Investments  

Investigate fees to ratings agencies, urges Fundhouse

Investigate fees to ratings agencies, urges Fundhouse

Ratings agency Fundhouse has revealed it has lobbied the FCA and the Investment Association to look more closely at rivals that are paid by fund houses for marketing logos.

Rory Maguire, the group’s managing director, said the practice amounted to a “loophole” in the RDR legislation, which attempted to end the biases arising from a commission-based system.

Though they do not charge fees to rate funds, all major fund ratings services charge fees for marketing licences, which allow asset managers to use ratings logos in their literature.

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Mr Maguire said he had approached the FCA and IA to challenge this practice, describing his move as “opening up a conversation”. He claimed his discussions with the IA indicated that the trade body may itself have issues with the model.

He added: “What it should come down to is the customer, and the industry’s current situation is not the optimal model.”

Guy Sears, director of risk, compliance and legal at the IA, said: “There are many commercial offers and interests in the market and it’s always healthy for new models to come in and present different propositions. We’re very open to discussing, with all the industry participants, how these various approaches best serve investors’ interests and whether changes are warranted.”

In the post-RDR world, many advisers use funds ratings services as part of their due diligence process. Last November, discretionary manager Hawksmoor’s head of research, Jim Wood-Smith, questioned what value there was to be gained from such “allegedly impartial assessments” when a fund provider had paid a fee to the researcher.

Fundhouse launched at the beginning of this year with a promise to dish out negative reviews when warranted. Typically, most agencies tend to prefer not to rate a fund rather than issuing a negative report, though some produce regular lists of underperforming funds.

Mr Maguire said the issue with the industry’s structure lies in part with concern over being “the first mover”. He added that industry bodies are wary of upsetting the status quo, as they fear it could lead to “a collapse of the industry if the rating agencies are disturbed”.

Fundhouse, based in Surrey, is solely paid for by advisers who subscribe to its reports.

In response to Mr Maguire’s comments, Square Mile said: “There is an important distinction between influencing and informing investment decisions. Square Mile’s research is conducted with the interests of investors and their advisers at heart, not those of asset management companies. We would never allow our integrity to be compromised by any form of financial consideration.”

Another agency, FE, said: “We do not accept money to rate funds. Any fund which meets our quantitative entry criteria is rated [...] We only charge if an asset manager wants to use a ratings logo as part of their marketing and promotional material.”

The FCA declined to comment.