Financial Conduct Authority  

Governance proposals to cost industry £28m a year

Governance proposals to cost industry £28m a year

The FCA's asset management market study proposals would create almost £28m in additional yearly overheads for the industry, the regulator has predicted.

In an analysis of the proposals made in its final report, including plans to enhance fund governance, the regulator said the changes would result in a one-off cost of £6.7m which it expected to be absorbed by firms.

Some £27.7m of annual ongoing costs are also expected to result from the changes, given the requirement to add at least two independent members to fund governance committees. The FCA said it expected this would be passed on to investors but was equivalent to only a 0.24 basis point increase in fees.

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However, in its cost-benefit analysis of its proposals, the FCA said that such costs would eventually be offset if the changes resulted in lower fund charges as anticipated.

"The policy intervention will be net costly to investors if the reduction in fees and charges stemming from authorised fund managers' (AFM) consideration of value for money is less than the direct ongoing costs of this policy, that we expect AFMs to pass through to investors in fund charges," said the report.

"We think that it is likely that the fees and charges will drop considerably more than this low breakeven level, and that our proposals will bring net benefits [to investors]. This is the case even after taking into account the one-off costs borne by AFMs, which are relatively small."

The FCA's headline figures for the industry were based on the estimated cost of enforcing current fund governance committee members - generally fund firms' senior management and directors - to consider value for money for investors.

But the bulk of the cost, at £26.9m, came from adding independent members to these committees. The regulator expected an annual salary for an independent to be around £40,000 - with each AFM adding 2.5 new members on average.

Another proposal, to force those firms taking risk-free box profits to return these to the relevant fund, could result in "at least £20m" being transferred from firms to customers holding the affected products. The FCA noted that the impact of this would generally be limited for asset managers' balance sheets.

"Industry reports confirm that most firms will not suffer a material fall in their overall profits by ceasing to take risk-free box profits," it said.

"In our view, this will not result in firms going out of business or having to modify their business models significantly. This should be true for smaller asset managers as well."

The FCA noted that the impact may be more significant in certain cases. The regulator had previously identified one example where risk-free box profits accounted for 10 per cent of a firm's revenue stream.