In its review of retail fund charges published  on 17 November, the Panel – an independent body which advises the FCA on policy – said the retail industry enjoys “largely unchallenged, the potential to exploit consumer behaviour, product structure complexity and the lack of cost transparency”.

Among its proposed ideas for reform is the replacement of all fund costs with a single investment management charge, representing the only cost charged to the end investor.

“All other intermediation costs, charges and expenses incurred by the investment manager, including transaction costs, would be borne directly by the firm and reflected in the single charge,” the report outlined.

The study follows a separate review undertaken by the FCA in May, which saw the regulator call on firms to scrap the annual management charge (AMC) in favour of the ongoing charge figure (OCF) after finding inconsistencies on cost disclosure.

The Panel’s review goes further still, describing even the OCF as “a poor guide to the full costs”.

“It is a very radical change. We are urging the FCA to consider the single charge very urgently,” Panel member Debbie Harrison told Investment Week.

The report acknowledged a softer reform option would allow groups to quote the costs of buying and selling separately.

But it added the “controversial subject” of whether future trading costs could be included in a single charge requires further study by the FCA, and is one of few concessions to fund managers offered by the study.

While the FCA is under no obligation to follow the recommendations, the regulator is likely to be struck by the report’s uncompromising tone.

On the single charge, the Panel said it “fully understands that such a radical proposal would require structural changes in the industry and would likely be challenged by investment firms. However, we believe a single charge merits consideration because other options are not working.”

One likely point of dispute among fund managers is how to implement this charge in a way that would enable them “to remain profitable yet competitive”.

The updated Markets in Financial Instruments Directive (MiFID II) is proposing a full disclosure of costs, including transaction costs, upon implementation in January 2017.

The Panel suggested one option for the FCA is to bring forward the implementation of these rules, as a complement to more structural reforms.

It added the IMA’s own initiative, the ‘pounds and pence’ plans requiring disclosure of operating costs, dealing commissions, and stamp duty, “stops well short of the disclosures envisaged by MiFID II.

“The FCA could send a strong message to the industry that it is minded to bring these rules in earlier to get the industry moving,” Harrison said.

“[But] our proposed single charge is very different from the IMA and MiFID II proposals. The single charge would be simpler, with no ifs, or buts, for consumers.”
Fund managers, the IMA, the Association of British Insurers, the government, and the FCA will meet to discuss the Panel’s proposals in January.

Other structural changes proposed by the Panel:

▶ independent governance committees (IGCs) for retail funds, with powers including the ability to replace investment managers 
▶ fiduciary standards for fund groups to act in the best interests of their customers, in keeping with those outlined in the 2012 Kay Review
▶ a requirement for the performance of consumers’ original investments to be tracked cumulatively through fund closures and mergers, alongside a full history of costs
▶ a requirement for managers to disclose their funds’ active share. Managers would disclose what proportion of trading was on index constituents, and whether they were long or short of relevant securities.