The cost section is where the Product Summary differs most from the PRIIPs KID.
The familiar Reduction in Yield (RIY) calculations have gone, implicit transaction costs are no longer disclosed, and performance fees are presented separately using worked examples instead of being blended into a single percentage.
The result is a much simpler disclosure for investors. Rather than showing projected costs over different holding periods using assumed rates of return, the Product Summary focuses on what a product has cost over the previous 12 months.
For firms, the challenge is not presenting the new cost disclosure — it is producing it. The Product Summary introduces new methodologies for calculating and presenting costs, while many firms will also need to continue producing EU PRIIPs disclosures using a different set of rules.
The Product Summary breaks costs into five standardised categories. The ongoing costs figure (OCF) is the headline measure, with the remaining costs disclosed separately.
These are the costs paid when an investor buys the product, such as entry charges, structuring costs, capital guarantee costs and applicable taxes. They are shown as both a percentage and a monetary amount.
These are the costs incurred when an investor sells or redeems the product. They are also shown as both a percentage and a monetary amount.
The ongoing costs figure brings together the annual costs of operating the product into a single figure, shown in both percentage and monetary terms.
Where a fund invests in other funds, the costs of those underlying investments are generally reflected in the OCF so that investors see a single headline figure. The main exception is underlying closed-ended investment funds, whose ongoing costs are disclosed separately.
Only explicit transaction costs are included. These cover identifiable costs such as broker commissions, exchange fees, taxes and other directly attributable dealing expenses.
The figures are calculated using the previous 36 months of trading activity (or a reasonable estimate where a shorter history is available) and disclosed separately from the OCF.
Performance fees are no longer included within the headline cost figure.
Instead, firms must explain how the fee works in plain English and provide at least one worked example showing how it would apply to a hypothetical £10,000 investment.
All costs are shown using a representative £10,000 investment over a single 12-month period.
Gone are the multiple holding periods, assumed growth rates and Reduction in Yield calculations that characterised the PRIIPs KID. Instead, investors see what the product has actually cost over the previous year, expressed to the nearest pound sterling as well as percentages.
Where a product has less than 12 months of history, firms may use reasonable estimates until actual figures become available. Likewise, if future costs are expected to differ materially from those incurred during the previous year, firms may adjust the disclosure to ensure it remains representative.
The FCA’s objective is straightforward: make cost disclosures easier for retail investors to understand.
The PRIIPs KID attempted to show the long-term impact of charges through Reduction in Yield calculations and multiple holding-period projections. While technically sophisticated, these disclosures often proved difficult for investors to interpret.
The Product Summary instead answers much simpler questions:
The FCA has also removed implicit transaction costs from the disclosure. The arrival price methodology generated considerable debate across the industry because the figures could vary significantly and, in some cases, even produce negative transaction costs. Under the Product Summary, only explicit transaction costs are disclosed.
Performance fees have also become easier to understand. Rather than incorporating them into a blended percentage, firms explain how the fee works and illustrate it using a worked example based on a hypothetical investment.
Although the disclosure itself is simpler, the operational requirements remain significant.
For firms distributing products in both the UK and the EU, the same fund may now have different cost disclosures depending on the regulatory regime.
UK Product Summaries, EU PRIIPs KIDs, EMT templates, MiFID disclosures and factsheets may all contain different cost figures because they are based on different methodologies. Firms will need robust governance to ensure those differences are understood and can be explained to distributors and investors.
For fund-of-funds, firms will continue to need reliable underlying cost data to calculate synthetic ongoing costs. Although the methodology has been simplified, the quality of the underlying data remains critical.
The new worked examples introduce a different type of governance challenge.
Firms will need a consistent approach to selecting assumptions and presenting examples so that disclosures remain fair, balanced and consistent across products.
As firms prepare for the transition, three areas deserve particular attention:
Although the Product Summary is simpler for investors, firms will still need robust data, methodologies and governance behind the scenes. For those operating across both the UK and EU, supporting two different cost disclosure regimes will remain one of the biggest implementation challenges of the transition.
If you would like to discuss how the UK CCI regime affects your cost disclosures, or would welcome support producing and governing your Product Summaries, please contact our Reporting team.
