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Home > Opinion > John Lappin

FSA fund cost review is a myth

The regulator is not reviewing fund charges in the UK, but the fund groups should

By John Lappin | Published Apr 02, 2012 | Regulation | comments

One way to determine whether a story is newsworthy or not is to see if investment advisers and industry professionals are talking about it amongst themselves.

Roughly a week ago, I found myself at a meeting involving several senior advisers and a big range of marketing people, including a couple of the main fund groups and an investment platform.

During the coffee break, many of them were talking about “the FSA’s review” on the controversial topic of fund charges, which would certainly make it newsworthy were it not for the fact that no such review exists.

We could take ourselves off to the Oxford English dictionary and have a debate about exactly what the word ‘review’ means, but when it comes to regulation it carries a particular definition.

To clarify, the story derives from an interview conducted with FSA head of investments policy Peter Smith by Bloomberg.

In the interview Mr Smith said: “In what is allegedly a competitive industry, the UK fund market, how is it that the average cost of funds has risen over the years rather than fallen? That is something we are going to be thinking about.”

It is significant that the regulator is entering the debate. But the follow-up coverage divided into separate parts. Some outlets aimed at the consumer threw caution to the wind and suggested to their readers, who may include your clients of course, that a review is to take place.

One press release from a fund group with an interest in the story said as much as well. The trade papers, however, covered the story more accurately. The FSA is concerned but there is no review.

A spokeswoman said: “We are thinking about this. We are considering what we might be able to do but we have no immediate plans to launch a review or a probe.

“We have been following what has been a very lively public debate and we think it would be odd for the regulator not to be considering these issues especially as we have already addressed, through the RDR, the concept of separating fund management costs and the cost of advice.

“It is fine for us to comment on what is a fact – that average total expense ratios have gone up – and to question why this should be in a competitive market.”

The FSA went on to say that it had to pay heed to, among other things, EU regulations. “There is not a massive amount of scope for completely overhauling the entire system and you have to work within certain boundaries.”

If the FSA isn’t reviewing charges, this shouldn’t stop investment managers from doing so – particularly the issue of how they are disclosed

John Lappin

Before this statement, I was poised to make a few hopefully telling points about the review. I was going to suggest that perhaps Mr Smith should not have used the present tense when talking about increasing costs given the changes already happening in the market, but that is a minor quibble.

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