FCA turning a blind eye

Date Published: 6 February 2019

Category: Uncategorized

Despite complaints to the FCA by SCM Direct, Charles Stanley Direct continues to show every new client, a ‘generic’ illustration of the costs and charges rather than showing the actual costs pertaining to the investment they’ve chosen.  SCM Direct’s view is that Charles Stanley’s illustrations of costs and charges flagrantly breaks the rules and is totally misleading.See no evil iconDespite new legislation that came into force on 3 January 2018, new clients of Charles Stanley Direct cannot see an illustration of the total costs and charges that relates to the actual fund selected. Instead, prospective / new clients are shown a “generic” illustration in which Charles Stanley shows active funds to have a Total Cost of 1.45% pa, and passive funds a Total Cost of 0.6% pa.  The fund cost component of these illustrations is either shown as 1.1% pa for active funds or 0.25% pa for passive funds, rather than the actual fund cost of the fund selected.

In our view, this is completely misleading and breaks the rules as Article 24 of MiFID II 50(2)[1] clearly states:

‘50(2) For ex-ante and ex-post disclosure of information on costs and charges to clients, investment firms shall aggregate the following:

(a) all costs and associated charges charged by the investment firm or other parties where the client has been directed to such other parties, for the investment services(s) and/or ancillary services provided to the client; and

(b) all costs and associated charges associated with the manufacturing and managing of the financial instruments.

The FCA rules clearly state that firms are meant to use the actual costs of the fund when available[2]

“50(8) Where calculating costs and charges on an ex-ante basis, investment firms shall use actually incurred costs as a proxy for the expected costs and charges. Where actual costs are not available, the investment firm shall make reasonable estimations of these costs.”

However, Charles Stanley must have the actual costs of these funds available to them.  We know this because they are freely available from the fund groups and various data providers e.g. Morningstar.  Furthermore, elsewhere within the Charles Stanley website the full costs of a fund are shown[3], so there cannot be any excuse for Charles Stanley not adding up the fund’s actual costs together with Charles Stanley’s costs and charges, to provide an illustration showing all costs at all levels of the fund chosen rather than some “generic” fund.

The whole point of Article 24 of MiFID II is to end costs being hidden and to allow consumers to see a total ‘ticket price’ in £ and % of various costs and charges an investor faces before they invest:

  • the fund costs
  • the transaction costs
  • the platform costs
  • and any other costs.

Fund costs vary enormously from fund to fund, so showing clients a typical or “generic” fund is completely meaningless and moreover breaks the rules in the view of SCM Direct.

This absurdity can be seen from Charles Stanley Direct’s Foundation Fundlist – a list of preferred funds across the major sectors.  Within the Actively Managed Investments list, Charles Stanley shows the TOC (Total Ongoing Charges) for 38 of these funds[4]  ranges from 0.38% pa to 2.28% pa, yet if a client decides to buy any of the funds, Charles Stanley will show them all as having an identical product cost of 1.1% pa[5]:

Fund TOC According to Charles Stanley
Threadneedle UK Social Bond INI GBP 0.38%
Royal London Sterling Extra Yield Bond Z 0.43%
Aviva Inv Strategic Bond 5 0.61%
Baillie Gifford Positive Change B 0.63%
EdenTree Amity International B 0.82%
FP CRUX European Special Situations I GBP 0.86%
Merian North American Equity U1 GBP 0.94%
Investec Diversified Income J -2 GBP 0.95%
Jupiter Absolute Return I 0.96%
Newton Real Return Inst W 0.96%
M&G Global Dividend I GBP 0.99%
Janus Henderson Strategic Bond I 1.00%
Fundsmith Equity I 1.01%
Franklin UK Smaller Companies W 1.03%
Stewart Investors Asia Pacific Leaders B 1.04%
JOHCM Japan A GBP 1.04%
Liontrust Special Situations I 1.08%
JOHCM UK Equity Income Y 1.08%
JPM Emerging Markets Income C 1.09%
BlackRock Continental European Income D 1.10%
Fidelity American Special Situations W 1.10%
Invesco Asian (UK) Y 1.11%
Merian UK Smaller Companies U1 GBP 1.12%
Standard Life Investments Global Absolute Return Strategies Ret Platform 1 1.14%
FP WHEB Sustainability C 1.15%
GS India Equity Portfolio I GBP 1.15%
Lazard Emerging Markets A 1.16%
Man GLG Japan Core Alpha D Professional 1.16%
GVQ UK Focus I 1.23%
BlackRock Gold & General D 1.25%
First State Greater China Growth B GBP 1.27%
Artemis Global Income I 1.40%
Liontrust Sustainable Future UK Growth 2 1.46%
Investec Emerging Markets Blended Debt I GBP 1.47%
BlackRock European Dynamic FD 1.55%
R&M UK Equity Income B 1.61%
Man GLG Undervalued Assets Professional D 2.02%
Artemis US Extended Alpha I GBP 2.28%

If that is not bad enough, we found 12 funds on the Charles Stanley Direct’s Foundation Actively Managed Investments list i.e. 24% of the total 50 funds within the list[6], which did not show their TOC (Total Operating Cost) within the foundation list web page itself – they were only available via links to other pages within Charles Stanley’s website.

Charles Stanley Direct states that the TOC includes the Ongoing Charges Figure plus Transaction costs plus Incidental costs” and that “whilst we endeavour to show all charges associated with specific funds, sometimes this is not possible due to the information not being made available by the fund provider. In such cases transaction or incidental cost information may be missing.”

Readers of this article can judge for themselves if this statement is true from the table we’ve complied below:

Fund Total Operating Cost of the fund according to Charles Stanley Direct’s Foundation Fundlist web page [7] Total Cost of the same fund shown elsewhere within Charles Stanley’s website
Asian Total Return Inv Co Plc 1.97%[8]
Fidelity Asian Values 1.15%[9]
Personal Assets 0.87%[10]
Scottish Mortgage 0.81%[11]
BlackRock Frontier Markets 1.69%[12]
RIT Capital 4.17%[13]
Allianz Technology Trust 2.01%[14]
Worldwide Healthcare Trust 1.40%[15]
Aberdeen Standard Equity Income 1.34%[16]
Perpetual Income & Growth Investment Trust 1.30%[17]
Aberforth Smaller Companies Trust 0.86%[18]

Why does this matter?

It is widely accepted that a significant drain on investment returns is due to fees and charges.  The European regulator recently found[19] that fund costs alone, reduced the returns received by investors by 25%.

In practical terms let’s say you choose to invest in the RIT Capital Partners Investment Trust, the actual Total Cost of Investing, including the platform charges, is 4.17% + 0.35% = 4.52% pa.  This is more than 3x the total shown in Charles Stanley’s illustration of costs and charges to any client selecting this investment trust.

The simple question is why does Charles Stanley not show clients this true cost rather than give clients a completely misleading illustration?  We have pointed out the misleading costs and charges illustrations on Charles Stanley’s website, to both the FCA and Charles Stanley Direct (see emails in appendix) but neither can be bothered to acknowledge or reply.

Come on Charles Stanley Direct and the FCA – your deafening silence speaks volumes.

Consumers deserve better than this.  Your peers desire a level playing field.

Alan Miller

Chief Investment Officer and Co-Founder SCM Direct

 

 

Appendix

  1. Email to Andrew Bailey, CEO of the FCA, Charles Stanley compliance and Charles Stanley CEO Paul Abberley on 28th January 2019 at 10:23

Dear Mr Abberley

Article 24 of MiFID II

I am sure you read the article within the Sunday Times  https://www.thetimes.co.uk/article/revealed-fund-shops-that-hide-away-their-fees-ljt0v5dml which highlighted that your firm fails to show new clients the total cost of the fund actually chosen by clients before they invest.  Instead your firm shows prospective clients just the “total anticipated cost for a “typical” fund” which of course may be completely different to the actual costs of the fund chosen, sometimes by a factor of two to three times.

We believe your firm’s interpretation of the law is in stark contrast to other regulated firms and in our view breaches both Article 24 of MiFID II and the FCA principles of conducting your business with integrity, paying due regard to the interests of customers and treating them fairly, not to mention communicating to clients in a way that is clear, fair and not misleading – https://www.handbook.fca.org.uk/handbook/PRIN.pdf.

The MiFID II rules are clear and simple – they are as follows:

https://www.handbook.fca.org.uk/handbook/COBS/6/1ZA.html

50(2) For ex-ante and ex-post disclosure of information on costs and charges to clients, investment firms shall aggregate the following:

(a) all costs and associated charges charged by the investment firm or other parties where the client has been directed to such other parties, for the investment services(s) and/or ancillary services provided to the client; and

(b) all costs and associated charges associated with the manufacturing and managing of the financial instruments.

You will see that point (b) refers to all costs and charges of the financial instrument – in the case of your firm, it is our view that the financial instrument refers to the actual fund rather than some ‘typical fund’ – no investor chooses to buy a ‘typical fund’. 

Our view appears to be the same as that of ESMA in this regard, as they state in https://www.esma.europa.eu/system/files_force/library/esma35-43-349_mifid_ii_qas_on_investor_protection_topics.pdf –  page 80 that:

Question 14 [Last update: 6 June 2017]

‘In line with recital 78 of the MiFID II Delegated Regulation, investment firms should disclose the costs associated with the products and the service the client intends to subscribe to.’

You will also see that the FCA rules clearly state that:

50(8) Where calculating costs and charges on an ex-ante basis, investment firms shall use actually incurred costs as a proxy for the expected costs and charges. Where actual costs are not available, the investment firm shall make reasonable estimations of these costs. Investment firms shall review ex-ante assumptions based on the ex-post experience and shall make adjustment to these assumptions, where necessary.

It is our view that it is inconceivable that the ‘actual costs are not available’ to Charles Stanley Direct, given that the MiFID II individual fund cost disclosures are readily available from the various fund manufacturers, not to mention third party data providers e.g. FE Analytics and Morningstar.

Surely, it makes a complete mockery of the legislation in MiFID II for Charles Stanley to inform potential clients who want to purchase a specified fund that the costs of the fund, irrespective of the fund chosen, will be identical.

I would be grateful if you could update us as to when your firm intends to follow Article 24 of Mifidii in line with other firms, in order to show the actual costs of the fund selected as it is our view that your firms continued infringement of Article 24 of Mifid ii is totally unfair to your peers who have chosen to follow the law and respect hard working investors.

I am sure your firm would want to meet both the rules and the spirit of the law.

Kind regards

Alan Miller

  1. Email to Andrew Bailey, CEO of the FCA, Charles Stanley compliance and Charles Stanley CEO Paul Abberley on 4th February 2019 at 15:31

Article 24 of MiFID II

We are surprised not to have received a response to the serious points we raised in our email of 28th January 2019, regarding your firm’s alleged non-compliance with Article 24 of MiFID II.

As a result of your silence on this matter, we can only assume that your firm agrees with our view of the rules and regulations contained in the email below, but your firm has chosen not to implement the rules at the expense of your clients best interests.

I am sure you are aware that this now opens up your firm to potential legal action from all clients which Charles Stanley Direct has onboarded since January 3rd 2018.  Should the courts decide that your generic illustrations were either misleading and/or in breach of MiFID II, clients may be able to recover the excess charges which they were unaware of, and/or potentially be put back into the position they were prior to investing with your firm.

According to your recent interim results report

 (http://msgfocus.com/files/amf_charles_stanley_direct/project_25/HY19_results_presentation_-_final.pdf ) during a six month period following on from the introduction of MiFID II, your firm onboarded new clients to the value of £200m, thereby implying c. £400m of new clients on an annualised basis have been onboarded using your firm’s “generic” illustrations of fund costs. 

No doubt you have updated your PII insurers in light of any potential legal claims your firm may face, as a result of your firm’s interpretation of Article 24 of MiFID II.

I look forward to your reply.

 Kind regards

Alan Miller

[1] https://www.handbook.fca.org.uk/handbook/COBS/6/1ZA.html
[2] https://www.handbook.fca.org.uk/handbook/COBS/6/1ZA.html
[3] https://www.charles-stanley-direct.co.uk/ViewInvestment?sedol=0736639
[4] https://www.charles-stanley-direct.co.uk/Foundation_Fundlist/
[5] https://www.charles-stanley-direct.co.uk/Registration/IllustrationOfCharges
[6] https://www.charles-stanley-direct.co.uk/Foundation_Fundlist/
[7] https://www.charles-stanley-direct.co.uk/Foundation_Fundlist/
[8] https://www.charles-stanley-direct.co.uk/ViewInvestment?sedol=0871079
[9] https://www.charles-stanley-direct.co.uk/ViewInvestment?sedol=0332231
[10] https://www.charles-stanley-direct.co.uk/ViewInvestment?sedol=0682754
[11] https://www.charles-stanley-direct.co.uk/ViewInvestment?sedol=0682754
[12] https://www.charles-stanley-direct.co.uk/ViewInvestment?sedol=B3SXM83
[13] https://www.charles-stanley-direct.co.uk/ViewInvestment?sedol=0736639
[14] https://www.charles-stanley-direct.co.uk/ViewInvestment?sedol=0339072
[15] https://www.charles-stanley-direct.co.uk/ViewInvestment?sedol=0338530
[16] https://www.charles-stanley-direct.co.uk/ViewInvestment?sedol=0603959
[17] https://www.charles-stanley-direct.co.uk/ViewInvestment?sedol=0679842
[18] https://www.charles-stanley-direct.co.uk/ViewInvestment?sedol=0006655
[19] https://www.esma.europa.eu/press-news/esma-news/esma-report-finds-investment-product-performance-highly-impacted-charges

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