Transparency ; an imperative not an option

The issue of transparency of charges in investments appears to be gaining in importance – not before time.  Earlier this year, the Department for Work & Pensions (“DWP”) published the ‘Better workplace Pensions: Further measures for savers’ Command Paper.  Disclosure of costs was a key component of this Command Paper, as discussed in a previous blog .  I understand that the Financial Services Consumer Panel, “an independent statutory body set up to represent the interests of consumers in the development of policy for the regulation of financial services” according to its website, is investigating charges in retail funds and defined contribution pension schemes.  The Investment Management Association, which represents the UK investment management industry, has apparently embarked upon a broad initiative to improve charges transparency across investments too.


These three streams of activity will result in charges’ disclosure requirements for defined contribution workplace pension schemes, at a minimum (courtesy of the DWP).  The nature and extent of these requirements is still to be finalised though.  Ideally, charges’ disclosures will be the same across all savings and investment products in order to provide consumers with sufficient information to make an informed decision on a level playing field.  It is unfortunate that it is likely to take Government intervention to bring about the desired level of transparency.  The financial services industry has missed an opportunity to gain trust from consumers by not providing this transparency pro-actively.  There has been no shortage of prompts to the industry, from the likes of the Pensions Institute and True & Fair among others


I am conscious that some elements of the process of redistribution of wealth from providers of capital to their agents are more difficult to quantify than others.  A few aspects of the costs of trading are particularly difficult to identify and isolate, market impact costs for example.  There are, however, pragmatic ways to deal with most of the material charges.  How about noting what the less significant/more difficult to quantify charges represent and deliberately excluding them from scope?  Changes are required to practices in certain markets in order to clearly separate operational charges (that should be disclosed) from risk charges (that might legitimately form part of the price paid/sought for an instrument).  These changes will be covered in another blog.


Costs, fees and taxes (which I collectively refer to as ‘charges’ below) can be specified, if not necessarily quantified, in advance:

  • Asset-based charges, usually expressed as a percentage of assets per time period, can be specified as such.These asset-based charges can also be translated into a monetary amount for a given investment, say £1,000, for the time period.

  • Fixed monetary charges can be quantified in monetary terms.These fixed charges can be translated into percentage terms for a given investment too, in order to build a corresponding total cost in percentage terms.

  • Charges that are fixed in magnitude, either asset-based or monetary, but are volume-dependent, for example commissions for equity trades, can be identified in advance.Their impact, in percentage or monetary terms, can be illustrated for a specified volume of activity per time period.


Aggregating the components set out above allows total charges to be assessed in advance, consistently across investments and savings vehicles for a given set of parameters in both monetary and percentage terms.  Actual charges incurred in the past year(s) should also be presented for all investment and savings vehicles, along with relevant supplementary information (e.g. level of turnover, flows etc.).  Past levels of charges are not necessarily a guide to the future, much like investment performance, but it does put providers of capital in a position to understand how their agents have acted in different market conditions.  The underlying information should be readily at the agents’ disposal – if not, how have the agents exercised due care in carrying out their duties?


There is likely to be more progress over time in disclosing to providers of capital how their capital is being eroded by their agents and to what extent.  The more this process is driven voluntarily by the financial services industry, the more likely the industry is to gain some trust from its clients.  Conversely, the more the transparency is imposed by regulators, so trust will be eroded.  Why should providers of capital not decide how they want to reward their agents?  Those services that are essential and/or add value to the providers of capital are likely to be supported in future.  Functions that benefit the agents rather than the providers of capital will likely be eliminated.  What is to fear from empowering providers of capital, be they new savers in auto enrolment pension schemes or large institutional investors, and giving them a say in how their own money is spent?

 [RF1]The ‘relatively little ado about much’ blog

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