The regulator acknowledged that the transaction fees, which relate to dual-priced unit trusts, could account for as much as 10 per cent of companies’ revenue in some cases.
Crucially, the regulator said this estimate related to “risk-free” profits – meaning fund houses are charging investors and declining to reinvest these fees back into portfolios despite none of their capital being at risk.
The FCA said: “We are concerned that risk-free box profits are opaque and are not passed through to investors.”
Haley Tam, an analyst at Citigroup, suggested the 10 per cent figure may refer to “smaller asset managers with lower revenues”.
It remains unclear how many firms still accrue box profits. Legal & General Investment Management and BlackRock, companies previously identified as taking the fees, told Investment Adviser they no longer did so.
The regulator acknowledged in its report that “most” firms do not engage in the practice, but some publicly listed companies – required to disclose more information than their privately owned peers – do state they take such profits.
However, none disclose what proportion of these revenues, if any, come from the "risk-free" box profits which concern the FCA.
In its 2015 annual report and accounts, Jupiter noted initial charges and box profit revenues totalled £18.8m. While it is unclear what proportion of this figure was accounted for by box profits, the total amount represented 5.7 per cent of Jupiter’s £330m of net revenues for the year.
A Jupiter spokesperson said: “We welcome this report and are reviewing its recommendations in order to contribute to the consultation process.”
Liontrust noted in its 2016 annual report that revenues could include box profits, but did not specify the amount. The firm declined to comment.
A spokesperson at Henderson, another company affected, said: “With only a small number of dual-priced funds in our range (seven out of 76), any changes proposed by the FCA to firms’ ability to make risk-free box profits will not have a significant impact.”
Schroders, another listed entity that offers unit trusts, declined to comment on whether it used box profits to boost revenues.
The regulator estimated that more than £63m in risk-free box profits was retained by asset managers in 2014. It added that individual investors had “no opportunity to scrutinise this cost” because it was impossible to tell whether a particular investor’s transaction had seen revenues funnelled back to the asset manager.
One asset management representative, who wished to remain anonymous, said: “I’m happy that they have made the distinction between risk-free box profits and box profits, where a service is being provided.
“Some are not providing a service or mitigating a risk – they are just making money for nothing. Those [revenue] numbers are big numbers. I’m happy for the FCA to focus there if the numbers are that high.”
What are box profits?
Box profits relate to the spread between the price at which a fund can be bought and the price at which it can be sold. This reflects the cost of buying or selling securities in a manner that ensures new or redeeming investors do not dilute the value of existing investors’ units.
When there are buyers and sellers of a fund on the same day, however, these bid-offer spread transaction costs can be avoided because orders can be matched with one another via dealing done through the asset manager’s ‘box’.
The FCA has asked for feedback on a proposal to ensure that box profits which do not involve any risk on the part of the asset manager are always paid back into funds rather than added to the company’s bottom line.
