UK’s FCA takes action on ‘closet trackers’, calls for transparency

The UK’s Financial Conduct Authority has told “a number of asset management companies” that they must pay a total of £34m to compensate those of their investors whom it deems to have overpaid for  ‘closet tracker’ funds, The Telegraph reported on Sunday.

And today, also writing in The Telegraph, the FCA’s director of supervision  for investment, wholesale and specialist, Megan Butler, explained that the regulator wants investors to be clear about what exactly they’re buying, likening investment funds to shades of paint.

“Consumers might be surprised if they took home a variety of colours, only to discover that each tin just contained white,” she says.

The Telegraph article  doesn’t say which asset managers will be required to compensate their investors, and this information wasn’t immediately available from the FCA. The decision to require the repayment followed a recent investigation by the FCA’s inspectors, The Telegraph said.

One asset manager is also facing enforcement action from the FCA, The Telegraph noted, quoting an un-named FCA source as explaining: “In this instance, the watchdog felt the marketing material put out by the company was ‘very misleading’, and so required ‘being taken a step further’.”

It added: “Asset managers will reimburse investors for the higher charges they paid on these funds. It is not an official redress scheme from the watchdog.

“These managers will also have to change their marketing material, and in the more serious cases of misleading investors they will have to notify existing investors.”

Funds ‘unlike tins of paint’

Further explaining the FCA’s thinking, Butler, in her piece for The Telegraph,  noted that unlike tins of paint, consumers typically find it “much harder…”to know whether their funds are doing what they said they would”.

“Take, for example, one type of fund we have been dealing with for a few years, so-called  ‘closet trackers’. Closet trackers are passive but look and charge like they are active,” she added.

“A similar but different colour is a ‘closet constrained’ fund. They make active decisions, but these are restricted around a benchmark.

“This may limit under-performance when markets fall but, importantly, may also constrain growth to levels similar to the benchmark. In both cases, the way the fund is managed isn’t clear, so consumers aren’t getting what they expected.

“We expect fund managers to take their duty to their consumers seriously. They should manage their funds the way consumers expect them to, and tell consumers what they are doing.”

Butler goes on to say that this expectation on the FCA’s part was behind its decision last year to review “84 potential closet tracker funds”, and, in the case of 64 of these funds, to take the further step of “requiring] the manager to make it clearer to consumers how constrained they are”.

These were the 64 funds that are now being told to pay £34m in compensation, she said, while “an enforcement investigation is ongoing against one firm”, the name of which she didn’t give.

An FCA report published in June 2017 stated that there was £109bn in partly active funds charging fully active fees. (The reference and related information is on page 40 of the report.)

An FCA spokesperson told International Investment the authority will be posting a document on the subject of closet trackers in due course.

FCA transparency focus welcomed

Among those commenting on the FCA’s announcement of its intention to focus on the way UK fund managers market their investment products was Andy Agathangelou,  the founding chairman of the Transparency Task Force, which campaigns for greater transparency in the investment industry.


Calling the FCA’s announcement, as reported in The Telegraph, “hugely positive news for investors, particularly long-term pension savers…around the world” he added: “There’s been a smoking gun on the awful issue of closet trackers for years,  so whilst it’s a case of ‘better late than never’, the Financial Conduct Authority deserves great credit for chasing down this issue so tenaciously since their Asset Management Market Study.

“It is now perfectly clear that the killer combination of courageous campaigning and robust regulation is going to clean up the parts of the asset management sector that need sorting.

“Sunlight continues to be the best disinfectant, and ‘parading the problem’ continues to be an effective tactic.”

Questions remained, however, Agathangelou went on, including “which asset managers are involved; which asset manager is facing enforcement action from the FCA for, as reported,  ‘very misleading’ marketing information; [and] should the investors that have suffered material detriment not just be compensated for the excess fees thay have paid, but also for the lost returns they could/should/would have had, had their monies been invested in the way described by the asset managers?”

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