Costs And Charges Reform: Beyond The Small Print

The FCA has issued its latest proposals in support of the government’s growth objective on reforms to distributors’ cost and charges disclosures: CP26/24: Simplifying Consumer Investment Disclosures. 

This latest consultation is trailed as focusing on simplification and growth and follows closely on the heels of its recent proposals to reform the Consumer Duty - see our article Cutting back the Consumer Duty | Macfarlanes. However, certain of the reforms require changes to firms’ charging structures and not just to their disclosures.

The FCA’s stated aims are to support both consumers in their investment decision making by providing clearer, more useful information and firms, by reducing unnecessary operational complexity. Lucy Castledine, the FCA’s director of consumer investments, said: 'We want more consumers to feel confident investing by getting clearer information in plain English on products and charges. The changes will give firms more freedom to innovate and communicate in ways that build trust and support informed decisions to help consumers navigate their financial lives'.

Fees and interest payments on cash holdings

In its 2023 Dear CEO letter to platforms and SIPP operators, the FCA made clear its expectation that these firms should not both charge fees and retain interest on cash holdings known as “double dipping”. This expectation applies even if the aggregate charges for cash management applied by the platform through fees and the retention of interest do no more than meet the costs of cash management incurred by the platform in question. The FCA’s letter warned other consumer investment firms with comparable business models holding uninvested cash to consider the FCA’s expectations and take appropriate action. Other firm types were not however specifically targeted. 

The FCA explains in their latest consultation that it is now codifying the position in its 2023 Dear CEO letter. However, the restriction is not limited to platforms or SIPP operators. As currently drafted, the “double dipping” restriction will apply to all firms with retail clients which hold client money (save for firms providing basic advice on stakeholder products in accordance with basic advice rules).

In addition to the double dipping restriction, firms will also need to disclose clearly to consumers the interest rates they will receive on their cash balances or any fees they pay on cash held in investment accounts. 

MiFID business

The existing rules for MiFID business currently require firms to disclose ‘all costs and charges’ of the services they provide and of the financial instruments in which the client invests through that service. Firms are required to provide a personalised estimate of the total aggregated costs before a transaction is made as well as providing post-sale disclosures of actually incurred costs. Both disclosures require an illustration showing the cumulative effect of overall costs and charges on the return of the client's investment in the financial instrument. 

Proposed changes to cost disclosures

The FCA’s proposals include: 

• removing the MiFID-derived cumulative effect illustration pre-sale;
• replacing the post-sale cumulative effect illustration with a requirement for firms to show how costs have impacted returns in regular post-sale reporting; and
• permitting, post-sale, a reasonable estimate of actually incurred costs where it would require disproportionate effort to obtain exact figures.

The FCA does not prescribe how the post-sale cost impact information should be presented and proposes to give firms the freedom to choose how to present it in a way that best promotes consumer understanding. Firms will also be required to make this information available to consumers over the lifetime of the service, for example within their online account.

Alignment with CCI regime

As part of implementation of the Consumer Composite Investments (CCI) regime, the MiFID-derived cost disclosure rules have already been amended. However, this was with respect to CCIs only in order to align product cost disclosures with those provided in the CCI product summary document. The FCA is now proposing additional changes to further align the rules in COBS with the new CCI regime and to make cost disclosures more consistent throughout the investment journey. 

Firms will still be required to present costs on a personalised and annualised basis, displaying them as a percentage and as a pounds and pence figure based on the consumer’s investment amount. However, the new proposals allow firms to use CCI cost categories in their regular post-sale reporting. 

Firms will also be required to provide an explanation of how any performance fees and carried interest will apply in relation to their service or product. Where the product is a CCI, firms will be able to provide a link to the detailed explanation in the product summary. 

Professional clients

Under the current regime, firms are required to provide uniform cost disclosures for both retail clients and, where the service includes investment advice or discretionary investment management, professional clients too. The FCA acknowledges stakeholder feedback that it is disproportionate to require that professional clients receive the same disclosures as retail clients when most professional clients have the capacity to negotiate bespoke disclosures that better suit their needs. 

The FCA proposes to retain a high-level obligation on firms to provide professional clients with transparent information about costs. However, under the new rules, firms will be able to provide either: a disclosure in accordance with the rules for retail clients, or such information as the professional client agrees with the firm is adequate.

The FCA is also proposing to remove all other detailed disclosure requirements for professional clients, save for in respect of information about a firm’s portfolio management service (COBS 6.1ZA.8R); compensation information (6.1ZA.22R); and CASS information rules on the treatment of client assets.

Rationalising the rulebook

Currently, cost disclosure requirements vary depending on whether a firm is conducting MiFID, Insurance Distribution Directive (IDD) or non-MiFID business. Alternative chapters of the FCA Handbook apply and many of these are duplicative. In line with the FCA’s commitment to simplify and streamline its rulebook, the FCA proposes a new chapter COBS 6A and will remove the distinctions between MiFID, IDD and non-MiFID business where possible. 

Timings

The FCA is seeking to coordinate implementation of its cost disclosure proposals with implementation of the CCI regime (which is itself currently in a transitional implementation period until 7 June 2027). The FCA has therefore proposed to bring the revised cost disclosure rules into force quickly in Q4 2026 (close to the day of publication of its policy statement) so that firms that wish to implement the CCI regime and the cost disclosures at the same time can do so. For firms that wish to implement the changes separately, the FCA has also proposed a transition period whereby firms can continue to apply the existing rules for an 18-month period to June 2028.

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