‘Radical’ change demanded of fund charging practices

A crackdown on fund managers passing on their costs to investors looks significantly more likely today after the UK’s top consumer protection body accused the firms of exploiting customers.

The £6trn investment industry was awash with conflicts of interest, poor governance, a lack of transparency and product complexity, the body said. It added that only sweeping reform would allow it to steward the nation’s savings effectively.

The claims have been made in a no-holds-barred discussion paper from the Financial Services Consumer Panel (FSCP), a statutory body that advises financial watchdog the FCA, based on two new studies into fund fees.

Fund managers currently pass various types of charges on to investors by paying for them directly out of the fund’s investment pool, including trading costs, commissions for brokers, legal and administrative costs, taxes and their annual management charges.

The FSCP paper argues for a “radical” new single investment charge, which would cover all these expenses, although this would require “structural changes in the industry and would be likely to be challenged by investment firms”.

It argues the single charge would motivate fund managers to be more cost-conscious, since any excessive spending would ultimately hit the profits they are able to take from the fund.

“It is striking that the problems of cost opacity and cost control are both widespread and long-standing,” the paper stated.

“The evidence reveals a market characterised by a weak demand side that is rapidly growing… and a powerful industry in which misaligned incentives are systemic and which enjoys, largely unchallenged, the potential to exploit consumer behaviour, product structure complexity and the lack of cost transparency.”

The proposals are a fresh blow for the fund industry, which is already reeling from months of persistent claims it charges excessively for active management that fails to reliably beat returns that could be achieved by simply owning a low-cost index tracker.

Regulators have recently launched an investigation into funds’ use of client money to hand opaque commission payments to brokers for a number of services.

IMA’s chief exec responds

Daniel Godfrey, chief executive of fund manager trade body the IMA, said the organisation was already working hard to find a way to make fund charges clearer to investors.

He pointed to recent IMA rule changes for UK funds, which come into force next spring, which will force all portfolios to publish a comprehensive “pounds and pence” figure revealing all charges paid per fund unit.

Responding to claims that the IMA’s work on transparency falls short of the requirements set in the forthcoming Mifid II directive, he said there was more to come from the trade body.

It is working on a new regime for funds that will include enhanced estimates of turnover rates and bid-offer spreads, and it is also contributing towards improvements of the European ongoing charges figure. The combination of these and other efforts should match the Mifid II requirements, he said.