Funds industry faces up to FCA's tiered fee and independent board proposals

Funds industry faces up to FCA's tiered fee and independent board proposals

The FCA's plans to overhaul fund governance and introduce measures for fairer fees and costs for investors have been met with a mixed reaction after the watchdog issued a damning verdict on “weak” levels of competition among asset managers.

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.

Article continues after advert

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.