July 26, 2018 / 12:01 PM / 8 months ago

UK financial watchdog chides firms for getting maths wrong in EU rules

LONDON, July 26 (Reuters) - Financial firms are not applying new European Union transparency rules properly and could face sanctions, Britain’s markets watchdog said on Thursday, dealing a blow to industry arguments that the rules were to blame for misleading investors.

Industry hopes for changes to the rules were raised in April when FCA Chief Executive Andrew Bailey said he wanted to review the EU’s Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation. The rules came into force in January.

On Thursday the FCA published a 22-page “call for input”, asking firms to send in evidence about their experiences with PRIIPs, setting a September deadline for submissions, with a feedback statement due in early 2019.

But there is no indication that the FCA was ready to diverge from the EU rules, which would pit Britain against Brussels at an awkward time ahead of Brexit next March.

The rules require financial firms to set out in a simple, short document the risks and estimated costs from a product.

Some firms have said the rules force them to show negative transaction costs for buying, selling or switching underlying investments in a product, while other firms show positive costs, making product comparisons confusing.

The FCA said it analysed these concerns and found that most investment companies are reporting small positive transaction costs.

A few firms report material negative transaction costs. “Some of these appear to be investing in illiquid assets. As noted... negative transaction costs should not be possible for products investing in illiquid assets,” the FCA said.

It also found “significant calculation errors” which, when corrected, resulted in positive costs.

Some firms were also failing to disclose costs to investors, as required and the FCA said it will consider running workshops to help firms comply with calculating transaction costs.

“Where we see non-compliance with the requirements we will consider appropriate supervisory and enforcement action,” the watchdog added.

Reporting by Huw Jones Editing by Keith Weir

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