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FCA cracks down on fund management fees

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28/06/2017
The Financial Conduct Authority has sought to crack down on opaque charging structures and weak governance within asset management companies, after almost two years investigating the industry.

While the industry avoided a full referral to the Competition and Markets Authority, the FCA pressed ahead with some reform ideas in spite of extensive lobbying. In particular, the regulator said investment managers must give investors an all-in fee and put two independent directors on fund boards.

Fees have been particularly controversial. Investment managers charge an annual management fee, but this may not include areas such as dealing costs. The costs included varies from one fund management group to another. The FCA said that fees must be all-inclusive.

The FCA also sought to tackle ‘box profits’. These related to the spread between the price at which a fund is bought, and the price at which it can be sold. The spread is supposed to reflect the cost of buying and selling securities. However, sometimes orders can be matched within the fund management group, avoiding the spread transaction costs. Some fund managers still pocket the spread, rather than returning it to investors.

The FCA said: “Where the money is retained by the asset manager rather than paying it into the fund for the benefit of the fund’s investors the revenue can be significant, amounting for some firms to as much as between £5.6m and £15.8m, equivalent to as much as 10 per cent of group revenues or 0.05 per cent of the affected assets under management.”

Last year, Jupiter announced that it would be moving to single pricing and giving up £13m in ‘box profits’. However, other fund companies still employ the practice.

Patrick Connolly, certified financial planner, Chase de Vere, said: “For too long far too many consumers have faced excessive charges, mediocre performance and a distinct lack of transparency.” He added that the situation is often worse for those in ‘closet tracker’ funds, which charge high fees but move little from the benchmark index, or in fund of funds, which have two layers of charges or for companies selling their own investment funds, where there is little price competition. He welcomed the FCA moves, but said that the situation needed actions rather than words.

Daniel Godfrey, founder of The People’s Trust, said: “Investment Managers will be relieved today. The FCA has delivered a report which spares them the harshest potential remedies flagged in their interim report last November.

“Asset managers’ biggest problem isn’t the FCA. It’s the dysfunctional nature of the investment chain that prevents them fulfilling their potential to optimise returns for investors and drive economic growth.”

“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.

Martin Gilbert, chief executive of Aberdeen Asset Management, broadly welcomed the new regulations. He said: “I have stated several times that I am in favour of all-in fees including all costs as the industry has an obligation to deliver what the customer wants. Incorporating dealing charges for equity funds should be straightforward particularly for those managers, like ourselves, who have low portfolio turnover…

“Aberdeen would advocate going further than the FCA currently suggests by introducing two independent directors on to the Boards of UK open-ended fund ranges. This introduces a separate and independent level of oversight from that undertaken by the manager, with an exclusive focus on the interests of fund shareholders as distinct from firms own commercial interests – a point which FCA acknowledges in its consultation paper.”

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