FCA fund management shake-up: industry divided in its reaction

Financial advisers and fund managers have been reacting to the release of the Financial Conduct Authority’s asset management market study, with the industry split between those supporting the regulator’s moves and those that believe that it has not gone far enough with its changes. 

As was expected, the FCA has said that fund management groups should introduce a single, all-in-fee to investors; strengthen the duty on fund managers to act in the best interests of investors and introduce technical changes to “improve fairness around the management of share classes” and the way in which fund managers profit from investors buying and selling their funds.

Below are some of the highlights from industry figures and commentators.

Patrick Connolly, certified financial planner, Chase de Vere (pictured below left)

“For too long far too many consumers have faced excessive charges, mediocre performance and a distinct lack of transparency.

“The situation is often worse for those in: 1. Closet tracker funds, which charge high fees but move little from the benchmark index. 2. Fund of funds, which have two layers of charges but where total costs are almost impossible for consumers to understand. 3. Companies selling their own investment funds, where there is absolutely no price competition at all.

“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.

“The investment experience can be even worse for consumers who buy funds based on past performance or those which are recommended by intermediaries and investment companies. The funds which are promoted are typically those with strong short term performance and too often investors jump in at the wrong time after the strong performance has already been achieved.

“We welcome the steps recommended by the FCA to improve transparency and to put further scrutiny and downward pressure on excessive fund charges. However, it is now time for action rather than just words.

Andrew Bailey, chief executive at the FCA (pictured below left)

“The asset management sector is important to the economy, managing the savings of millions of people and in the current low interest environment it’s vital we help people earn a return on their savings.

“We need a competitive sector, attracting investment into the United Kingdom which also works well for the people who rely on it for their financial wellbeing.

“We have listened carefully to the feedback we received in response to our report last November.

We have put together a comprehensive package of reforms that will make competition work better and help both retail and institutional investors to make their money work well for them.”

Ryan Hughes, head of fund selection at AJ Bell (pictured below left)

“The asset management industry is ripe for reform.  There are too many examples of fund groups making huge profits, while delivering poor returns for investors and it is clear that the regulator has its sights firmly focused on tipping this balance back towards the consumer.

“There are pockets of high quality active funds delivering great value to investors but there is a far higher proportion of active funds delivering poor value.  The majority of new business goes into the high quality funds but the fact is there are hundreds of billions of pounds stagnating in poor performing funds.  This needs to be unlocked and either moved into to high quality active funds or passive funds, a trend we have already started seeing.

“Some of the measures confirmed today should improve transparency of charges and make it easier for investors to judge whether they are receiving good value and, if they aren’t, switch to a better option.

“The key now is in the implementation.  An awful lot of what has been announced today by the FCA is still up for further consultation, so there is going to be little immediate change.  It should also be remembered that the unbundling of fund charges since the Retail Distribution Review has had virtually no downward impact on active fund charges as it was expected to do.

“So, whilst today’s paper is encouraging, the key now is how long the additional consultations take and how quickly the proposed reforms are enforced.”

Martin Gilbert, chief executive of Aberdeen Asset Management (pictured above and below left)
“I strongly welcome the FCA’s Market Study as it provides clear guidance on how the FCA wishes the industry to operate in the future.
“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.
“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. It is more challenging to calculate all-in-fees for bond funds, but I’m encouraged the industry is already looking at ways of doing this.
“We need to embrace the concept and commit to finding a solution for the best interests of clients. I am a vocal advocate of the benefits of involving independent directors in fund governance, having seen how they help elsewhere in the world. While supporting FCA’s general moves in this direction,
“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. This finer point notwithstanding, I certainly agree that strengthening the onus on both investment managers and fund boards to consider value for money for investors will help to protect investors’ interests.
“I firmly believe these remedies will not only benefit customers but ultimately strengthen confidence and competitiveness in the UK asset management industry.”
“The industry now needs to engage with the regulator to discuss and coordinate the implementation of the recommendations.”

Gina & Alan Miller, SCM Direct

“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 consultations 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 by the FCA to retail and institutional investors alike rather than just institutional investors or it is inevitable that differing formats by investment groups will make easy comparisons impossible.

“Whilst the FCA agrees with our long-held view that forthcoming legislation requires firms to provide aggregated and on-going information on all costs, there is no timeline to when the ‘future remedies’ to allow investors to ‘understand the role of the prominence and formatting of charges information’ will actually take place.  Furthermore the FCA is only ‘considering’ the wider use of pounds and pence disclosure on other information sources.

“In terms of the numerous consultations and working groups, some appear unnecessary and rules should be brought in straight away to protect savers.  More consultations opens the FCA to more self-interested lobbying from the industry and its anti-consumer trade bodies.

“However, we welcome the announcement of an investigation into the UK platform market as many retail investors and advisers have substantial sums invested via platforms where in some cases the fees appear excessive.  We also welcome the decision to ignore the attempts by pension consultants to avoid a formal investigation.

“The fact that the FCA feels it has to state there will be an increased ‘duty on fund managers to act in the best interests of investors and use the Senior Managers Regime to bring individual focus and accountability to this’ shows how fundamental the dereliction of duty has been in the asset management industry.”

Daniel Godfrey, chief executive of the People’s Trust and former head of the UK’s Investment Association
“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 management’s 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.

“Even the biggest asset managers do not have agency to reform the chain without a mandate from clients. A way needs to be found to break the links of this dysfunctional chain so that investment can focus on sustainable wealth creation, not short term, relative performance.

“Today’s report makes it clear that only external disruption can deliver the necessary change, not the FCA.”

Sean Hagerty, managing director, Europe, Vanguard

“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.

“Our own proprietary research demonstrates the impact of cost on performance. Our findings show that too many funds fail to meet their performance benchmarks, largely because of the charges they levy.

“As an industry, we have an opportunity to reassure people that investing can be a force for good, and for many people, a sensible way of providing for the future.

“This includes ensuring investors have access to all the information they need, including costs, in a format they can understand. The increased transparency proposed by the FCA will enable an informed investor to choose high-quality, low-cost products which will lead to better financial outcomes for UK investors.”

ABOUT THE AUTHOR
Gary Robinson
Deputy Editor, International Investment and Head of Video at Open Door Media Publishing. A fully qualified journalist and filmmaker with more than 20 years' financial services experience, both as journalist and originally as an IFA.

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