The regulator is currently seeking feedback from consumers and the investment industry regarding their initial experiences with the Priips regulation, which came into effect in January 2018. The call for input, published on the FCA website on Thursday, is seeking feedback on cost and risk disclosures required under Priips, as well as the scope of the European Union directive.
The FCA paper noted a “small number” of investment companies and funds are reporting negative transaction costs under Priips and Mifid II. Around 5% of funds are reporting zero transaction costs.
The FCA said negative transaction costs are not always inaccurate, but reviews of portfolios had found “significant calculation errors”.
The call for input said: “When these are corrected, overall portfolio transaction costs for these portfolios are positive.
“That is, we have found that some firms are failing to properly disclose costs to investors as required under the Priips legislation. Where we find issues during our supervisory work, we get firms to address them.”
The FCA added that a handful of investment companies were reporting negative transaction costs for illiquid assets even though this should not be possible.
It also warned anti-dilution mechanisms should not shift transaction costs into negative territory, stating this indicated misuse for purposes other than offsetting costs connected to investors exiting the fund.
Transaction costs include the bid-offer spread and commission costs, but the FCA said an investor may be able to buy at the bid price or sell at the offer price, resulting in negative costs.
The FCA found negative transaction costs where: corporate actions had been incorporated into the arrival price, but not the transaction price; the arrival price for a liquid share was significantly outside the high-low of the day; differences in currencies for the arrival and transaction prices; or a bond’s included accrued interest was included in the transaction price, but not the arrival price.
