The Investment Association

MEMBER GUIDANCE
Disclosure of fund charges and costs
2 July 2020

Mark Sherwin
Senior Adviser, Financial Reporting

Page 1 of 9
Contents
Introduction page 2
Regulatory requirements page 3
IA recommendations page 3
Annex: illustrative examples of disclosures page 6

Introduction
This document summarises the current regulatory requirements and sets out IA’s recommended practice
for the disclosure of product charges and costs for UK authorised funds. IA's recommended practice is
intended to promote understanding of the nature of charges and costs, and transparency. Where
possible, it also aims to harmonise disclosures across different regulatory regimes.

When investors use funds to invest in financial markets they are charged for the running of those funds.
All such fund charges must be disclosed in a standard format in the key investor information document1
(KIID). IA’s recommendations are consistent with the regulatory requirements but cannot alter or add to
the disclosures that must be made in the KIID.

In addition, in common with other types of investors in financial markets, funds incur costs as a
necessary part of buying and selling underlying investments in order to achieve the investment
objective. These transaction costs affect a fund’s investors in different ways depending on whether they
are joining, leaving, or continuing with their investment in the fund.

Intermediaries are required to disclose all charges and costs in relation to their services and the funds
they distribute. They rely on the Managers of these funds to provide the necessary fund charges and
transaction costs data. Fund charges disclosed by intermediaries should be consistent with information
given in the KIID and should be supplemented with additional information about transaction costs.

We recommend that the disclosures set out in this document be made readily accessible to all investors,
for example via clearly signposted sections of members’ websites. This should ensure that investors have
the same information regardless of whether they invest directly through the Manager or indirectly via an
intermediary. Managers are encouraged to consider clarity of language2 to help investors understand
terms and concepts that may be unfamiliar, and we provide illustrative examples in the Annex.

This document builds on IA guidance first issued in September 2012 and reflects new regulations in the
form of MiFID II and the FCA’s expectations resulting from their thematic3 and supervisory4 reviews on
the disclosure of charges and costs. It also reflects the exemption of UCITS from the PRIIPs Regulation
until the end of 2021 and assumes that NURS will produce the NURS-KII document during that period
rather than opting to produce the PRIIP KID. Where a PRIIP KID is produced this guidance will not be
applicable.

1
References to the KIID in this document mean both the UCITS KIID and the NURS-KII document.
2
IA Fund Communication Guidance (February 2019), produced in partnership with the Wisdom Council, sets out a
number of overarching considerations for good fund disclosure. While this guidance did not focus specifically on
charges and costs, the key messages from the consumer testing are highly relevant and the IA is continually
reviewing how we can further support members on all aspects of disclosure.
3
FCA TR14/7 clarity of fund charges (May 2014).
4
FCA review on disclosure of costs by asset managers (February 2019).
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Current regulatory requirements
Regulations5 require the following disclosures in the KIID:

1. The maximum percentage of any entry and exit charges that might be deducted from an investor’s
capital commitment;

2. A single figure for the charges deducted from the fund in the preceding year, to be known as the
‘ongoing charges’, expressed as a percentage of the NAV. The ongoing charges figure should be
calculated in accordance with CESR’s guidelines6;

3. The amount of any performance fee charged in the last financial year expressed as a percentage of
the NAV and the basis on which the charge is calculated; and

4. A statement where the impact of portfolio transaction costs on returns is likely to be material due
to the strategy adopted.

This information must not be contradicted, nor its significance diminished, by information disclosed in
other marketing materials7.

Intermediaries are required to provide their clients with a KIID8 and to provide appropriate information
on aggregated costs and charges for their services and the underlying products they offer as well as an
itemised breakdown when requested9. In doing so they can rely on the information provided in the KIID
and supplement it with additional information on costs not included in the KIID10.

Additional requirements
In order to help intermediaries to meet their obligations under MiFID II, Managers can expect to be
asked to provide portfolio transaction cost information in addition to the entry and exit charges, ongoing
charges and performance fees information provided in the KIID. Typically, this information is provided
using the European MiFID Template (EMT).

FCA has indicated that firms should aim for effective and consistent disclosures where this can be
achieved without compromising on regulatory compliance. They have highlighted a view that additional
information about costs and charges can be given outside the KIID, such as in factsheets and on
websites, provided that it does not contradict or diminish the information given in the KIID.

IA recommendations
1. IA recommends the following practices in relation to the disclosure of fund charges to complement
the above regulatory requirements. The figures should be updated as often as necessary to ensure
they remain consistent with the figures given in the most up to date KIID:

• Explanation of the purpose of any entry charge. In respect of dual-priced funds, this should
include a statement that the entry charge is included in the offer price and forms part of the
bid/offer spread. Managers should also consider including an example to illustrate the effect of
the entry charge.

5
Chapter III, Section 3 of the UCITS KII Regulation (reproduced in COLL Appendix 1EU) and equivalent UK NURS-KII
document rules set out in COLL Appendix 2.
6
Recital 8 of the UCITS KII Regulation (reproduced in COLL Appendix 1EU) and guidelines on the methodology for
calculation of the ongoing charges figure (CESR/10-674).
7
COBS 4.13.2R implementing article 77 of the UCITS Directive.
8
COBS 14.2.1AR implementing article 80 of the UCITS Directive.
9
Article 50(2) of the MiFID Delegated Regulation (reproduced in COBS 6.1ZA.14EU).
10
Recital 78 of MiFID II and article 50(4) of the MiFID Delegated Regulation (reproduced in COBS 6.1ZA.14EU).
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 • Explanation of the purpose of any exit charge. Where appropriate, this disclosure should
illustrate how the investor’s holding period affects the charge.

• Explanation of the types of charge included in the ongoing charges figure. IA recommends
disclosing the ongoing charges figure instead of the annual management fee because it gives
investors the most complete picture of the charges deducted from the fund and is consistent
with the KIID. FCA has indicated that prominently referring to the annual management fee could
be considered misleading11.

• It should be stated whether or not the fund is subject to a performance fee, and the percentage
of the NAV that was charged in the last financial year (including where it was nil) should be given
alongside the ongoing charges figure. Further information as to the conditions that would give
rise to a performance fee should be given. The location of more detailed information on how it
is calculated should be signposted.

2. IA recommends additional disclosures about the portfolio transaction costs necessarily incurred in
buying and selling investments for the fund. Total transaction costs should be presented as a three-
year average expressed as an annual percentage of the NAV. Where three-year averages are not
available a shorter period should be used. An explanation of the key components of transaction
costs should also be given.

3. In order to aid a proper understanding of the total transaction cost figure, Managers should
consider itemising and explaining each of the following key components:

• transfer taxes (such as stamp duty);

• broker commissions and any other explicit transaction costs;

• implicit transaction costs, together with a statement explaining the calculation methodology
used. The calculation basis (slippage or spread) should be stated;

• indirect transaction costs arising in underlying funds; and

• total benefits arising from pricing mechanisms that offset the dilutive impact of transaction
costs on the fund.

4. IA recommends providing all fund charges and transaction cost information at a single location on
their websites and ensuring it does not require unreasonable levels of effort to find. Explanations
should be sufficiently clear to aid a proper understanding of the figures, including the fundamental
differences in the way fund charges and transaction costs impact investors’ returns.

5. IA recommends providing intermediaries with the same figures for fund charges as those included in
the KIID and supplement these with the total transaction cost figure as specified in point 2 above.

Pricing policies
There are three pricing methodologies used in the UK – dual pricing, swinging single pricing and single
pricing with a dilution levy. It could be argued that each method requires different disclosures in respect
of entry and exit charges. For example, a dilution levy is a form of entry or exit charge whereas in both
the swinging and dual approaches, dilution is addressed within the price. Moreover, dual pricing has no
explicit entry or exit charges because they are built into the bid-offer spread.

The recommendations are designed to enhance comparability between funds. Therefore, they should
reflect the substance rather than the form of the pricing mechanism employed. To achieve this, any

11
FCA review on disclosure of costs by asset managers (February 2019).
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dilution levy should not be disclosed as an entry or exit charge, and the entry charge should be extracted
from the bid-offer spread of a dual priced fund. The extent to which amounts may be recovered from
incoming and outgoing investors to protect ongoing investors from transaction costs, is disclosed in a
comparable way in the pricing policy notes.

Existing IA guidance on stock lending

The true operating costs should be reported in the ongoing charge figure. Stock lending income received
by the fund should not be used to reduce the ongoing charges figure. Also, where stock lending income
is shared with another party in order to subsidise the cost of the service provided by that party, that
party’s share of the stock lending income should be included in the calculation of the ongoing charge.

Calculation of the figures

Ongoing charges should be calculated in accordance with CESR’s guidelines which specify an ex-post
calculation based on audited accounts wherever possible and adapted as necessary in the case of new
funds or where there is a significant change to the costs of an existing fund.

Each component of portfolio transaction costs should be disclosed in accordance with these
recommendations by dividing the monetary amounts by the average net asset value. Where the fund
has more than one class, the total of the average net asset values of all the classes should be used,
except in the case of costs specific to a single class (such as the costs of share class hedging transactions).
Broker commissions for purchases and sales should be added together to give a single percentage.
Any other costs that are required to be excluded from the calculation of the ongoing charges figure for
the KIID (eg. interest on borrowing) should disclosed separately where they are material.

Underlying investment vehicles

Where a fund is invested in other underlying vehicles, the regulations require a “synthetic” ongoing
charges figure to be calculated. This takes account of charges incurred in those underlying vehicles and
any costs associated with buying or selling the units. The indirect transaction costs figure should be
calculated on the same basis as the synthetic component of the ongoing charges figure by taking into
account the transaction costs incurred in the underlying vehicles.

The basis for calculating the synthetic ongoing charges component for UCITS is to include the ongoing
charges incurred by underlying collective investment undertakings (CIUs). Historically, industry
interpreted this term as excluding closed-ended vehicles, such as investment trusts. However, the PRIIPs
Regulation requires the charges and costs of underlying UCITS or AIFs, PRIIPs other than UCITS or AIFs,
and investment products other than PRIIPs to be included. This expands the perimeter and presents a
challenge in determining whether some vehicles should be included.

For the purposes of calculating the synthetic components of charges and transaction costs, IA
recommends that the UCITS references to CIUs should be regarded as aligned with PRIIPs. When
determining whether a vehicle lies within the perimeter, it may be useful to consider whether the
vehicle exhibits the characteristics of a CIU12 and, in particular, whether it has a general commercial or
industrial purpose other than being an investment vehicle.

Disclosure notes
In order that investors can properly understand the disclosure, the figures given should be accompanied
by explanatory notes, which should be adapted to suit the circumstances. (It should be noted that the
prescribed KIID layout does not accommodate these disclosures). Where appropriate, Managers should
use signposting in marketing material, factsheets and so on to direct users to the location where this
disclosure is given.

12
Guidelines on key concepts of the AIFMD (ESMA/2013/611)
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Annex: Illustrative examples of disclosures
The following notes are illustrative examples of the content and are not intended to be a template for
the presentation of the disclosures.

One-off charges taken before or after you invest

Entry charge
[This is the maximum that might be taken out of your money before it is invested. For example, if you
invest £[ ], an entry charge of [ ]% means £[ ] of your money will be used to buy units in the fund. It
covers the costs of setting up your investment. [It also covers payments to your financial adviser and/or
any other firm through which you invest.][It does not include payments to your financial adviser and/or
other firm through which you invest. You pay for their services directly.] [For dual priced funds only: It is
included in the price at which you buy into the fund and accounts for [part of] the difference between
the bid and offer prices.]]

[There is no entry charge. You pay directly any charges made by your financial adviser and/or other firm
through which you invest.]

Exit charge
[This is the maximum that might be taken out of your money before the proceeds of your investment are
paid out. [The exit charge is used instead of an entry charge and is a delayed charge for setting up your
investment.]]

[There is no exit charge for this fund.]

Charges taken from the fund over a year

Ongoing charges
This is [based on actual expenses for the [period] ending [date]][an estimate of the expected future
charges. An estimate has been used because ...]. It covers all aspects of operating the fund during the
year, including fees paid for investment management, administration, and the independent oversight
functions. [It also covers payments to your financial adviser and/or any other firm through which you
invest.][It does not include payments to your financial adviser and/or any other firm through which you
invest. You pay for their services directly.] Where the fund invests in other funds, the figure includes the
impact of the charges made in those other funds.

Portfolio transaction costs

[This is the average cost incurred over [the last three financial years] as a necessary part of buying and
selling the fund’s underlying investments in order to achieve the investment objective.][A [significant]
proportion of these costs is recovered directly from investors joining and leaving the fund.][Where the
fund invests in other funds, the average transaction costs of those other funds are included as indirect
transaction costs.

In the case of shares, broker commissions [and [transfer taxes][stamp duty]] are paid by the fund on
each transaction. In addition, there is a dealing spread between the buying and selling prices of the
underlying investments. Unlike shares, other types of investments (such as bonds, money market
instruments, derivatives) have no separately identifiable transaction costs; these costs form part of the
dealing spread. Dealing spreads vary considerably depending on the transaction value and market
sentiment.

[We measure implicit transaction costs based on the spread at the time of the transaction.][ We
measure implicit transaction costs using the slippage methodology which combines spread and market
impact. Market impact is an estimate of the impact on the market price of a large trade being placed.
The estimate also includes market movements unrelated to the trade and assumes these are random
and will tend to average out to zero over many trades. Where these movements do not average out to
zero, they will cause implicit transaction costs to be over- or under-estimated.
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Comparing portfolio transaction costs for a range of funds may give a false impression of the relative
costs of investing in them for the following reasons:

• Transaction costs do not necessarily reduce returns. The net impact of dealing is the combination of
the effectiveness of the manager’s investment decisions in improving returns and the associated
costs of investment.

• Historic transaction costs are not an effective indicator of the future impact on performance.

• Transaction costs for buying and selling investments due to other investors joining or leaving the
fund may be recovered from those investors. For further information see… Refer to pricing policy
note.

• Transaction costs vary from country to country.

• Transaction costs vary depending on the types of investment in which a fund invests.

• As the manager’s investment decisions are not predictable, transaction costs are also not
predictable.

Charges taken from the fund under certain specific conditions

Performance fee
[No performance fee is charged.][This is the actual performance fee for the financial year ending [date].
A performance fee of [ ]% of any outperformance becomes payable only when the fund outperforms its
performance fee benchmark, the [insert name of benchmark]. For further information on how the
performance fee is calculated see…]

Pricing policy note

We operate a dual pricing methodology for this fund whereby net contributions take place at the issue
price and net withdrawals take place at the cancellation price. The issue price is currently [ ]% higher
than the cancellation price. The issue price is calculated by reference to the buying prices of the
underlying investments, plus an allowance for broker commissions [and [transfer taxes][stamp duty]].
The cancellation price is calculated by reference to the selling prices of the underlying investments, less
an allowance for broker commissions [and transfer taxes]. This means that, when investments are
bought or sold due to other investors joining or leaving the fund, your investment is fully protected from
the costs of these transactions.

We operate a single pricing methodology for this fund and reserve the right to adjust the fund's price to
protect your investment from the costs of buying or selling investments that result from other investors
joining or leaving the fund. The amount of any such adjustment is calculated by reference to the
estimated costs of dealing in the underlying investments, including any dealing spreads, broker
commissions [and [transfer taxes][stamp duty]]. Typical adjustments to this fund’s price are to increase it
by [ ]% for net inflows or decrease it by [ ]% for net outflows. [We always adjust the price to the
maximum extent possible whenever net contributions or withdrawals take place, which means that your
investment is fully protected from the costs of the resultant transactions][We usually adjust the price to
the maximum extent possible whenever net contributions or withdrawals take place, which means that
your investment is usually protected from the costs of the resultant transactions][We usually adjust the
price to the maximum extent possible when the value of net contributions or withdrawals is significant,
which helps to protect your investment from the costs of the resultant transactions][We usually adjust
the price whenever net contributions or withdrawals take place, which helps to protect your investment
from the costs of the resultant transactions][We usually adjust the price when the value of net

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contributions or withdrawals is significant, which helps to protect your investment from the costs of the
resultant transactions]. Over the last year we adjusted the price on [ ] occasions.

We operate a single pricing methodology for this fund and reserve the right to charge a dilution levy to
protect your investment from the costs of buying or selling investments that result from large investors
joining or leaving the fund. The amount of any such dilution levy is calculated by reference to the
estimated costs of dealing in the underlying investments, including any dealing spreads, broker
commissions [and [transfer taxes][stamp duty]]. [Investors joining the fund may be charged a levy of up
to [ ]% of their contribution.][Investors leaving the fund may be charged a levy of up to [ ]% of their
proceeds.] When we impose a dilution levy on a single investor or group of investors, this is paid into the
fund and helps to protect your investment from the costs of the resultant transactions.

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The Investment Association
Camomile Court, 23 Camomile Street, London, EC3A 7LL
www.theia.org
mark.sherwin@theia.org

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