UPDATE 1-UK markets watchdog says funds failing to come clean on charges

Tue May 13, 2014 7:14am EDT

* Watchdog review proposes single "on-going" charge figure

* Watchdog to check changes being made to fee details (Adds more detail, funds sector reaction)

By Huw Jones

LONDON, May 13 (Reuters) - Mutual funds should use a common method when explaining their fee structures to make them easier to understand for investors, Britain's financial watchdog said on Tuesday.

The government is trying to encourage people to save more for their old age, but critics say fund fees are too confusing, hinder competition, and eat up lots of the money built up.

The Financial Conduct Authority (FCA) said a review has found that some firms did not provide investors with a clear, combined figure for charges in their marketing material or on websites.

A minority of firms failed to give a clear rationale for their charging structures, particularly performance fees, indicating insufficient consideration of investors when designing charging structures, the review of 11 firms found.

"We believe that it is important for investors to clearly understand and compare charges across the market as this, together with fund performance and risk profile, are the key areas that they should look at," Clive Adamson, FCA director of supervision, said in a statement.

"We are therefore today encouraging all firms to respond to our findings and adopt the clarity and consistency we believe to be important."

Fund managers should consider the findings and review their arrangements accordingly, the FCA said. It will check on whether the changes are being made.

The review found that many fund managers were using the annual management charge figure as the headline fee in their marketing material. But this figure leaves out other substantial costs.

The watchdog said it wants funds to use a so-called on-going charges figure, seen as a better guide to fees.

The watchdog will work with the Investment Management Association (IMA), a funds industry body, which has issued voluntary guidance on the disclosure of charges and costs.

The IMA said all fund managers should use only the on-going charges figure.

"This is an important element of the IMA's programme to bring simplicity, transparency and comparability to consumers across all investment types," IMA Chief Executive Daniel Godfrey said in a statement.

The IMA, whose members manage 4.5 trillion pounds in assets, will also produce a "comprehensive pounds and pence" measure for historic costs, and a common basis for the calculation of portfolio turnover rates.

This refers to how much of the fund's holdings of shares and other securities were changed in the past year. A higher rate would mean more trading costs are passed on to investors.

The True and Fair Campaign, which lobbies for clearer charging by fund managers, said in a report in March entitled "Legalised Looting", that retail investors in Britain pay 58 percent more for active equity funds than their U.S. counterparts.

Last week the FCA tightened rules on how funds can use customer money to pay brokers for research on stock picks. (Reporting by Huw Jones; Editing by Hugh Lawson)

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