News Analysis: FCA to probe fund charges

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News Analysis: FCA to probe fund charges

The rhetoric from the City watchdog, as outlined in its recently published business plan, is predictably broad in terms of what the probe will entail. However, it states that the issues to examine “will include the charges paid by investors and the factors that drive those charges”.

It adds it will “review whether new UK authorised investment funds and segregated mandates are operated in line with our rules”, adding that it would also consider compliance with other responsibilities to investors such as “adherence to risk management parameters”.

PricewaterhouseCoopers asset management director Grant Lee thinks the study will fundamentally be asking “are asset managers putting the interest of the investor at the heart of what they do?”.

Mike Booth, a regulatory consultant at Bovill, highlights the background to much of this is that the FCA has been asking investment managers to explain the rationale behind fee setting, which he notes that “some firms feel is intrusive as they believe this is their prerogative”.

“But I think it will look at market dynamics: what factors and economic drivers are at play when asset managers are setting their fees and how different firms compete,” Mr Booth adds.

The FCA is looking into the wholesale banking sector, and the fact that fund management is now to be put under its microscope should arrive with minimal bewilderment given the ever-rising amount of cash the industry is being entrusted with.

Notably, Bank of England chief economist Andrew Haldane last year cited research that stated global assets under management in the industry could reach $400trn (£261.6trn) by 2050. “If these trends are even roughly right, asset management may not only have come of age, we may be about to enter the ‘age of asset management’,” he said at the time.

Cicero Group executive director John Rowland says: “With ever-increasing assets in the stewardship of fund managers, it is no great surprise the FCA is looking at the area more closely. There is no doubt some of the debate about costs, transparency and outcomes for customers, which has been taking place in other areas such as in pensions, is now being read across into asset management.”

But he adds: “It is important that any discussion about costs focuses on investor outcomes and value for money, rather than driving a race to the bottom on charges.”

While advisers and investors naturally want a more transparent backdrop to ensure they have access to the right information, some believe the FCA should be careful not to be too prescriptive as to how a fund management company runs its business.

SG Wealth Management director Neil Shillito says: “In the financial services industry we are in danger of a race to the bottom where ‘cheap equals good’ and the consumers know the price of everything and the value of nothing.

“A fund management company is just a company like any other, but instead of manufacturing widgets it manages money.”

Mr Shillito thinks a firm’s costs are ultimately their own affair. He says: “The issue here is not what they charge, but do they have hidden costs that are to the detriment of the consumer?”

Scott Gallacher, chartered financial planner at Rowley Turton, admits he finds it somewhat surprising that investment management “is still a little murky”, in terms of charges and transparency.

He thinks it is the one area where arguably independent financial advisers have not been able to drive down client costs because historically it has been very difficult to obtain the full information on all the charges payable by investors.

“Once we have full transparency of the charges, we may see real pressure on investment management charges to ensure that our clients get the best value for money,” Mr Gallacher says.

“This full transparency may in turn drive down costs.”

While how deep the regulator will actually dig into charging trends and structures is still up in the air, some believe the active versus passive argument could crop-up in the review.

Mr Lee cites the issue of lower-charging passive funds delivering superior returns compared with their more costly active counterparts. But he admits this issue is something of a minefield as performance can be measured in a plethora of ways.

“Some active fund managers endure short-term underperformance for the sake of long-term outperformance,” he says.

Three Counties director Andrew Alexander argues that if the regulator is going to look into ascertaining some kind of “active premium”, regulating an active as opposed to a passive approach and levying some sort of arbitrary fee on divergence from the index from a set point in time, “then good luck”.

He adds: “It is all symptomatic of the FCA becoming a consumer regulator. Not a bad thing in any case, but indicative of a change in tack. I just hope it does not damage the industry.”