InvestmentsNov 15 2017

FCA accused of breaching its own competition rules

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FCA accused of breaching its own competition rules

The Financial Conduct Authority has been accused of acting against its own stated competition aim by bringing in new rules that could see smaller funds forced to close even if they perform well. 

If implemented the recommendations from the FCA's Asset Management Market Study could cause some funds to fold and restrict new entrants into the market, several fund managers have warned.

This would seemingly run contrary to the FCA's role to promote effective competition in the financial sector in the interests of consumers.

On the FCA's website it states: "When competition works well, consumers are empowered as well as informed... firms strive to win custom on the basis of service, quality, price and innovation.

"This helps generate better outcomes for consumers. Markets are open to entry and innovation, and successful, innovative firms thrive, while unsuccessful firms change or exit."

One of the Asset Management Study recommendations causing ire among managers of smaller fund is that a non-executive director be appointed to act in the interests of all investors in the unit trusts of a particular asset management company.

When I read some of the comments from the FCA I wonder if they know their industry. With these changes, I'm not sure if there is a future for small funds. I will certainly have to consider what to do.Dominic Fisher

A firm with dozens of unit trusts can appoint directors and spread the costs across all of them. But a smaller company, with fewer trusts, or trusts with fewer assets, will bear many of the same costs, hurting the smaller, and newer players, at the expense of the major incumbents.   

The FCA confirmed to FTAdviser that it is currently “assessing feedback” from the consultation it launched on the subject. The consultation closed on 29 September.

Dominic Fisher, an investment industry veteran of firms such as Hambros and Close Bros, who founded and runs Thistledown Asset Management and manages its only fund the £19m VT Thistledown Income fund, said he is likely to be adversely affected by the FCA's proposed rules.

His fund is among the top 25 per cent best performing funds in the IA Flexible Investment sector over the past five years, and Mr Fisher has been largely unconcerned with attracting new investors to the fund and was content for the fund to remain small.

But he said the economics of managing, or launching a new small unit trust have changed as a result the FCA’s interventions.

Mr Fisher is himself a non executive director of an investment trust, so has an understanding of their salary levels, where he said £30,000 to £40,000 per director would be typical, though he said this is likely to be greater where there is oversight of a range of funds.

A unit trust company with £100m of assets in the early stage of its growth could face a bill of more than £80,000 for two non-executive directors.

If it charges the standard annual fee for a unit trust, of 0.75 per cent, that would add significant extra cost for the fund house, Mr Fisher said.

"When I read some of the comments from the FCA I wonder if they know their industry. With these changes, I'm not sure if there is a future for small funds. I will certainly have to consider what to do."

Another fund manager, who did not wish to be named, said his experience of running an investment trust is that non executive directors can provide a lot of value, particularly in stopping a manager who has “had a good run” from getting carried away with a sense of their own importance.

But he said the addition of non-executive directors is likely to reduce the incentive for new unit trusts to launch, both from the point of view of existing large fund houses, and those wishing to become new entrants into the market.

A second recommendation in the Asset Management Study, and one that has been adopted as part of the Mifid II regulations, is the requirement for fund managers to report their trades in a timely fashion, when previously brokers could do the reporting.

An anonymous fund manager said the costs of this will likely be passed on to the investor.

The FCA has also confirmed that data received by fund houses from sales people at brokerage firms will also count, from a regulatory point of view, as research and will have to be explicitly stated and presented to investors as a separate fee item to investors.

This is additional to the material many asset managers receive from brokers, which is more clearly identified as research. 

James Sullivan,  fund manager and director at Coram Asset Management, which until last year was an independent company, said being part of a bigger firm definitely helps to mitigate the risks of these extra costs.

Philip J Milton, of Philip Milton and Co, an advice firm in Devon, said he has long had a preference for smaller funds, as he believes when a fund gets too large, the style of investing has to change.

A spokesperson for the FCA said: "As this is a consultation these are proposed changes. We will have to wait for final rules before commenting."

david.thorpe@ft.com