In interim findings from its highly anticipated asset management market study, the City watchdog said weak price competition and fee clustering meant mainstream active fund charges had remained “broadly the same” for the past decade. This was in contrast with progress in the passive space, where growing assets under management have allowed firms and investors to benefit from economies of scale.
The FCA unveiled a series of potential remedies to tackle its concerns.
Five overarching principles included plans for a tiered pricing system where larger funds would share economies of scale with investors, and governance reforms which could see the introduction of independent boards overseeing individual funds.
While many industry players, including fund firms, were reluctant to comment on specifics from the 208-page report, reactions from regulatory consultants and fund selectors were mixed.
Some commentators claimed tiered pricing flew in the face of one of the FCA’s proposed aims of reducing complexity for investors.
However, Amanda Rowland, an asset management regulation partner at PwC, said the move could benefit investors – but only if enacted “thoughtfully and proportionately”, not hindering the development of new products where necessary.
“It’s a balance,” she added. “If you push everything down to the lowest possible price, you have to be careful that we are not adversely impacting other parts of the market.”
Julie Patterson, an investment management regulatory specialist at KPMG, said active funds should implement the system, drawing comparisons, as the FCA did, with better pricing in the passive world.
“We do see some cases of funds reducing their amount [charged as economies of scale arise], we see that in the passive fund world.
“There’s nothing stopping [asset managers] from doing that now, to be frank.
“You would need to give a bit more notice, but I really can’t think of a major reason why they are not doing it.”
However, some fund buyers raised technical issues with the process.
Dennis Hall, an adviser, backed the concept of sharing economies of scale, but described tiered pricing as a “blunt tool”.
“It wouldn’t recognise the different costs and approaches that different funds have,” he explained.
“A UK-based fund investing in blue chip equities would have much lower costs than an emerging market fund. Where do you place the threshold?”
The regulator also made moves to overhaul fund governance and oversight, proposing six options. These included changing the current authorised fund manager (AFM) model or replacing it with an independent board charged with monitoring value for money.
It also suggested forcing fund groups to set up independent governance boards, mimicking the set-up seen in corporate pensions providers.
Ms Rowland argued a higher degree of independence on AFMs could work for funds given the corporate arena had made progress.
However, she and a number of other commentators raised concerns about the practicalities. “How do you introduce that independence and where do you get the expertise? It’s a limited pool and there are an awful lot of fund boards,” she said.
“It would probably come back to the individual who can fill that role.”
Daniel Godfrey, the former Investment Association boss who served as a consultant to the FCA, claimed an independent board at fund level could challenge providers and report on “value-for-money issues”. But he also highlighted logistical concerns.
“A better option would be some kind of independent governance board within the asset manager rather than within the fund structure.
“You would be replicating the work and the governance across a number of different structures within the organisation [by having fund boards].”
‘Shining a light’ on underperformance
The FCA rebuked the active management community with its interim findings, warning an investor in a typical low-cost passive fund would receive 44 per cent more than one using a typical active fund once transaction costs were accounted for. This came on top of its calculation £109bn sits in “expensive funds that mirror the performance of the market”.
The watchdog also turned its attention to popular absolute return funds, warning many of these were “not sufficiently clear” about their performance. It found some fund benchmarks did not represent the risk taken, while some carried performance fees whose threshold was lower than the return targeted.
The FCA has pledged to “shine a light” on underperformance. However, the watchdog’s competition director, Mary Starks, denied this would lead to “naming and shaming”. “We are not looking to create a hall of infamy,” she said.
Additional reporting by Julia Faurschou
