IMA is 'baffled and disappointed' by FSA disclosure proposals
By: Simon Evans, Funds Reporter

The Investment Management Association (IMA) today delivered a damning verdict on the latest regulatory initiative governing how retail funds disclose the details of their internal costs.

The IMA described the latest consultation paper on the subject from the Financial Services Authority (FSA) as baffling, concerning and disappointing.

The paper attempts to address how investors in retail funds will benefit from the enhanced disclosure regime, covering bundled brokerage and soft commissions, being introduced from the beginning of next year.

Soft commissions are where brokers contribute to fund managers' operational costs in return for share dealing business, while bundling means passing the combined cost of trading, research and other services on to fund investors.

Under the new regime investment managers have to disclose expenditure charged through customers' portfolios. The idea is that increased disclosure will lift the veil of secrecy that has shrouded the practice of bundled brokerage and soft commissions.

But the FSA has taken the view that retail investors do not want to be inundated with information about these kinds of costs and in any case they would not understand such information if it was given to them. So the FSA plans instead to appoint a designated individual or body to represent the interests of retail investors. This appointed representative would then be responsible for keeping track of the costs being charged back to the fund.

For collective investment schemes the FSA has suggested that a fund's depositary or trustee takes up the watchdog role, while with profits funds for example, the committee or person appointed to review compliance with the Principles and Practices of Financial Management, take the position.

Responding to the new proposals, Julie Patterson, director of regulation, operation and taxation at the IMA, said: 'IMA is disappointed that in its consultation on the reporting of bundled brokerage within retail products, the FSA has not properly taken into account the extensive work undertaken by the IMA in 2004 on the governance of collective investment schemes.'

She added: 'We are particularly concerned by the FSA’s suggestion that information on brokerage and commissions should not be made available to the retail investor. IMA believes that investors should have access to the same information as reported to the trustee in order to see where their money is being spent.'

Patterson also questioned the consistency of the new rules, pointing out the FSA is proposing that some products will be allowed to report in house and not make their information public to the end investor. 'IMA questions how this is in the interest of fairness and accountability to investors,' she said.