Charges incurred when dealing in the underlying investments, are not included in the cap on charges for stakeholder pensions, "stakeholder products" proposed in the Sandler Review or ISA CAT standards.

They are hidden in the case of both stakeholder and personal pensions. They are not included in the Comparative Tables of the FSA. It is proposed in the Sandler Review that they should be excluded from the accounts of "stakeholder with-profits". Dealing costs can be estimated from portfolio turnover. This is given as a percentage in the accounts of mutual funds in the US, but not the accounts of unit trusts in the UK.

Churners are being helped by describing "stakeholder" "products" as "low cost" and "simple", whilst excluding dealing charges from the cap on charges. The stakeholder "cap on charges" is only on the management charge. The FSA discusses CAT standards in its report Comparative Tables (May 2001):

"On average, disclosed charges are about 1.4 % of the funds under mangement each year, but disclosed charges on a CAT-marked product are capped at 1 %. ... reduce the amount they pay for annual charges by an average of 0.4 percentage points." (paragraph 55) ... "We assume here that undisclosed charges remain constant." (footnote 15)

But they might not remain constant! They have in fact been increasing. There should in any case not be any undisclosed charges. They are often more than an additional 1 % of capital per annum. But the Treasury states that CAT standards "get rid of hidden charges". The Minister Patricia Hewitt MP said:

"But we know that many ordinary savers are concerned about getting a poor deal or what might be hidden in the small print. ... Our CAT standards will get rid of the small print and hidden charges that worry people so much."
( Making saving easy A new deal for savers )

This is an example of "the asymmetry of information between provider (or adviser) and consumer", which is described as "one of the fundamental rationales of regulation", in the Occasional Paper of the FSA CAT standards and Stakeholders (2000) by Paul Johnson.

Kevin James (formerly at the FSA, now at the Bank of England), says that the 1% cap produces an incentive to increase hidden charges, that is churning. In his report Waiting for Ariadne (2002) published by the CSFI, he says:

"Explicit charges account for only about half of true total charges. It follows that the Treasury's price cap captures only about half of the true total price of investing. Moreover, one might expect the proportion of charges captured by the cap to fall over time, as the cap's very existence creates a strong incentive for funds to devise ways to increase the proportion of the true total charges levied in the form of hidden charges. The Treasury's approach fails because it does not capture hidden charges." (page 35)

The FSA describes CAT standards for stocks and shares ISAs in a fact sheet on its website:

annual management charge must be no more than 1%

no other charges

This does not tell the whole story because there are dealing or transaction costs. There is a similar situation in other countries. The book Investments from Stanford University in the US, gives as an example the Altamira Equity Fund:

"In 1993, the fund had transaction costs of 2.22%, pushing the total costs to 4.59% as a percentage of assets in the fund. In 1994, transaction costs of 1.30% pushed total costs to 3.62%. 'It is clear that MERs do not tell the whole story,'"

Not telling the whole story is a general feature of this subject. For example Sir Howard Davies, the chairman, gives this as a reason for the FSA's failure to regulate Equitable Life properly: "We were frequently not told the full picture. It would have been better had we been more sceptical." (3 Section 6).

The FSA is not giving information about dealing costs in fact sheets for the point of sale. But it does in other publications both that they exist, are harmful for savers, and even how to calculate or at least estimate them as a multiple of portfolio turnover. By "undisclosed" the FSA means especially undisclosed at the point of sale. If information about dealing costs were supplied at the point of sale people are likely to become worried and confused. If you want to make a sale in accordance with the government policy of promoting saving, keep it simple.

In its consultation paper Comparative Information for Financial Services (1999) the FSA distinguishes between explicit charges and "price":

"Any indicators of the 'price' of a product ought to take all costs and charges into consideration so far as reasonably possible." (paragraph 6.12)

The paper has a diagram showing unit trusts^* underperforming the market by 3.7 % per annum (Annex 2), of which 1.2 % is due to the annual management charge. Discussing the difference 3.7 - 1.2 = 2.5 % , it comments:

"But some must be due to dealing costs or other costs which are not disclosed to investors." (paragraph 6.16)

Surely the 2.5 % must be entirely caused by costs. The alternative is that the fund managers of unit trusts are systematically choosing poor performing investments.