The investment industry is seriously considering the implications of a potential ban on passing on fund costs directly to investors, with some groups already deliberating how it could be implemented.
The change was proposed earlier this month by the financial regulator’s top consumer protection body as part of a scathing discussion paper on industry fee practices.
The Financial Services Consumer Panel (FSCP) urged the FCA to consider a new single-fee fund-charging regime, under which the current model, which allows funds to pay for services (such as trading) directly out of their capital pools would be outlawed.
The costs would instead have to be passed on indirectly under a single fee, with fund houses raising their headline prices to cover the costs and shouldering the risks if they end up higher than expected.
David Aird, managing director of UK distribution at City-based fund firm Investec Asset Management, said an “all-encompassing fee” that clients can trust “has to be the destination the industry gets to”.
“We have not got plans, [and we are not] saying when we would roll it out, but we are having discussions about whether it is feasible and how we would implement it,” he said.
Dominic Johnson, chairman of the New City Initiative that represents small fund managers, said firms were not panicking “about the nature of what is suggested”. He said, however, it would bring welcome transparency to fund charging.
He said much of the burden of a new regime would fall on firms such as brokers and custodians, which make up much of the fees funds pay internally, as asset houses would look to drive down costs if they became liable for them.
“I do not rejoice in lower income streams for asset management firms but hopefully a transparent market means people will have greater confidence in the industry, which means more money will be invested with asset managers,” he said.
A senior executive at another major City-based asset manager, who wished to remain anonymous, told Investment Adviser the firm was holding a meeting this week to discuss the paper and he expected other groups would be doing the same.
But the industry also echoed concerns voiced last week by industry trade body the IMA, which flagged up potential flaws with a single-fee regime. The IMA’s chief executive Daniel Godfrey said a single-fee could work for some funds, but if fund managers were made to pay for trading costs, this could disincentivise them from making investment calls for their clients.
Investec’s Mr Aird said: “A fund group would not want to go to its manager and say, ‘Slow down on trading’.
“Fund managers must execute investment objectives and behave within their mandate. They should not be restricted.”
Meanwhile, a spokesperson at Henderson Global Investors said the firm was “considering the FSCP proposals at the moment and will engage with the FCA and IMA as needed”.