InvestmentsNov 21 2016

Fund firms face revenue hit from FCA 'box profits' crackdown

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Fund firms face revenue hit from FCA 'box profits' crackdown

As much as 10 per cent of some fund firms' revenues would be wiped out by an FCA proposal to ensure obscure "box profits" are passed back to a fund's investors rather than asset managers themselves. 

In its asset management market study interim report, published last Friday (November 18), the FCA suggested it could seek to ensure box profits are no longer able to be accrued by fund firms, saying the charges are often "significant" despite remaining "opaque" to investors.

The regulator acknowledged that the transaction costs, which relate to dual-priced funds, are not retained by most firms. But the FCA added the fees can account for as much as 10 per cent of a fund firm's revenue in cases where businesses opt to keep the fees.

The FCA said: "Where the money is retained by the asset manager rather than paying it into the fund for the benefit of the fund's investors the revenue can be significant, amounting for some firms to as much as between £5.6m and £15.8m, equivalent to as much as 10 per cent of group revenues or 0.05 per cent of the affected assets under management.

"Whilst the revenue taken by asset managers as an annual management charge is clear, we are concerned that risk-free box profits are opaque and are not passed through to investors."

Box profits relate to the spread between the price at which the fund can be bought and the price at which it can be sold. This reflects the cost of buying or selling securities in a manner which ensures new or redeeming investors do not dilute the value of existing investors' units.

When there are buyers and sellers of a fund on the same day, however, these bid-offer spread transaction costs can be avoided because orders can be matched with one another via dealing done through the manager's "box".

But the FCA said it had concerns that some firms were nonetheless keeping the spread costs, which have effectively already been paid by an investor even if their order is matched with another, rather than putting this money back into the fund.

It has asked for feedback on a proposal to ensure that these box profits, which do not involve any risk on the part of the asset manager, are always paid back into funds rather than added to a company's bottom line.

The regulator, which considered how 11 fund houses managed such profits as part of its review, estimated that more than £63m in box profits was retained by asset managers in 2014. 

It added that individual investors have "no opportunity to scrutinise this cost" because it is impossible to tell whether or not a particular investor's transaction has seen revenues funnelled back to the asset manager.

KPMG regulatory consultant Julie Patterson said the regulator's estimate of box profits' revenue contribution was higher than she had anticipated: "Certainly going back a couple of decades box profits were high, but I was surprised by [the 10 per cent] figure."

Ms Patterson described the practice as relatively rare among fund firms, but added: "If individual companies are apparently making significant profits from the box, it would be legitimate for the regulator to ask why."