Research

Disclosure of charges is regulated and standardised for retail investors, but is currently less so for institutional investors. Consequently, institutional investors are finding it difficult to obtain and analyse cost data from asset managers or accurately compare costs across the market.

This was one of the findings of the FCA’s Asset Management Market Study in 2017, which prompted the creation of the Institutional Disclosure Working Group (IDWG). Off the back of the IDWG’s recommendations, the ‘Cost Transparency Initiative’ (CTI), a partnership initiative between the Pensions and Lifetime Savings Association, the Investment Association (IA), and the Local government Pension Scheme Advisory Board (LGPS), was launched in November 2018.

1. The drive to enhance cost transparency is nothing new

For a number of years, the asset management industry has been criticised for its opaque and inconsistent approach to cost disclosure. As a result, several industry-led initiatives have developed to address the information asymmetry and poor price competition that exists in the market, including:

• The Institutional Limited Partners Association’s (ILPA) collection framework for Private Equity in the US.¹
• The IA’s Draft (cost) Disclosure Code, adapted from the LGPS template, for use by member firms.²

2. Templates, templates, templates!

The IDWG’s aim was to establish templates for cost collection from the perspective of an institutional investor. In essence, this meant describing a MiFID II-compliant framework with more detail to allow better decision making, with the inclusion of some contextual data. In addition, templates for non-MiFID II fund structures and asset types have been added by the IDWG, such as for the costs of holding cash, private equity and physical assets.

In its report³ to the FCA, the IDWG recommends the following five templates:

• a user template that summarises data from the account-level templates so institutional investors can easily see the key data from their providers, as well as easily segment data along dimensions such as asset class or manager;
• a main account-level template, covering most product types;
• a separate account-level private equity template that feeds summary fields in the account template;
• a separate account-level physical assets template for property that feeds summary fields in the account template; and
• a separate account-level ancillary services (custody) template that feeds summary fields in the account template.

The CTI is currently piloting these templates with a number of pension schemes and asset managerswide.

3. The CTI templates go beyond the LPGS template/Draft IA Disclosure Code

The IDWG’S recommendations build upon the LPGS template/Draft IA Disclosure Code in the following ways:

• The ‘ongoing costs’ section for asset managers has been expanded to capture far more detail.
• The number of different asset types covered by the templates has been expanded in recognition of the multiplicity of strategies and asset classes purchased by institutional investors.
• Separate templates for private equity (see below), physical assets (property and infrastructure) and custody have been developed.
• There will be a single template for both segregated and pooled funds, rather than using separate collection mechanisms, to improve comparability across investment options.
• There is a shift away from multi-year performance reporting, and the use of only one relevant year of performance data.
• A user template has been developed to allow institutional investors to see all the complex cost data from the various account templates presented in one place and in summary.

4. There is specific template for private equity

A private equity template has been designed for closed-ended private equity funds, but could also be used by other private market participants, for example debt funds. The template has been reviewed by a number of private equity firms and investors and, according to the IDWG, has passed the scrutiny of key LGPS Funds. Important points include the following:

• The IDWG recommends that private equity firms that complete the ILPA fee template do not need to also complete the private equity template.
• The private equity template uses terminology that is more familiar in the UK (and Europe), and follows the level of granularity included in the main account template. The private equity template is also based on Invest Europe’s Investor Reporting Guidelines.
• The IDWG has waived, for the time being, the need for firms to submit a full account template that looks through all underlying funds within a pooled fund and/or fund of fund structure. Instead, the account template requests summary data to be presented in the ‘pooled fund’ column within the account template. According to the IDWG, the exception is where the investing fund and the underlying funds are all operated by the same asset manager, in which case all data to the level of the account template should be collected and submitted.

5. Use of the templates is voluntary (well, sort of)

Following the example set by the LGPS Code of Transparency, the IDWG recommends that the use of the templates be voluntary, but with an appropriate period of ‘completion on a best endeavours basis’ applied to allow the systemic abilities of providers to be adapted to the templates.

Rather than seeking an FCA rule mandating use of the templates, the IDWG recommends that compliance be “encouraged through other means”, such as through pressure applied by institutional investors. To put it more bluntly, providers should not be surprised if they are de-selected from RFPs (Requests for Proposal), or their contracts are not renewed, for failing to use the templates.

The IDWG has also suggested that the IA should adopt the IDWG’s recommendations as its Disclosure Code (supplanting the one currently in place), and that the BVCA should formally adopt the private equity template.

If, notwithstanding the above, industry uptake of the templates is poor, or institutional investors still find it difficult to obtain accurate information on costs to the level proposed in the templates, this may prompt the regulator to make adoption of the templates mandatory.

Osborne Clarke comment

Whilst the CTI’s templates should improve cost transparency and go some way to allaying concerns around the opacity of private equity in particular, the success of the initiative depends on education and uptake. Even with the potential of an established standardised framework, costs are a complex area that institutional investors and asset managers need to get to grips with.

Cost transparency will continue to be an industry-wide ‘hot topic’ for 2019. Therefore, whether you are an asset manager, pension fund trustee, independent governance committee, master trust, sovereign wealth fund, charity investment fund, family office, insurer or carry out corporate treasury functions, Osborne Clarke’s funds team can help you become better educated on the matter of costs disclosure.

This article is provided as a general informational service and it should not be construed as imparting legal advice on any specific matter.

Dianne Bell, a Knowledge Lawyer, has a broad range of financial services regulatory experience advising financial institutions, asset managers, corporates and directors. In addition to secondment experience with a retail bank, she has experience working with the UK regulators (the UK Listing Authority and the Financial Services Authority) in relation to market conduct issues, the Approved Persons Regime and policy development work. Dianne joined Osborne Clarke as a Senior Knowledge Lawyer within the Financial Institutions Group in December 2018 where she covers four core service lines: financial regulation, payments, funds and consumer credit. She also has experience designing and delivering training programmes, producing practical updates and briefing notes on key legal developments, and horizon scanning projects. Dianne regularly comments on developments within the 4 service lines and has contributed to several industry publications and participates in working groups covering a range of regulatory topics (e.g. marketing and financial promotions issues, and product development requirements). Dianne qualified as a solicitor in England and Wales in 1998.

Anna Perry, a Senior Knowledge Lawyer, has a broad range of experience advising on domestic and cross border insolvency, restructuring and regulatory issues and has particular expertise in assisting investors, creditors, managers and independent directors of distressed funds. She also has commercial litigation experience in relation to fund, shareholder and financial services disputes. Anna joined Osborne Clarke as a Senior Knowledge Lawyer within the Financial Institutions Group in March 2018, where she covers 4 core service lines: Funds, Payments, Financial Regulation and Consumer Credit. Anna also has significant experience designing and delivering training programs, producing practical updates and briefing notes on key legal developments and implementing technology to provide easy access to know-how and other resources. Anna regularly comments on developments within the sphere of payments, funds, consumer credit and financial services law and regulation, and has contributed to several industry publications. Anna qualified as a solicitor in England and Wales in 2009 and was admitted as an attorney-at-law in the Cayman Islands in 2014.

For more information, please visit www.osborneclarke.com.