In the first article of our blog series on the new CCI regime, our Head of Investor & Digital Services, Seamus O’Cuill, examines the implications of cost disclosures.
What does the manufacturer need to produce?
Manufacturers are required to provide the following information for each CCI:
- Percentage figures illustrating the impact of costs and charges on an investment, split across various categories over the preceding 12 months.
- These figures must be divided into four categories and disclosed separately in percentage terms:
- One-off entry costs
- One-off exit costs
- Ongoing costs
- Transaction costs
Each category should be accompanied by a concise description in plain English of the nature of the costs included.
Additionally, manufacturers must provide written confirmation to distributors where any of the above categories are calculated as zero, explicitly stating whether the calculation was zero or the category of costs doesn’t apply to that CCI.
Manufacturers are also recommended to provide distributors with a breakdown of ongoing costs and any other information that might help retail investors understand the nature of the costs.
If anti-dilution mechanisms are used to reduce transaction costs, manufacturers must provide a description of this.
All direct and indirect costs, excluding performance fees and carried interests, must be allocated to one of these categories.
Similar to UCITS KIID provisions, it is permissible to replace the 12-month figure with an estimate if the costs figures from the last 12 months are no longer representative. Estimates can also be used when the CCI is unlaunched or has existed for less than 12 months, but this should be disclosed.
Two ‘all costs’ disclosures:
Product manufacturers will be required to make the following two disclosures:
- A Sterling figure representing the overall costs incurred on an investment over the preceding 12 months, based on an assumed investment amount of £10,000.
- Written confirmation and descriptions to assist distributors and retail investors in understanding the costs and charges.
Performance fee and carried interests disclosures:
Where a CCI has performance fees or carried interests, the product manufacturer must provide:
- An explanation of each fee.
- Details of the conditions under which these fees may be applied, including the performance fee benchmark used, the calculation method, and the payment/levy mechanism.
- A worked example illustrating how the performance fee would impact investors.
Cost definitions and Methodologies
One-off costs are defined as costs that are either:
- Deducted from a payment to a retail investor
- Deducted from the value of the investment amount in the CCI
- Costs borne by the retail investor and not the CCI
- Paid directly by the retail investor
A one-off entry cost is incurred or paid upfront, upon or shortly after the retail investor purchases the CCI. A one-off exit cost is incurred or paid upon or shortly after the retail investor sells/disposes of their investment in the CCI.
Ongoing costs include expenses incurred in the operation of the CCI and any payments to connected parties or service providers to the CCI.
The FCA has clarified inclusions/exclusions in the ongoing costs calculation for certain types of funds:
- For closed-ended funds, costs incurred in the maintenance and commercial operation of real assets, debt servicing, and gearing costs are excluded.
- Indirect costs (underlying fund costs) are included except for index tracker funds.
Transaction costs, as per PRIIPs, continue to be calculated based on the annualised costs of the past 36 months, with provisions for funds less than 36 months old. However, slippage or “arrival costs” are no longer required to be included in the calculation.
Anti-dilution benefits may continue to be deducted from transaction costs, provided the benefit doesn’t take the overall transaction cost below zero.
Comparison Table
| Cost Type | UCITS KIID | PRIIPs KID | CCI |
|---|---|---|---|
| One-off Costs | Included | Included | Included |
| Ongoing Costs | Included | Included | Included |
| Transaction Costs | Excluded | Included | Explicit Costs only |
| Performance Fees/Carried Interests | Description of fees included together with details of last 12 months of charges | Annualised figure included based on average of last 5 years of fees | Description and illustrated example shown. No requirement to disclose actual or estimated fees |
| Overall Costs Summary | Excluded | Included on RIY basis over various time horizons | Included on actual basis (for a single 12-month period) but excludes performance fees/carried interests |
Seamus O’Cuill, Head of Investor & Digital Services at Funds-Axis, observed:
“The impact of the new calculation is multi-faceted, if the legislation follows the Consultation Paper:
- Product manufacturers have the option of adopting the new legislation immediately or waiting until 18 months after the legislation is enacted. Those wishing to adopt early will have a very short time frame to implement the new calculations.
- The removal of implicit costs will be welcomed by the industry and will potentially result in significant cost savings.
- Product manufacturers who distribute in both the UK and Europe will need to prepare transaction costs excluding and including the implicit costs.
The team at Funds-Axis is working through the Consultation Papers to support our clients in their transition to the new regime.”
