FCA backs increased cost disclosure for Private Equity and Real Estate Managers

FCA backs increased cost disclosure for Private Equity and Real Estate Managers

October 3, 2018

Last year, the FCA set up the Institutional Disclosure Working Group (“IDWG”), chaired by academic Dr. Chris Sier, to come up with ways to address a lack of uniformity in the disclosure of fund management charges. The group was formed in response to one of the main findings of the FCA’s asset management market study namely that institutional investors such as pension funds and insurers found it difficult to get the necessary cost information to make effective decisions.

The IDWG was established as a stakeholder working group comprising of a range of experts, including the BVCA, with an independent chair, Dr Chris Sier. Its objective to “gain agreement on (cost) disclosure templates for asset management services provided to institutional investors”. A range of experts were selected and invited to join the IDWG with support from several observers and a secretariat provided by the FCA. Approximately 40 per cent of the group comprised institutional investors and their advisers, 40 per cent asset managers and 20 per cent independent experts with a range of backgrounds.

Over the summer, IDWG published its initial recommendations, which included:

  • The use of five templates (including a private equity fund template) for collecting and disclosing data;
  • The arrangements that need to be in place to ensure the templates are maintained;
  • Proposals on how asset managers can be encouraged to offer information using the templates; and
  • Proposals on how more investors can be encouraged to request information in this format from their managers.

The FCA welcomed the IDWG recommendations “We believe that the group has made significant progress in tackling the issues we found in relation to institutional disclosure as part of the Asset Management Market Study”.

The full report and templates are due to be published in the autumn. As part of its proposals, the IDWG has encouraged the formation of a new body or group to maintain and update the framework to be formed over the summer also with a launch planned for autumn, when the full report will be released. The publication of the new templates was delayed in order to allow the new monitoring group to be established in order to act as a Helpdesk and Information Hub for Firms seeking information on how to incorporate the templates into their processes. Unlike the IDWG, the new group will not be overseen and facilitated by the FCA. The IDWG was chaired by Sier, but it is not yet clear whether he will be invited to sit on or chair the new body, although it is understood there is strong support for him holding a role within it.

The IDWG also recommended ways to encourage adoption of the templates voluntarily including urging investors to pressure managers to use them. “Typically, this would be by non-compliance resulting in de-selection from requests for proposal and the non-renewal of contracts,” the group said, adding that investment consultants and platforms should also take this approach. Members of the UK’s Local Government Pension Scheme (LGPS) already apply this approach, the group said. The schemes existing transparency code has succeeded in encouraging most of the biggest providers to public sector pension funds to report all costs, and the IDWG’s work built on the disclosure templates drawn up by the LGPS. “Industry representative organisations and trade bodies should be prepared to adopt the templates as their disclosure codes and to support the use of the templates by their members,” the group said.

Private equity managers that complete the Institutional Limited Partners Association (“ILPA”) fee template do not need to also complete the IDWG fee template following BVCA representations that its members should not have to complete multiple templates. The ILPA is a voluntary association funded by its members and published its fee template on 29 January 2016. The ILPA has grown its membership to more than 4,500 professionals today across 50+ countries, managing 50% of the global institutional private equity AUM. Members represent all investor categories of small and large institutions including public pensions, corporate pensions, endowments, foundations, family offices, insurance and investment companies, development financial institutions and sovereign wealth funds.

Although the working group stopped short of calling for regulation, it said the FCA should enforce regulations if managers fail to report voluntarily. The FCA responded by stating “We will reconsider the issue of disclosure to institutional investors in the future if we have any reason to be concerned about the effectiveness of how the IDWG recommendations have played out in the market.” The ILPA template published in early 2016 has been adopted partially by a significant number of UK private equity managers but full adoption of the template in its entirety is far from widespread. Therefore, many managers will face a difficult decision in the autumn whether to fully adopt the ILPA template or the new IDWG template in the knowledge that if a significant number of managers choose neither then the FCA could bring in mandatory disclosure requirements in the near future.

If you would like to discuss the practical implications of the IDWG recommendations or to arrange a free Regulatory Outlook consultation, please contact the Augentius Compliance Team here.