Asset management companies have been forced to reimburse clients £34m in fees after the Financial Conduct Authority (FCA) found their products did little more than track an index despite being marketed as active funds.
The FCA stated it had investigated a number of fund houses for charging a level of fees similar to those levied on an active fund, while delivering the returns of a passive fund.
Last year the City watchdog estimated that there is around £109bn in ‘active’ funds that closely mirror the market which are significantly more expensive than passive funds.
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.
The City watchdog revealed one, unnamed, asset management firm was found to have produced "very misleading" material that warranted further action.
The FCA highlighted the problem of closet tracker funds in the Asset Management Market Review, published last year, and is due to announce a set of proposals to tackle the problem later this year.
Andy Agathangelou, chairman of the Transparency Task Force, said: "There has been a smoking gun on the awful issue of closet trackers for years so whilst it is a case of 'better late than never' the Financial Conduct Authority deserve great credit for chasing down this issue so tenaciously since their Asset Management Market Study."
As part of its response to FCA's Asset Management Study, the Investment Association questioned the watchdog's claims that £109bn of assets could be in 'partly active' funds which nonetheless levied high charges.
Focusing specifically on the UK funds, the IA replicated 2016 research from the European Securities and Markets Agency (Esma) and said just 27 funds out of 546 met the European body's definition of a potential closet tracker.
A spokesman for the IA said: "Only half of these [27 funds] had a negative alpha net of fees.
"Considering other factors besides performance, such as management fee and active share figures over several years, resulted in only a handful of funds that would still merit further attention to assess whether an issue existed with respect to investor literature and how investment objectives are communicated."
Esma's own research suggested 15 per cent of all equity funds in Europe could potentially be providing near-market returns, despite being marketed as active strategies and charging active fees.