The FCA published the interim report on November 18 and among its principal findings was the “limited price competition” for actively-managed funds, with fees “clustering” between 0.75% and 1% of assets per year.
It said the average actively-managed fee, at 0.9% of assets, had “stayed broadly the same for the last 10 years”, with very few firms telling the regulator they would lower charges to win new business.
The FCA also weighed in on the controversial topic of closet indexing – funds that charge for active management but whose performance closely mirrors an index. The FCA did not use the term, but said it had found £109 billion “in expensive funds that closely mirror the performance of the market” and were “considerably” pricier than passive funds.
The FCA said it was proposing other measures to remedy the problems it had identified in UK fund management. It wants to introduce a new “all-in fee” model that will ensure “investors in funds can easily see what is being taken” and impose new duties on asset managers to explain charges, objectives and benchmarks to investors.
The regulator is also proposing changes to the way funds are governed. It suggests putting a formal duty on fund boards to consider value for money for investors, including comparing the charges for retail investors to the charges for institutional clients, where these are substantially lower.
As previously reported by FN, the FCA said it might “mandate having a majority of independent members [on fund boards] and an independent chair”.
Investment consultants also came in for a broadside from the FCA’s review. In particular, their new service, fiduciary management, in which they offer to take on more responsibility for managing the assets and liabilities of pension schemes, was critiqued for a lack of transparency and competition.
The FCA said: “There is very little public reporting and scrutiny of fiduciary management fees and performance. This makes it difficult for investors to assess the performance of fiduciary managers. Fees and charges disclosure by fiduciary managers is not consistent and comparable.”
It found “very limited” scrutiny of the regular asset allocation advice given by consultants to pension schemes, with pension funds unable to assess the impact of this advice in any “consistent or comparable way”.
The FCA said: “We believe the market for investment consultancy services would benefit from a market investigation reference. The Competition and Markets Authority would be best placed to explore what impact the difficulties in assessing the quality of investment consultancy advice has on competition between investment consultants, the advice they offer and ultimately the returns investors receive.”
The FCA said that one of the reasons it was considering bringing in the CMA was that investment consultants’ advice is not formally regulated, meaning “we have limited authority to ask industry to develop ways to measure and assess advice themselves”.
So it recommended the Treasury consider making investment consultants’ advice a formally regulated service. The FCA said: ” This is a very important part of the asset management value chain which is currently unregulated.”
The FCA said it wants feedback from the market on its proposed remedies by February 20, 2017. It plans to publish its final report on the market sometime next year.
Andy Agathangelou, chairman of the Transparency Task Force, a consumer group, said the FCA’s report looked “at first glance” to be the “hard-hitting, real-world analysis the market has been crying out for”.
Chris Cummings, chief executive of the Investment Association, fund managers’ trade body, said in a statement this morning: “Over the coming weeks, we will engage closely with the FCA to understand its findings and the full implications of potential remedies.”