered problems with the way asset managers calculate and present transaction costs under the Priips (packaged retail and insurance-based investment products) regulation.

Priips obliges investment groups to disclose the transaction costs incurred by their funds for the first time. The requirement has been heavily criticised by the sector, which argues that the calculation methodology stipulated in the regulation produces confusing results, including negative transaction costs.

However, following a recent review of the application of the new rules, the FCA said that it had not found “credible evidence to support claims that the methodology is not working as intended”.

The watchdog said that unrepresentative transaction costs are caused by “poor application of the Priips methodology”. It said asset managers generally do not disclose all associated costs and charges and noted that where full disclosures are made, “inconsistencies between documents and website mean consumers can find the information difficult to understand”.

The FCA urged asset managers to review their calculations and indicated that it was prepared to follow its review with more detailed investigations into specific firms, individuals or practices. It added that it would provide examples of poor compliance on its website and work with asset managers to help them improve their calculations.

“While awareness of the rules appears good, we found that firms take inconsistent approaches, risking confusion for customers, who may be misled about how much they are being charged,” FCA chief executive Andrew Bailey said.

“We are aware that many firms are finding aspects of the calculations difficult or are making inaccurate calculations. We will work with firms to help them ensure their reporting is accurate.”

However, Mr Bailey poured cold water on the idea that fund managers are deliberately not complying with the regulations — a claim repeatedly put forward by Gina and Alan Miller, founders of SCM Direct, the investment boutique campaigning against hidden charges.

Mr Bailey said that while the FCA had uncovered areas of non-compliance, claims that groups were intentionally circumventing the disclosures are “not supported by the evidence”.

Mr Miller responded by calling the FCA “delusional” and accusing it of engaging in “sound bite regulation”.

“The evidence is overwhelming — there is no doubt that the well-resourced compliance departments are aware what is compliant and what isn’t,” he told the FT.

“Instead of changing things for the better for consumers through promoting industry templates and effective enforcement through fines and punishment, the FCA chooses empty words over proper action.”

Chris Cummings, chief executive of the Investment Association, the UK asset management trade body, said fund groups would work with the FCA on correcting the calculation issues in order to provide investors with reliable, clear and meaningful information.

While the FCA stood firm on the Priips transaction cost rules, it acknowledged that the performance disclosures contained in the regulation were a source of concern. Fund managers have pushed back against these rules, arguing that they can mislead investors. Under Priips, investment groups have to present performance scenarios under four market conditions instead of the conventional practice of showing past fund performance.

The FCA said it would work with EU regulators to review the performance disclosure rules and would consider issuing interpretative guidance to minimise the potential for confusing results.

Ian Sayers, chief executive of the Association of Investment Companies, welcomed the FCA’s acknowledgment but said that its efforts to improve the disclosures would take time. “Meanwhile consumers continue to be misled,” he said. “The regulator should take a creative and urgent approach to protect UK consumers from harm.”

The Priips regulation currently only applies to providers of investment trusts and alternative funds. However, it is due to be extended to providers of retail funds, known as Ucits. In addition, many fund groups rely on the Priips cost calculation methodology to make disclosures required under Mifid II.

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