A wealth manager is considering bringing a legal case against the Financial Conduct Authority to force it to take action on fund manager charges to investors, saying the regulator's latest response to the issue "achieves nothing”.
Alan Miller, founder of SCM Direct, a wealth management company, is so disappointed with the regulator’s latest remedies to the issue of fund fees and charges that he is looking into bringing a judicial review against the FCA.
Judicial review is a type of court proceeding in which a judge reviews the lawfulness of a decision or action made by a public body. In other words, judicial reviews are a challenge to the way in which a decision has been made, rather than the rights and wrongs of the conclusion reached.
Mr Miller is also a co-founder of the True and Fair campaign, which aims to highlight what it perceives to be a lack of transparency around the charges levied by fund houses.
He said the FCA’s latest paper, 'Setting out next steps to improve competition in the UK’s asset management industry', which was published on 5 April, “achieves nothing” to improve the situation for UK investors.
Mr Miller said: “The FCA has dealt with important but relatively minor negative industry malpractices, such as box profits, but not the substantive issue of misleading fees through the various distribution channels.”
The FCA's 74-page report stated fund management firms must demonstrate the services they provide are worthwhile for the fees they charge.
This appears to be a climbdown on the FCA’s previous view that firms must demonstrate “value for money” in pounds and pence, after push back from the industry which argued investors' focus should not only be on cost but what they get for the charges.
The FCA's final rules require firms to carry out an 'assessment of value' which covers areas such as quality of service, performance, fund manager costs, economies of scale, comparable market rates, comparable services, and classes of fund units.
Mike Barrett, of consultancy firm the Lang Cat, said this assessment will need to be carried out annually, with the results published for all to see in a manner that is clear, fair and not misleading.
"Each one of the above criteria could raise some interesting questions for certain fund manager boards, but especially the questions of economies of scale and comparable services," he said.
"For the former, this doesn’t prevent fund managers from, for example, reinvesting savings achieved via economies of scale into the business and/or subsidising other parts of the business - however they will need to demonstrate how this is in the best interests of investors.
"As for comparable services, if, for example, you are flogging a UK tracker for 16 times the cost of an identical product, then I look forward to seeing how you justify it."
He said the changes that have been announced are “very significant”, but wonders if prioritising value is sensible, given its subjective nature.
David Barron, chief executive of asset management company Miton, said the regulator’s shift of emphasis away from looking at the level of fees and towards the value of the products is a positive step.
However Mr Miller said he has presented the regulator with a 90 page dossier of what he believes are “industry wide noncompliance” with the requirement to disclose fully the total cost of ownership in cash terms, and to demonstrate that marketing material is “clear fair and not misleading".
He said he is in “regular contact” with the FCA about the contents of this dossier.
On the same day it released its remedies to charging in the fund management sector, the FCA also released an occasional paper which contained research showing when investors are presented with information about the true cost of funds, they are more likely to switch to a cheaper product.
Mr Miller welcomed this research.
"It is good to see that the FCA finds how important it is to disclose costs and charges in a clear and meaningful way, as this leads to consumers buying cheaper funds," he said.
"They have also found, apparently in some magical 'now you see it' moment, that costs alone are not the biggest buying trigger.
"Through our True and Fair Campaign, we have always said that consumers need to see the true level of costs, then balance this with the likely risk and return.”
He said the FCA have “let down” ordinary consumers by not taking more decisive action.
When asked if he is serious about a judicial review Mr Miller said: “If I were not serious, I would not have said it.”
The Financial Conduct Authority was contacted for comment for this article, but declined to do so.
In the rules it published, the FCA decided against requiring an end to the practice of advisers receiving trail commision on legacy products.
The regulator also said it will force firms to be clear about the objectives of each of their investment products.
Paul Gibson, of Granite Financial Planning in Aberdeen said he stopped using active fund management products some time ago as a result of general fears about the level of charges and performance of such products.
He said he has not seen an improvement in terms of fee levels as a result of Mifid II or other regulation.
