City watchdog unveils ‘package of remedies’ to address fund manager failings

The City watchdog has moved to address various fund management failings that are delivering poor outcomes for consumers.

Various flaws were highlighted by the Financial Conduct Authority (FCA) in the final report of its Asset Management Study published today, noting a lack of both competition and transparency in the fund management industry.

In particular the FCA is critical of fund charges, reaffirming its support for an ‘all-in-one’ fund fee to be introduced, which would see the trading costs incurred by fund managers when they buy or sell securities included inside the ongoing charge figure (OCF). Under this scenario OCFs could rise by 30 per cent.

In addition, the FCA also raises concerns that fund managers need to improve the way fund charges and their impact on fund performance are communicated to investors.

The FCA also takes aim at ‘weak price competition’. This is evidenced by the fact that when it comes to fund charges asset management firms tend to charge very similarly, with the vast majority of active fund displaying an OCF of between 0.75 per cent and 0.1 per cent. 

While, in other industries competition helps to reduce costs for consumers, this is not commonplace when it comes to fund management; as a result the FCA notes the asset management industry enjoys ‘high levels of profitability’.

It adds that average profit margins stood at 36 per cent for the firms it sampled – but despite its criticisms it stops short of making any firm recommendations to address the competition issues raised.

It does, however, make the point that retail investors fail to benefit from economies of scale, in the case of both funds and online brokers. On the latter the FCA says it will conduct a separate study into how ‘direct to consumer’ and intermediated investment platforms ‘offer value for money’. This was previously flagged up in April.  

Elsewhere, the regulator calls on fund managers to ‘strengthen their duty’ to ‘act in the best interests of investors’. In addition, it hints at future plans that may force fund managers into making their fund objectives and aims clearer and more useful for consumers.

The regulator separately says it will consult on requiring fund managers to stop pocketing so-called ‘box-profits’, which are commonplace in the case of unit trusts. In simple terms ‘box-profits’ are the difference between the offer price (the unit price paid by the investor) and bid price (the price at which the provider buys units back from the investor).

Rather than returning the difference between these two prices to investors by putting the excess cash back into the fund to be invested, fund management firms can currently keep the profit for themselves.

Also in the regulator’s sights is an escape route for investors stuck in old commission-paying share classes (notably those invested directly with the manager rather than through a platform or broker), an issue that Money Observer has highlighted and campaigned for change on.

The FCA says it wants to make it easier for fund managers to switch investors to cheaper ‘clean’ share classes, and is seeking views on whether it should consider introducing a phasing-out of old commission charges.

As things stand, those who invested directly with the fund group via an adviser still have commission (typically 0.5 per cent) paid to the adviser, even if they are no longer receiving any service. Directly invested self-directed investors, meanwhile, simply pay fees to the fund manager for non-existent advice.

In contrast investors who use an online broker, either directly or through a financial adviser, no longer pay commission. They are invested in commission-free funds via clean share classes. They pay a separate fee to their broker: either a fixed fee or one based on a percentage of their investment.

INDUSTRY REACTION

The proposals were less radical than the fund management industry feared, and as a result were widely welcomed.

Martin Gilbert, chief executive of Aberdeen Asset Management, said the proposed remedies ‘will not only benefit customers but ultimately strengthen confidence and competitiveness in the UK asset management industry’.

'Its recommendations to improve investor protections through better governance and to drive competition through greater transparency of fees and fund objectives are constructive and sensible,’ he adds.

‘With investment risk increasingly being passed down from governments and employers to individuals, it is crucial that asset management evolves to meet this new world.'

However, other commentators, including Daniel Godfrey, the former chief executive of the Investment Association, felt the FCA’s reforms did not go far enough. He says: ‘The purpose of investment is sustainable wealth creation which delivers absolute returns. Yet the critical success factor in the industry is short-term relative returns. The effect of this disconnect damages returns in the long term by depriving the non-financial economy of long-term investment and stewardship for positive impact.’

He adds: ‘Even the biggest asset managers do not have agency to reform the chain without a mandate from clients. A way needs to be found to break the links of this dysfunctional chain so that investment can focus on sustainable wealth creation, not short-term relative performance. Today’s report makes it clear that only external disruption can deliver the necessary change, not the FCA.’ 

Justin Modray, of Candid Financial Advice, calls the FCA’s remedies a ‘damp squib’, which are ‘unlikely to make a tangible difference to most investors’.

‘The key proposal appears to be a desire to move towards an ‘all in one’ annual charge, which would include investment dealing fees. Of all the various issues considered, dealing fees are perhaps one of the least offensive since they are reflected in performance, so while this move is probably positive overall it won’t fix other more troublesome issues affecting investors,’ he says.

‘We remain concerned that the FCA’s proposals will not fix three key issues hurting fund investors: price collusion, failing to pass on economies of scale and profiting from inflated admin expense claims.’


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