ClearGlass

Frequently Asked Questions

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No, though the IDWG recommends using the templates, they are not mandatory.

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The recommendations of the IDWG are clear that the templates are not to be made mandatory; instead, it offers alternative approaches for encouraging the adoption of the templates.

  • The IDWG recommends that institutional investors collect data from providers using the Account Templates, and summarise this data in User Templates for ease of understanding and to allow comparability.
  • According to the IDWG, no FCA rule should be written at this time that either mandates the submission of data by providers using the templates or requires the collection of data from providers by institutional investors in the prescribed format.
  • However, the FCA should consider writing rules if institutional investors or their providers fail to adopt the IDWG Recommendations; or institutional investors report difficulties in obtaining the cost data at the level of detail proposed in the Recommendations; or providers are found to have misrepresented data to clients.
  • The adoption of the Recommendations should be voluntary, but it must be encouraged through other means such as pressure from institutional investors applied to providers. Typically, non-compliance by providers should result in de-selection from RFPs (requests for proposal) and non-renewal of contracts. This mechanism is already operational under the LGPS (Local Government Pension Scheme) Code of Transparency.
  • The IDWG suggests that investment consultants and other similar market participants (such as platforms) adopt a similar gated selection approach, where they select providers based on their compliance with the Recommendations.
  • Industry representative organisations and trade bodies are recommended to integrate the templates into their disclosure codes and to encourage their members to adopt the Recommendations.

Because it is the right thing to do. Asset managers are not required by law or industry regulations to use the templates, but it is considered a best practice. At a recent corporate adviser event attended by a mix of consultants and trustees, 95% of the audience responded “YES” to the question: “Do you think a trustee would be in breach of their fiduciary responsibility if they failed to collected data using the IDWG Templates?”

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We use the IDWG Templates for two reasons:

  • They were developed by ClearGlass Chairman Chris Sier when he chaired the IDWG for the FCA from September 2017 to July 2018. He is an expert in these frameworks and is well-positioned to support their use and implementation.
  • These are the most intensive and thorough frameworks that have ever been developed for cost and fee collection. They are designed to deliver unparalleled insight into the costs associated with the asset management supply chain, to the benefit of both institutional investors and asset managers.

At this time, we primarily use the Collection Templates developed by the IDWG and released to market in October 2018.

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  • For the first six months, we will also be using the LGPS costs collection framework (the IA Disclosure Framework) as the LGPS transitions slowly to the IDWG framework. This will only be for LGPS clients.

Yes, and they always will be. If the Recommendations evolve over time due to the changes introduced by the new IDWG (to be convened in autumn 2018), we will adapt our templates accordingly.

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MiFID II (Markets in Financial Instruments Derivatives 2) requires all costs and charges, both direct and indirect, to be aggregated and provided to each client at least annually, with an itemised breakdown being provided on request.

The aggregated statement must include all costs and associated charges, including the following:

  • Costs charged by the firm
  • Costs charged by other parties where the client has been directed by the firm to such other parties
  • Costs associated with any products provided by the firm (indirect costs)

An illustration showing the cumulative effect of the costs on the returns must also be provided, along with a description.

Product regulations for funds (UCITS) and packaged retail investment and insurance-based products (PRIIPs) must provide a breakdown of product costs in a manner consistent with MiFID II.

The costs correspond to the IDWG account-level template sections as follows (please refer to the Account Template):

 All the details need to be provided, except for Section 4 (ongoing charges), for which only the sub-totals (4.1, 4.2, 4.3 and 4.4) are compulsory. However, as transparency is often seen as a plus point, providers who submit more detailed information may be considered more favourably.

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Existing regulatory standards require only summary information by default­­—forcing providers to adopt a system with a higher degree of granularity adds complexity and may cause potential delays in its adoption. The IDWG Templates aim at an intermediate level of granularity.

Within the Account Template, data is to be submitted at the following level of detail:

  1. In Section 3, transaction costs must be split across asset classes, where appropriate.
  2. In Section 4, only the top level of detail is the minimum expected level of disclosure (Sections 4.1, 4.2, 4.3 and 4.4).
  3. More granular fields below these sub-totals are optional at this time, but have been left within the template for the following reasons:
    • To guide providers on what items should be added to generate the sub-totals.
    • To give a clear indication to institutional investors and their advisers on the more granular items that might be available on request.
    • To allow those providers who are both willing and able to provide granular data the opportunity to differentiate themselves.
    • To demonstrate the expected direction of development of the Recommendations (granularity) and to allow providers to prepare their systems accordingly.
  4. If a provider opts to only supply information at the top level of detail (4.1, 4.2, 4.3, 4.4), either they should complete the more granular fields with a “0” or it should be left blank. If a “0” is shown, it means that a cost would normally have been charged and presented, but it was nil on this occasion. If the field is left blank, then this should be accompanied by one of the following statements.
    • “N/A” that is, it is someone else’s cost—for example, custody cost
    • “We cannot submit data to this level at this time, but it may be found as part of subtotal X.x”
    • “We cannot calculate this figure at all”
  5. Though it is not necessary to do so, it would probably be useful for the provider to give an itemised list of additional services that fall within the management fee if an asset manager has opted for an “all-in” or “near-all-in” fee model.

However, some argue that such reduced granularity may lead to reduced honesty and may hinder optimal negotiation on all services.

No. Such costs are effectively charged to institutional clients through management fees.

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Such costs are effectively charged to institutional clients through management fees. However, expressing such costs may allow clients insights into a provider’s business and their service provision model and quality. This is not considered fair by the IDWG (and also ClearGlass) for two reasons:

  • Capturing such costs in both the management fee and also as items expressed individually elsewhere might lead to double counting.
  • Expressing such costs that form part of an asset manager’s business model might reveal possibly confidential operating information to wider, possibly public, scrutiny.

If the investing fund and the underlying funds are all operated by the same asset manager, then all data as required by the Account Template should be collected and submitted for all sub-funds.
If the investing fund and the underlying funds are operated by different asset managers, then the summary data is to be presented in the “pooled fund” column within the Account Template. The costs and charges incurred by the underlying funds will also be reported under the various categories in the Account Template.

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Pooled funds and fund of funds are complicated in both the mainstream/listed environment as well as in private equity. In a perfect world, it is desirable to have the same “Account Template” details for all funds within the pooled fund or fund of fund structure.

 

In practical terms, at the current time, this is extremely difficult and, in some cases, potentially impossible for three reasons:

  • The number of funds and underlying funds in the “waterfall” structure of ownership and sub-ownership can be considerable, and the sheer volume of data that would have to be collected and aggregated is significant, especially if that account-level collection and aggregation process is wholly or partially manual.
  • The underlying funds may be held by managers other than the investing manager, and the investing manager may have limited control over these funds. In such cases, and where funds have different accounting cycles, this may necessitate a degree of approximation in calculating costs.
  • The situation grows more complex if the underlying funds are managed by an offshore entity not subject to the purview of the UK asset manager and the regulatory and policy environment in which it operates.

The pragmatic decision is to waive, for the time being, the need to submit a full Account Template that looks through all the underlying funds within a pooled fund and/or fund of funds structure. Instead, the Account Template requires summary data to be presented in the “pooled fund” column. The costs and charges incurred by the underlying funds will be reported under the various categories in the Account Template.

However, if the investing fund and the underlying funds are all operated by the same asset manager, all data for each fund as required by the Account Template should be collected and submitted.

Once a solution for data collection is available with wide adoption, there will be a contracting pool of underlying funds for which automated collection is not available. The process described above is to be reviewed at the first reset point of the new IDWG (Autumn 2019). The proposed review criteria is the degree of automation of the collection mechanism.