Financial Conduct Authority chief executive Andrew Bailey has hit out at fund managers for keeping more than £100bn in funds that are only “partially active.”
The FCA is “not saying passive management is better than active”, Bailey says, but cites “strong and consistent margins” and unwavering charges in active funds compared to falling passive costs over the past decade.
An interim study on the asset management market published by the FCA today showed some £109bn sitting in “partially active” funds, that charge higher fees than passive funds but deliver returns closer to the benchmark.
Bailey says these funds are not only “closet tracker” funds, but also include other “expensive” active funds which take “modest positions” close to their benchmark.
He says: “There are active managers and active managers, they are not all the same.There are some active managers that are less active so we question the fees and the transparency of those fees.”
Bailey adds: “We have also found a lot of examples of price clustering. We’ve got consistent profits over time [for these funds]. Also past performance is inconsistently presented to consumers and we found that 50 per cent of retail investors are unaware they are paying an ongoing charge.”
The asset management study also asks for greater clarity on the identification of underperformance of funds, and speaking at a press conference today, Bailey said he hoped the study would give “clarity of choice” to consumers.
Bailey said the most striking finding of the report, however, is the choice of the regulator of not to impose a fee cap on investment funds as this would be a measure of ‘”last resort” and not an effective way to drive competition in the market.
He said: “If you want to stimulate competition, a price cap is not the best idea. It is a measure of last resort and is not encouraging competition in the market.”
FCA supervision director Megan Butler added the FCA would only took enforcement actions “when there is a breach in this area”.
Driving costs down
FCA director of competition Mary Starks told the conference that price competition that is performing “effectively” in the market should drive prices down.
She said: “We have some concerns, but it is not a picture of doom and gloom. We see discipline in the passive management space, and would like to see this discipline transferred to active funds.”
Overall, industry experts have so far welcomed the FCA long-awaited interim report.
Daniel Godfrey co founder at The People’s Trust and adviser on the findings of the report says the study’s suggested remedies would make the fund industry “more Darwinian” in the interests of consumers.
He says: “In particular, raising the bar on fiduciary standards and introducing independent governance to challenge asset managers on value for money would improve governance. Also the sunlight remedy of an all inclusive charge and requirements for funds to be explicit about their objectives, strategies measures and timeframes would create better informed advisers and consumers, better able to judge prospective employees and actual value for money and hold asset managers accountable.
“Combined this would all create a stronger industry, which is better for the industry and consumers, although not every firm in the ecosystem today.”
He says: “[The FCA] are asking for managers to do a better job of assessing value for money for investors, which is not a new idea. They are looking at making that a more explicitly duty than it currently is, but most regulated firms should understand at this point that achieving ‘fair customer outcomes’ has a value for money dimension.
“They are considering more independence and better challenge from fund boards including pulling them into the senior managers regime. This is simply asking those boards to do their existing job more effectively.”
The regulator’s final report is due in the second quarter of next year.
The review has cost the regulator at least £1m so far, according to a Freedom of Information Act request by Fund Strategy’s sister title Money Marketing. The regulator described the study as a “key piece of work” for the FCA.