Henderson has been fined almost £2 million for overcharging retail investors on two closet trackers.
The Financial Conduct Authority (FCA) has fined Henderson Investment Funds £1.9 million for failing to treat customers fairly.
The regulator says that 4,713 retail investors in the Henderson Japan Enhanced Equity fund and the Henderson North American Equity fund were treated differently from institutional investors in the same funds.
In November 2011, Henderson reduced the level of active management of the Japan and North America funds – effectively turning them into closet trackers – but failed to inform retail investors of this fact.
This was in contrast to the treatment of institutional investors. “Henderson informed nearly all of the institutional investors who were affected by this change and offered to manage these two funds for those investors without charge,” the FCA states.
Henderson did not cut fees accordingly for retail investors despite the reduction in active management. It failed to make any amendments to the funds’ prospectuses, or to communicate the changes to retail investors.
Ryan Hughes, head of active portfolios at broker AJ Bell, welcomes the FCA’s decision and hopes it will make it “harder for closet trackers to hide”.
“In other markets, regulators have been very active for some time around closet trackers, with Norway, Sweden and Germany all seeing action being taken against managers; however, this is an important step forward here in the UK, demonstrating the importance of asset managers justifying the fees being charged for supposed active management,” says Hughes.
The FCA found that Henderson had charged investors almost £1.8 million over and above what they would have been charged for a passive fund.
The fund management firm has compensated all the affected investors for the additional costs incurred.
Commenting on the fine, a Janus Henderson spokesperson said: “The FCA’s notice relates to events in the period 2011 to 2016, prior to the merger between Henderson Global Investors and Janus Capital Group in 2017. Janus Henderson Investors accepts the FCA’s findings and the financial penalty and has co-operated fully throughout the process.”
The FCA announced back in March this year that several firms were being forced to compensate investors for misleading marketing information.
Mark Steward, executive director of enforcement and market oversight at the FCA, comments on the fine: “In this case, retail investors paid fees for active investment management they did not receive. For retail clients, the Japan and North American funds were in effect operating as ‘closet trackers’, as the fees charged to them were inappropriate given the diminished level of active management.”
Matters were made worse by serious weaknesses discovered by the FCA in Henderson’s “management, oversight and governance”. “The matter is aggravated by the length of time HIFL took to identify the harm being caused to the retail investors and to fix it,” says Steward.
Both funds have been renamed since their inception in February 2006 (North America) and December 2005 (Japan). Henderson North American Enhanced Income is now the Henderson Institutional North American Index Opportunities fund. It has performed marginally ahead of the Investment Association (IA) North American equity sector over one, three and five years, returning, 14%, 42% and 93% respectively.
Henderson Japan Enhanced Equity fund has been rebadged as the Henderson Institutional Japan Index Opportunities fund. It has lagged its IA Japan equity sector over one, three and five years as at 19 November.