29th July 2022
The FCA’s Consumer Duty rules are aimed at improving how consumers are served by firms. A great deal of the focus is on protecting consumers from being over-charged. This is fantastic and we welcome it. The image of our industry is often not as good as it should be. Our industry looks after the financial health of the nation and it is great to have a regulator so focused on protecting consumers from potentially nefarious or low-quality actors providing a lack of value for money.
There is, however, a massive problem. The regulator expects intermediaries to judge the cost of investing in funds (and whether fair value is being provided) via the Ongoing Charge Figure (OCF). Recent guidance requires funds that invest in other funds to disclose the “costs” of doing so in their own OCFs (known as “synthetic costs”. For example, if a Hawksmoor fund invests in an Investment Trust or open-ended fund that has a “cost” of 2%, and we have a 1% position in it, this will add 0.02% (1% of 2%) to our own OCF.
Let us leave aside the notion that investment trusts have cash “costs” at all (when one invests in an investment trust, one invests in the share price, not the Net Asset Value, from which all costs are subtracted). Is it appropriate to disclose these sorts of costs within an OCF?
We believe the answer is unequivocally “no”. The decision to invest in these vehicles is an investment one. When we invest in these vehicles, we do so taking into account all potential costs. What would be the point of investing in a higher cost vehicle otherwise? Indeed, commercially it makes our lives so much harder as it results in a higher “cost” for our own funds. Moreover, there is nothing necessarily “ongoing” about these costs. We could decide not to invest in such vehicles and invest only into direct bonds and equities that carry no “cost”. Indeed, why aren’t equity managers required to disclose the “costs” of investing in companies that make losses, or when they make the investment decision to own a higher cost operator over a lower cost one in a particular sector?
Our belief is that the OCF should contain true “ongoing” costs such as the AMC the fund manager earns and any unavoidable admin costs associated with running the funds. Synthetic costs can be disclosed outside the OCF. It is simply not helpful to compare a fund of funds to a directly invested fund using the OCF. It tells you nothing about value and does not provide a fair “apples to apples” basis to compare costs.
The crux of the issue is thus the calculation methodology of the OCF. The regulator’s laudable attempts at protecting consumers and increasing transparency via their rules of cost disclosure is arguably doing the opposite. The Consumer Duty rules compound the issue by forcing intermediaries to assess cost and value using the OCF. Indeed, platforms will become gatekeepers on value for money. Recently, as I posted on LinkedIn, Fidelity has removed an excellent fund of funds (the definition of “excellent” being the achievement of strong differentiated performance for its investors via a portfolio of assets that would be impossible to replicate by investing directly into “zero cost” securities) from its platform as the OCF is now above an arbitrary cap following the updated rules on synthetic cost disclosures. This would not have happened had the OCF been calculated fairly. I stress: synthetic costs can still be disclosed elsewhere.
We take our duty to our consumers very seriously. This manifests itself in taking investment decisions not on the basis of cost alone, but on the basis of outcomes for our investors. This necessitates investing in funds and it is a travesty that this approach is being penalised by well-intended rules & regulations.
Ben Conway – Head of Fund Management
For professional advisers only. This financial promotion 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.FPC456.
