Will investors finally find out exactly how much they pay for funds? ‘Single all-in fee’ backed by watchdogs – but not until new EU rules start in early 2018.
- FCA uncovered evidence of rip-off charges and weak price competition in probe published last year
- Watchdog said ‘all-in fee’ was needed so investors can see what they are paying
- Today it voiced support for fee disclosure under pending European rules in 2018
This will include an estimate of transaction charges – a figure currently excluded from the ‘ongoing charge’ given to investors, and which transparency campaigners say adds significantly to total costs.
After uncovering devastating evidence of rip-off charges and weak price competition in the industry in a probe published last November, the Financial Conduct Authority concluded an all-in fee was needed so investors can see what they are paying.
Fee transparency: FCA uncovered devastating evidence of rip-off charges and weak price competition in fund management industry probe published last year
Today, it confirmed its initial findings that price competition is weak in a number of areas of the investment fund industry.
But it pointed out that the introduction of a single all-in fee is already pending under new European regulations known as ‘MiFID II’ from January 2018.
But meanwhile, the FCA plans to launch a consultation on ‘ways to improve the effectiveness of forthcoming disclosure’ later this year.
It also plans to set up a working group to consider how to make investment fund objectives clearer and more useful for investors, and to launch a new probe into the online fund brokers used by DIY investors.
Andrew Bailey: The asset management sector is important to the economy, managing the savings of millions of people’
In addition, the FCA is calling for feedback on whether it should introduce a phased-in ‘sunset clause’ for trail commissions.
Fund houses were banned from paying commission to financial advisers in 2013, leading to the creation of ‘clean funds’ without these payments.
Commission is therefore no longer paid by investors who buy or move their money to new funds. However, many old-style funds with commission payments that were sold through advisers years ago still exist.
The FCA said: ‘The final report confirms the findings set out in the interim report published last year. This found that price competition is weak in a number of areas of the industry.
‘Despite a large number of firms operating in the market, the FCA’s analysis found evidence of sustained, high profits over a number of years.
‘The FCA also found that investors are not always clear what the objectives of funds are, and fund performance is not always reported against an appropriate benchmark.’
Andrew Bailey, chief executive of the FCA, said: ‘The asset management sector is important to the economy, managing the savings of millions of people and in the current low interest environment it’s vital we help people earn a return on their savings.
‘We need a competitive sector, attracting investment into the United Kingdom which also works well for the people who rely on it for their financial wellbeing.
‘We have listened carefully to the feedback we received in response to our report last November. We have put together a comprehensive package of reforms that will make competition work better and help both retail and institutional investors to make their money work well for them.’
What does the investment industry say?
Chris Cummings, boss of the Investment Association, the lobby group bankrolled by the fund industry, said: ‘Our industry looks after pensions and investments for millions of UK households, helping them to lead more prosperous lives into retirement.
WHAT ELSE HAS FCA PROPOSED?
The watchdog says it will also:
* Strengthen the duty on fund managers to act in the best interests of investors
* Work towards making fund objectives and the reporting of investment performance clearer, including which benchmarks funds choose to compare themselves against
* Consult on requiring investment firms to return any ‘box profits’ to their funds rather than pocketing them. Investors have to pay transaction costs on trades, but firms can sometimes avoid them by matching buy and sell orders – through the ‘manager’s box’ – and some keep these savings rather than giving them back.
* In addition to an all-in fee for individual investors, support better disclosure of fund costs and charges to big money investors like pension schemes. The watchdog suggests the creation of a standardised template, which ‘should be free of jargon, accessible and easy to understand’.
* Look into the role of investment consultancy firms, which are relied on by many pensions schemes when taking decisions
* Recommend the Department for Work and Pensions try to remove barriers to pension scheme mergers, so they can benefit from economies of scale when investing on behalf of workers.
‘With this role comes significant responsibility. We strongly support the FCA’s objective of ensuring our industry serves its customers in a competitive, accountable and transparent manner.
‘Many of the key recommendations work with the grain of European legislation already in the pipeline to introduce more clarity and transparency for consumers.
‘We will work closely with the FCA as it looks further into the detail of how to present costs and charges in the clearest way for savers and how it will develop more independent oversight of investment funds in a way that is effective and proportionate.
‘We welcome the regulator’s recognition of the industry’s work to date on developing a consistent and transparent disclosure code for charges and costs which can be built on further with consumer groups.’
Martin Gilbert, chief executive of Aberdeen Asset Management, said: ‘I strongly welcome the FCA’s Market Study as it provides clear guidance on how the FCA wishes the industry to operate in the future.
‘Its recommendations to improve investor protections through better governance and to drive competition through greater transparency of fees and fund objectives are constructive and sensible.’
He added: ‘I have stated several times that I am in favour of all-in fees including all costs as the industry has an obligation to deliver what the customer wants.
‘Incorporating dealing charges for equity funds should be straightforward particularly for those managers, like ourselves, who have low portfolio turnover.
‘It is more challenging to calculate all-in-fees for bond funds, but I’m encouraged the industry is already looking at ways of doing this. We need to embrace the concept and commit to finding a solution for the best interests of clients.’
Tracker fund specialist Vanguard said it welcomed the FCA’s efforts to lower the cost and complexity of investing.
Sean Hagerty, managing director for Europe, said: ‘Consumers always benefit from lower prices, better quality products, and clearer information.
‘Costs matter. Every pound that investors pay in charges is a pound out of their potential returns, reducing their chances of being able to afford a comfortable retirement or save for a mortgage deposit.
‘Our own proprietary research demonstrates the impact of cost on performance. Our findings show that too many funds fail to meet their performance benchmarks, largely because of the charges they levy.’
Hagerty said investors should be able to access all the information they need, including costs, in a format they can understand.
Ryan Hughes, head of fund selection at finance broker AJ Bell, said: ‘The asset management industry is ripe for reform.
‘There are too many examples of fund groups making huge profits, while delivering poor returns for investors and it is clear that the regulator has its sights firmly focused on tipping this balance back towards the consumer.
‘There are pockets of high quality active funds delivering great value to investors but there is a far higher proportion of active funds delivering poor value.
‘The majority of new business goes into the high quality funds but the fact is there are hundreds of billions of pounds stagnating in poor performing funds. This needs to be unlocked and either moved into to high quality active funds or passive funds, a trend we have already started seeing.
‘Some of the measures confirmed today should improve transparency of charges and make it easier for investors to judge whether they are receiving good value and, if they aren’t, switch to a better option.
‘The key now is in the implementation. An awful lot of what has been announced today by the FCA is still up for further consultation, so there is going to be little immediate change.
‘It should also be remembered that the unbundling of fund charges since the Retail Distribution Review [when commission was banned] has had virtually no downward impact on active fund charges as it was expected to do.
‘So, whilst today’s paper is encouraging, the key now is how long the additional consultations take and how quickly the proposed reforms are enforced.’
Patrick Connolly, certified financial planner at Chase de Vere, welcomed the steps recommended by the FCA to improve transparency and put further scrutiny and downward pressure on excessive fund charges, but added ‘it is now time for action rather than just words’.
‘For too long far too many consumers have faced excessive charges, mediocre performance and a distinct lack of transparency,’ he said.
‘We have seen genuine price competition in passive funds, but even here overall charges may be much higher than consumers think.
‘While a passive fund could have an annual charge of 0.1 per cent, it might only be possible to buy these on a platform which could charge up to 0.45 per cent each year and so the total cost to the investor rises to 0.55 per cent.
‘In this situation the platform represents 82 per cent of the overall charge of investing in the fund.
‘The investment experience can be even worse for consumers who buy funds based on past performance or those which are recommended by intermediaries and investment companies.
‘The funds which are promoted are typically those with strong short term performance and too often investors jump in at the wrong time after the strong performance has already been achieved.’
Connolly said the situation was also poor for people holding closet tracker funds, which charge high fees but move little from the benchmark index; funds of funds, which have two layers of charges and where total costs are almost impossible to understand; and funds bought direct from providers where there is no price competition at all.
Gina Miller, co-founder of wealth manager SCM Direct and the True and Fair Campaigner for greater fee transparency, said: ‘Whilst the FCA is finally pursuing a pro-consumer agenda it is disappointing that they still appear to be dragging their feet on some key aspects.
‘The UK investment industry has been ripping off the consumer for decades and it is time for the UK regulator to act now rather than have further consultations with the industry and its shoddy trade bodies.
‘This should be mandated by the FCA to retail and institutional investors alike rather than just institutional investors or it is inevitable that differing formats by investment groups will make easy comparisons impossible. ‘
Miller noted the FCA was only ‘considering’ the wider use of pounds and pence disclosure on other information sources.
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