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Regulator proposes ‘all-in’ fee for investor funds over value for money concerns

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Written by: Paloma Kubiak
18/11/2016
The asset management industry has come under scrutiny amid concerns by the Financial Conduct Authority (FCA) over competition and value for money for investors, leading to it proposing a number of "significant remedies".

Three quarters of all UK households with an occupational or private pension use the services of asset managers.

However the regulator, the FCA, launched a study into the sector in November 2015 amid competition concerns.

Today it proposed a “significant package of remedies” in a bid to protect those least able to engage actively with their asset manager.

The asset management proposals

It is considering introducing an all-in fee so that investors in funds can easily see what’s being taken from the fund, plus a strengthened duty on asset managers to act in the best interest of investors, such as reforms to hold them to account of how they deliver value for money.

The FCA is also looking for asset managers to be clearer about fund charges and their impact at the point of sale and in ongoing communication to retail investors, as well as making it easier for investors to move into better value share classes.

Furthermore, it will also explore the requirement of asset managers to be clear about the objectives of the fund, including clarifying the use of benchmarks and providing tools for users to identify persistent underperformance.

The move comes after the FCA study found the following:

  • Limited price competition for actively managed funds, meaning investors often pay high charges. On average, these costs are not justified by higher returns.
  • There’s stronger competition on price for passively managed funds, though the FCA did find some examples of poor value for money in this segment.
  • Fund objectives aren’t always clear, and performance is not always reported against an appropriate benchmark.
  • Despite a large number of firms operating in the market the asset management sector as a whole has enjoyed sustained, high profits over a number of years with significant price clustering
  • Investment consultants undertake valuable due diligence for pension funds but are not effective at identifying outperforming fund managers. There are also conflicts of interest in the investment consulting business model which require further scrutiny.

‘Duty to act in customers’ best interests’

Andrew Bailey, chief executive at the FCA, said in today’s world of persistently low interest rates, it is vital everything possible is done to enable people to accumulate and earn a return on their savings which can meet their lifetime needs.

“We want to see greater transparency so that investors can be clear about what they are paying and the impact charges have on their returns.  We want asset managers to ensure investors receive value for money through pursuing energetically their duty to act in their customers’ best interests.  The remedies that we are proposing today aim to achieve these outcomes.”

Chris Cummings, chief executive officer at the Investment Association, said it supports the FCA’s objectives to ensure competition in the industry works to the benefit of its customers.

He said: “The FCA’s analysis and recommendations come at a time when the industry is already taking significant steps to improve investor confidence. Amongst new measures the IA has put forward is a detailed plan for a new model of charge and cost disclosure, which is acknowledged in the Interim Report and has been welcomed by all parties. We will now look in detail at the FCA’s proposals in other areas, such as independent oversight of investment funds in order to ensure that the FCA’s final recommendations mean customers will be ultimately better served.”

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