IDWG Engagement Event. Thursday 8 February 2018

IDWG Engagement Event Thursday 8 February 2018

Agenda Introduction Mary Starks Technical Session IDWG members Dr Chris Sier Ralph Frank Piers Lowson Iain Clacher Closing Session User, producer and regulator perspective Jeff Houston Chris Cummings Robin Finer

Introduction Mary Starks Director of Competition FCA

Progress Update 2018 Q1 Institutional Disclosure Working Group Dr Christopher Sier Chair, FCA IDWG Fintech Envoy Professor of Financial Technology Leeds University 09/02/2018 4

Summary The Why Terms of Reference (ToR) Philosophy and Principles The Templates so far what they are, how they were created, how they work, results of initial testing The Reference Template Ralph Frank The Account Template Piers Lowson The User Template Prof Iain Clacher Summary Next steps 09/02/2018 5

The Why Good for the Institutional Investor Best practice on costs data collection Better VFM decision-making Good for the The Consumer A bp saved is a bp earned, and this creates a real uplift in performance through the magic of compounding Good for the Asset Management Industry Define and standardise best practice cost data disclosure to reduce bespoking and duplication Improve trust at a time when trust is in short supply raise inflows, reduce outflows Identify inefficiencies in the investment supply chain and apply technology solutions ( fintech ) Good for the UK Support a systemically important UK sector Brand the UK as the best place to domicile your asset management company Tom Tugendhat Real investment charge transparency will supercharge the City (The Telegraph article, 19/08/17) Brand UK as the best place to have your money managed CHEAPER, LESS COMPLEX, MORE EFFICIENT, FAIRER 09/02/2018 6

The How (ToR) Cost and fee disclosure by asset managers to institutional investors is a complex issue and has several dimensions, each of which will be examined by the IDWG: 1. Breath of coverage and depth of data Are current templates sufficiently detailed or should they have additional data fields added, and be expanded to other security or vehicle types? Should separate templates be set for other suppliers in the value chain? 2. Different types of institutional investors have different data requirements What Institutional Investors should we consider and which should we prioritise for setting templates? How can the data needs of the different types of pension funds be respected? Are different data-capture mechanisms and data standards needed? 3. Data consistency What data is actually needed by different types of institutional investor for the purposes of accurate financial reporting and decision-making? Can the mechanisms alluded to above be used to provide this reporting and analysis? 09/02/2018 7

Key design principles and philosophy Wide range of expertise needed, therefore wide range of expertise on the Panel Don t reinvent the wheel re-use, build-on, adopt where possible LGPS, IA Code of Disclosure, ILPA Low-hanging fruit first DB vs DC Good data science is important Summary data is only as good as the data collected to create that summary Presentation One sheet vs. multiple sheets There is a pyramid of data we could construct Institutional asset owners use asset managers and their products/strategies to build their institutional products Asset managers build products and strategies from a rather limited set of underlying asset types 09/02/2018 8

Design Pyramid LOW granularity Summarises all costs from all account level data templates Iain Clacher User Template Disclosed to users One template per account All account costs included Costs unique to an asset class are split out Piers Lowson Account Template HIGH granularity Reference template variables will be mapped to the account level template Ralph Frank Reference Template Used by the working group 09/02/2018 9

The Reference Template

What is the Reference Template? A resource to support the consistent completion of the Account Template (and, by extension, the User template) Each cost and charge is clearly defined Each cost and charge is mapped to a specific cell in the Account Template

Evolution of the Reference Template Started with the six stages of an investment product s lifecycle and considered six categories of costs Created consistent definitions of the costs and charges Determined the mapping to the Account Template Worked to identify as many costs and charges as we know of within these 36 categories Organised the costs and charges into consistent groupings to inform development of the Account Template Re-organise the structure of the Reference Template to aid ease of use (with the Account Template)

Sample costs and charges Investment administration Definition: Investment administration costs capture the explicit charges incurred in administering the investments. These are often referred to as back-office costs. Map to: 3.2.2 Administration Investment administration Stamp Duty Reserve Tax Definition: Stamp Duty Reserve Tax is a tax paid on all equity purchases settled through CREST Map to: 3.1 Portfolio transaction costs Transaction taxes

Account Template

ACCOUNT LEVEL DATA TEMPLATE 1. ACCOUNT INFORMATION Provider Account/Fund Name Share Class Name Asset Manager ABC Multi Asset S Class Report Dates Start: 01/04/16 End: 31/03/17 Base Currency of Account Currency of Report Strategy: Active / Passive / Mixture Strategy: Direct / Indirect / Mixture GBP GBP Active Direct 2. PORTFOLIO INVESTMENT ACTIVITY Investment Vehicle Client Total Public Equity Fixed Income Derivatives Foreign Exchange Cash / Equivalents Commodities Private Equity Real Estate Other (Specify) Opening Assets Closing Assets Average Value of Assets Opening Exposure Closing Exposure Average Exposure Purchases Sales Investor Inflows Investor Outflows 3. RECURRING COSTS % 3.1. PORTFOLIO TRANSACTION COSTS % Public Equity Fixed Income Derivatives Foreign Exchange Cash / Equivalents Commodities Private Equity Real Estate Other (Specify) Slippage Costs Explicit Trading Costs Broker Commission (Execution-only) Broker Commission (Research) Transaction Taxes Transaction Related Third Party Legal / Tax Advice Transaction Related Asset Valuation Custody Settlement Fees Implicit Trading Costs Anti-Dilution Mechanism Indirect Transaction Costs GROSS RETURN (%) (1, 3, 5 Years) % % % 3.2. ONGOING CHARGES % 3.2.1. Investment Management Fees % 3.2.2. Administration % 3.2.3. Governance, Regulation & Compliance % 3.2.4. Distribution, Comms & Client Service % 4. INCIDENTAL COSTS % Performance Fees (Invoiced) Performance Fees (Paid Through Nav) Carried Interest NET RETURN (%) (1, 3, 5 Years) % % % 5. ANCILLARY SERVICE COSTS (Incurred via Account) % Custodian Charges Collateral Management Transition Management Costs Stock Lending Fees (Net) Other (Specify) 6. ONE-OFF COSTS % 7. ADMINISTRATIVE FEES % CLIENT RETURN (%) (1, 3, 5 Years) % % %

User Template

Draft user templates Add-back costs Fund Description AUM Active FTSE All Share (UK) Equity Fund 98,000,000 Amount % Client Return 7,320,600 7.47% Add back Ancillary Service Costs (Incurred Via Account) 196,000 0.20% One-Off Costs 29,400 0.03% Administrative Fees 39,200 0.04% Net Return 7,585,200 7.74% Add back Ongoing Charges 490,000 0.50% Ongoing Charges Breakdown Investment Management Fees 392,000 0.40% Administration 49,000 0.05% Governance, Regulation & Compliance 19,600 0.02% Distribution, Comms & Client Service 29,400 0.03% Incidental Costs 686,000 0.70% Gross Return 8,271,200 8.94% Add back Portfolio Transaction Costs 98,000 0.10% Implied overall investment gain/performance 8,859,200 9.04% Deduct costs Fund Description AUM Active FTSE All Share (UK) Equity Fund 98,000,000 Amount % Implied overall investment gain/performance 8,859,200 9.04% Deduct Portfolio Transaction Costs 98,000 0.10% Gross Return 8,761,200 8.94% Deduct Ongoing Charges 490,000 0.50% Ongoing Charges Breakdown Investment Management Fees 392,000 0.40% Administration 49,000 0.05% Governance, Regulation & Compliance 19,600 0.02% Distribution, Comms & Client Service 29,400 0.03% Incidental Costs 686,000 0.70% Net Return 7,585,200 7.74% Deduct Ancillary Service Costs (Incurred Via Account) 196,000 0.20% One-Off Costs 29,400 0.03% Administrative Fees 39,200 0.04% Client Return 7,320,600 7.47%

Trustee testing 50+ trustees consulted We asked trustees to select the best fund based on net performance Majority preferred deduct rather than add-back The norm in life and finance is to move from gross to net

Trustee feedback Categorizations are useful but definitions and clarity is needed Some want more detail on the make up of costs account template There will need to be a programme of trustee education to get to grips with this Differentiate between what is paid to third parties from what is paid to investment managers There needs to be more information than this for vfm to be assessed

Investment consultants Historically trustees have been focussed on net of all costs and mainly on AMC Not all categories will be understandable to all trustees There needs to be clear descriptions of line-items and an ability to breakdown understand the constituent parts

Next Steps Complete the mapping exercise for the Reference Template Confirm the data fields in the Account Template 09/02/2018 21

Confirm the level of data in the Account Template 3.2. ONGOING CHARGES % 3.2.1. Investment Management Fees % Invoiced Fees (incl. VAT) Fees Paid Through NAV Less: Rebates Payments For Research (RPA) Engagement & Voting Fees Data & Index Fees Direct Expenses (E.G. Property Management Etc.) Transition Management Costs Stock Lending Fees (Net) Collateral Management Fees Indirect Investment Management Fees Other Charges (Specify) 3.2.2. Administration % Investment Administration Performance Measurement Risk Monitoring Custody Charges Collateral Management Wrapper Costs Other Administration Charges (Specify) 3.2.3. Governance, Regulation & Compliance % Audit Costs Compliance Monitoring Quality Assurance Costs Statutory Reporting Trustee/Non Executive Director Costs Regulators' Costs (E.G. FCA) Compensation Scheme Costs (E.g. FSCS) Secretarial Services Insurance Legal Fees Tax Advice & Structuring Costs Costs of Providing Indemnities Other G, R & C Charges (Specify) 3.2.4. Distribution, Comms & Client Service % Marketing Costs Communication Material Investor Support Other D, C & C-S Charges (Specify)

Next Steps Complete the mapping exercise for the Reference Template Confirm the data fields in the Account Template Incorporate feedback received on both Account and User Templates Complete the work for the less-assured asset classes (e.g. PE) 09/02/2018 23

Complete the work for the less-assured asset classes Portfolio Transaction and other unique costs are split by asset class Public equity Fixed income Derivatives Foreign Exchange Cash/Equivalents Private Equity Real Estate Other 3.1. PORTFOLIO TRANSACTION COSTS % Public Equity Fixed Income Derivatives Foreign Exchange Cash / Equivalents Commodities Private Equity Real Estate Other (Specify) Slippage Costs Explicit Trading Costs Broker Commission (Execution-only) Broker Commission (Research) Transaction Taxes Transaction Related Third Party Legal / Tax Advice Transaction Related Asset Valuation Custody Settlement Fees Implicit Trading Costs Anti-Dilution Mechanism Indirect Transaction Costs

Next Steps Complete the mapping exercise for the Reference Template Confirm the data fields in the Account Template Incorporate feedback received on both Account and User Templates Complete the work for the less-assured asset classes (e.g. PE) Consult on periodicity of collection Release the stable Templates for use Work with Insurers/DC funds to understand their needs, and the incremental costs that may be incurred by models other than DB Consider how standard will evolve How to move beyond Excel and automate 09/02/2018 25

Q&A session

Closing session Jeff Houston Head of Pensions Local Government Association Chris Cummings Chief Executive The Investment Association Robin Finer Head of Wholesale & Investments Competition Department FCA

Thank you very much for your participation today. If you have any questions, suggestions or anything else some members of the IDWG will be around for a short time. To get in touch with the IDWG please contact: institutionaldisclosureworkinggroup@fca.org.uk