FCA action costs fund managers fraction of gains

FCA action costs fund managers fraction of gains

The FCA’s recent action against firms accused of incorrectly marketing closet tracker products as active funds is “too little too late”, according to Alan Miller, a director of wealth manager SCM Private.

Mr Miller is also a founder of the True and Fair campaign, which was created to campaign for greater transparency around fund fees and charges.

As FTAdviser reported on 5 March, several firms have reimbursed clients a total of £34m for the way products were marketed as being active funds, when, in practice, they did little more than track the index, an investment style which costs significantly less.

One firm was found to be such an egregious miscreant that the Financial Conduct Authority (FCA) referred it to its enforcement unit.

But Mr Miller said the actions are “too little too late.”

He said he had highlighted the issue of closet trackers in a report he issued in 2013 - which he sent to the FCA - and said it should not have taken the regulator five years to look at the issue.

Mr Miller added: “The FCA's own November 2017 Asset Management Study found there was £109bn in 'partly active funds charging active fees'. Let's say these funds charged a typical annual management fee of 0.75 per cent rather than an index fund annual management fee of 0.25 per cent per annum, then their excess charges over 5 years would be 0.5 per cent [per firm per year]."

Five firms have returned money to clients. Mr Miller estimates that 0.5 per cent per year over the five year period since he highlighted the issue equates to £2.72bn in fees received by closet tracker providers.

This is 2.5 per cent of the £109bn the FCA said in 2017 is in closet trackers.

But the £34m in charges asset management companies have returned to clients equates to 1.2 per cent of the £2.72bn in excess fees he believes such firms have earned over the past five years.

An FCA spokesman refused to comment on whether the regulator regards the £34m as an adequate punishment, but highlighted how one firm has been referred to its enforcement division.

The refunds are not part of an official enforcement action by the FCA but the regulator confirmed the companies in question will also have to change the way they market the products in question.

The regulator examined 84 funds, and found that 64 must now change their marketing material as the material previously supplied by the fund houses in question was found to be misleading to investors.