The UK’s new Product Summary marks its sharpest break from the PRIIPs Key Information Document (KID) in how it presents costs, according to regulatory technology specialist Zeidler. The change looks like a win for retail investors. Zeidler warns, however, that the operational burden on firms is far from lighter.
Under the Consumer Composite Investments (CCI) regime, the Reduction in Yield (RIY) calculations have been removed. Implicit transaction costs are no longer disclosed, and performance fees are shown separately through worked examples rather than folded into a single percentage. Instead of projecting costs across several holding periods using assumed returns, the Product Summary looks back at what a product has actually cost over the previous 12 months.
Zeidler explains that costs now fall into five standardised categories. One-off entry costs cover charges paid on purchase, such as entry fees, structuring costs, capital guarantee costs and relevant taxes. One-off exit costs apply on sale or redemption. Both are shown as a percentage and a monetary amount.
The ongoing costs figure (OCF) is the headline measure. It combines the annual running costs of a product into one number. For fund-of-funds, the costs of underlying holdings are generally captured within the OCF. The main exception is underlying closed-ended investment funds, whose ongoing costs are disclosed separately.
Transaction costs are limited to explicit items such as broker commissions, exchange fees, taxes and other directly attributable dealing expenses. They are calculated using 36 months of trading activity, or a reasonable estimate where the history is shorter, and sit apart from the OCF. Performance fees and carried interest are also excluded from the headline figure. Firms must explain them in plain English and give at least one worked example based on a hypothetical £10,000 investment.
All costs use a representative £10,000 investment over a single year, expressed to the nearest pound as well as in percentages. Products with less than 12 months of history may use reasonable estimates. Firms may also adjust figures where future costs are expected to differ materially from the prior year.
The FCA’s aim, Zeidler notes, is clarity. RIY projections were technically sophisticated but often confusing for investors. The arrival price methodology behind implicit transaction costs was also controversial, because it produced volatile figures and sometimes even negative costs.
For firms, Zeidler argues, the real challenge lies in production rather than presentation. Groups distributing in both the UK and EU may now show different cost figures for the same fund across Product Summaries, PRIIPs KIDs, EMT templates, MiFID disclosures and factsheets. Strong governance will be needed to explain those discrepancies to distributors and investors. Fund-of-funds will still depend on reliable underlying data, and performance fee illustrations will need consistent, fair and balanced assumptions.
Zeidler recommends that firms act on three fronts now. They should compare their existing PRIIPs calculations with the CCI methodology, identify the data needed for the OCF and explicit transaction costs, and set up a consistent approach to governing performance fee examples. For cross-border firms, running two cost regimes side by side may prove the toughest part of the transition.
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