The Financial Conduct Authority has been urged to radically reform how the asset management industry operates by an influential panel set up to advise the watchdog on its policies.
In a damning assessment of the industry, the Financial Services Consumer Panel has urged the FCA to overhaul how fund managers charge investors, as well as strengthen the legal duties asset managers have towards their clients in order to prevent overcharging and short-termism.
The fact that fund managers often have no idea what trading costs, among other charges, they are passing on to investors without their knowledge is of particular concern to the panel, an independent body that represents the interests of consumers.
“Even institutional investors of multibillion-pound pension funds may not know the full costs of investing,” the panel said. As an example it cited a recent FTfm interview with Railpen, the £20bn pension scheme, which took months to work out that the headline fees it paid to fund managers were only a fifth of total costs.
“Retail investors are particularly badly placed. They lack the market clout of institutional investors,” the panel said.
The consumer body wants the regulator to force fund managers to disclose all costs charged to investors. The panel has also recommended that the FCA incentivises fund managers to control the costs being passed on to savers by introducing a single investment management charge.
All other costs and charges incurred by the fund manager, including transaction costs, would be paid for directly by the fund company and reflected in the single charge.
“The panel 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,” it said.
The panel’s suggestions have proved effective in the past. In 2012 it argued that the FCA should be able to “name and shame” poorly performing companies. The following year the regulator was given new powers to publish details of disciplinary action it had taken against companies.
The FSCP’s findings are based on two studies that it commissioned from Rajiv Jaitly, a highly regarded risk consultant, and David Pitt-Watson, executive fellow at the London Business School and former director of UK fund house Hermes.
The panel also flagged concerns about managers concentrating on short-term performance, poor governance of retail funds and the emergence of “closet tracking”, whereby funds charge high active fees but in practice only mimic the composition of an index.
The panel has recommended that the FCA impose a fiduciary duty on investment managers to act in the best interests of their customers. Currently treating customers fairly is a regulatory principle, but not a legal duty.
A spokesperson for the FCA said: “We welcome the panel’s work. The recommendations around the disclosure of costs and charges are a useful contribution to the current debate on delivering transparency of transaction costs in the workplace pensions market.”
Robert Higginbotham, head of global investor services at T Rowe Price, the US fund house, warned that placing the onus for paying unexpected transaction costs on fund companies could backfire.
“I don’t want fund managers doing anything apart from trying to get the best returns for clients. If some of the activities they engage with in order to do that have a [profit and loss] implication, that creates room for disincentives,” he said.