The Financial Conduct Authority (FCA) has published the final findings of its asset management market study - and has suggested a “comprehensive package of reforms” designed to increase transparency, improve competition and lower charges.
The FCA said reform of the £7 trillion asset management industry was necessary to help the millions of retail investors who rely on this sector for their financial well-being.
As well as calling for clearer information on fund costs, and more competition between providers, the FCA said it had concerns about investment consultants, and will also launch a review into the way investment platforms operate.
Andrew Bailey, the chief executive of the FCA was highly critical of the way the investment industry worked at present. “Despite a large number of firms operating in the market, the FCA’s analysis found evidence of sustained, high profits over a number of years. The FCA also found that investors are not always clear what the objectives of funds are, and fund performance is not always reported against an appropriate benchmark.”
He added: “In the current low-interest environment it is vital we help people earn a return on their savings. We need a competitve sector [to do this].”
Crackdown on Excessive Fund Charges
The report set out a number of key “remedies” designed to tackle the problems identified.
One of the most radical is the call for fund managers to disclose a single all-in-fee to investors. This would include charges – such as trading fees – that are often not included with the standard ongoing charge fee (OCF) that is usually presented to investors.
It is hoped this will boost competition and so create a downward pressure on fees.
In its interim report – published in November – the FCA was particularly critical of the high charges on active funds. It said its conclusions had not “materially changed” in this final report. The FCA pointed out that despite the increase in sales of lower cost passive funds in recent years, the charges on active funds had remained “broadly stable” over the past decade and often “clustered” around certain points, indicating a lack of effective price competition.
The FCA found that the firms it sampled had an average profits margin of 36%.
Other proposals including strengthening the duty of fund managers to act in the best interests of investors. To achieve this the FCA will require fund managers to appoint a minimum of two independent directors to their boards.
Clearer Details on Fund Objectives
The FCA also wants to introduce technical changes to improve the fairness around the management of share classes, and the way in which fund managers profits from investors buying and selling their funds.
Other “remedies” proposed include a recommendation that the Department of Work & Pensions remove barriers to pension scheme consolidation. The FCA will also chair a working group to focus on how to make fund objectives more useful, and will consult on how benchmarks are used. The FCA will also launch a market study which will look in further detail at the investment platform market.
‘Costs Matter. Every Pound Paid Reduces Returns’
The report was welcomed by many in the fund management industry. Sean Hagerty, managing director of Vanguard Europe said: “This is an important moment for UK investors. We support the FCA’s efforts to lower the cost and complexity of investing. Consumers always benefit from lower prices, better quality products and clearer information.
“Costs matter. Every pound that investors pay in charges is a pound out of their potential returns, reducing their chances of being able to afford a comfortable retirement or save for a mortgage deposit.”
Martin Gilbert, chief executive of Aberdeen Asset Management added that he welcomed this report. “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. 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.”
He said he was in favour of a single, inclusive all-in-one fee. It should be “straightforward” for most equity fund managers to adopt such a fee, he said. “It is more challenging for bond funds, but I’m encouraged the industry is already looking at ways of doing this.”
Does FCA Report Go Far Enough?
There was a more muted response though from the Investment Association, the industry trade body. Chris Cummings, chief executive said caution was need on how these recommendations were implemented.
"Asset managers compete every day to attract investors and are focused on delivering the best outcomes for them. Our priority now is to have a meaningful dialogue with the regulator about the implementation of the recommendations, to ensure savers are getting the best possible deal. A pragmatic timetable is key to achieving this, given the major regulatory changes already in the pipeline and the preparations for Brexit.”
However, some commentators said these recommendations did not go far enough. Gina Miller of SCM Direct said: “Whilst the FCA is finally pursuing a pro-consumer agenda, it is disappointing that they still appear to be dragging their feet on some key aspects. The UK investment industry has been ripping off the consumer for decades and it is time for the UK regulator to act now rather than have further consultation with the industry and its shoddy trade bodies.
“Consistent and standardised fee disclosure in a single number is vital for ordinary investors to make better choices. This should be mandated now by the FCA to retail and institutional investors alike.” Without this she said it is “inevitable” that investment groups will devise different formats for presenting this fee, making easy comparison impossible.
Patrick Connolly, a certified financial planner with Chase de Vere said: “For too long many consumers have faced excessive charges, mediocre performance and a distinct lack of transparency. He said this problem was particularly bad for those in ‘closet trackers’ and fund-of-funds. Connolly added: “We have seen genuine price competition in passive funds, but even here overall charges may be much higher than consumers think.
“While a passive fund could have an annual charge of 0.1%, it might only be possible to buy these on a platform which could charge up to 0.45% each year and so the total cost to the investor rises to 0.55%. In this situation, the platform represents 82% of the overall charge of investing in the fund.”
