The FCA released the occasional paper, Now you see it: drawing attention to charges in the asset management industry, alongside final rules announced today following its asset management market study consultation and the launch of a new consultation focused on improving information about funds, specifically their objectives and chosen benchmarks.
Occasional papers are accepted from authors if they make “substantial contributions to knowledge and understanding of financial regulation”, but do not necessarily reflect the views of the regulator.
However, the FCA noted in the paper, which was written by staff from the FCA’s behavioural finance and data science unit and its competition and economics division, it would “consider changing rules and guidance to mandate certain forms of disclosure” in light of the outcome of the platforms market study.
The experiment created a simulated online investment platform where the 1,049 participants choose between six fictional UK equity funds, which were all actively managed. Each fund had a different combination of poor, strong or middling performance with high, low or medium fees.
Alongside a control group, which mimicked current disclosure requirements, participants saw information about the detrimental impact of fund fees in four different ways (see table below).
All participants that were not in the control group saw a warning about the impact of fund fees, but those who also saw the impact chart or review screen were more likely to understand the impact of charges on returns and make their decision about which fund to invest in accordingly. The comparator chart was less effective.
Treatments used in FCA experiment
| Warning | A warning reminding participants to check how much they were paying and that charges can have a significant impact on their returns. This was at the top of the page containing the six funds. |
| Warning & impact chart | Includes a graph depicting the impact of a small difference in charges on net returns over time. This was also at the top of the page containing the six funds. |
| Warning & comparator chart | Includes a chart comparing a fund’s charges to others in the same asset class. This was on fund-specific pages which investors could open as pop-ups. |
| Warning & review screen | Includes a screen that appears once investors have selected a fund. This provides a summary of the costs and charges for their chosen fund as well as the comparator chart (in the previous treatment). Participants must either confirm their choice or go back to look at the available funds again. |
Source: FCA
In the control group 72.8% were likely to choose a fund with cheaper fees, but this number increased across every group receiving one of the four treatments. For the impact chart they were 7.8 percentage points more likely to pick the cheaper fund, while for the review screen this rose to 10.5 percentage points.
The impact chart demonstrated the detrimental impact of fees on returns with a graph, while the review screen showed a chart comparing costs and charges to other funds in the same asset class.
The warning by itself was less effective at changing investor behaviour, with a 6.2 percentage point increase in the investor choosing the cheaper fund, as was the requirement for participants to click on a pop-up screen to access extra information, where investors were more likely to choose a cheaper fund by a 8.4 percentage point margin. In 54% of cases investors did not click on the pop-up screen.
Under most treatments investors were marginally more likely than the control group to pick funds with higher performance, except for the warning & impact chart where they were 0.4 percentage points less likely to go with the top-performing pick.
The sample for the experiment was focused on non-advised investors with at least £10,000 in investible assets and who had previously invested in a fund before. They also needed to be the chief financial decision maker in their household.
The occasional paper follows the introduction of Mifid II and Priips in 3 January, which require greater disclosure of costs and charges, including transaction costs.
