FCA proposes 'all-in-one' fund charge and plots escape route for direct investors

An 'all-in-one' fund charge is one of several remedies being proposed by the Financial Conduct Authority (FCA) to address 'weak' competition in the asset management industry.

The FCA released its long-anticipated market study into the industry, which manages nearly £7 trillion of institutional and individual assets, on Friday (18 November) morning.

The watchdog highlighted a number of concerns that the industry needs to address. The regulator was critical of fund charges, noting a lack of both competition and transparency.

On the issue of competition, the FCA says it found 'considerable price clustering', with most active equity funds charging between 0.75 per cent and 1 per cent. The FCA says asset managers are 'reluctant' to undercut each other, while the vast majority fail to pass on economies of scale when fund sizes increase.

ALL-IN-ONE FUND CHARGE

On fund charges, the FCA was critical that the ongoing charge figure (OCF) levied on funds does not paint the full picture of total charges. Some fees are excluded from the OCF, most notably transaction fees.

In light of this the FCA has proposed that a single 'all-in-one' fund charge is introduced, so that investors can easily see what has been taken from the fund.

One of the ideas on the table is for asset management firms to provide an estimate of any implicit and explicit transaction costs, which will then go inside the OCF.

As well as highlighting 'poor' competition, the FCA also pointed out that some investors have been left languishing in expensive 'legacy' share classes, an issue that Money Observer has highlighted and campaigned for change on.

In what marks a victory for our campaign, the FCA has suggested various remedies for asset managers to enable them to move direct investors from 'expensive to better value share classes'.

Options include 'shining a light' on the differences between old and new share classes. Another option is to communicate with direct investors as a means of finding out whether they would like to switch into the cheaper share class.

As Money Observer has previously highlighted, there is an issue around triggering a capital gains tax liability when making the fund share class switch.

STRENGTHENING CONFIDENCE IN THE INDUSTRY

Separately, 'closet tracker' funds were also highlighted in the report as a big problem. The FCA estimates £109 billion of investor money is held in such funds. The FCA also found evidence that some funds use inappropriate benchmarks when comparing performance.

The regulator was also critical of the ability of active funds to add value in general, stating that 'looking at the relationship between price, performance and how actively the fund is managed, its evidence suggests actively managed investments do not outperform their benchmark after costs'.

In a statement Andrew Bailey, chief executive of the FCA, says: 'We want asset managers to ensure investors receive value for money through pursuing energetically their duty to act in their customers' best interests.'

Martin Gilbert, chief executive of Aberdeen Asset Management, welcomed the report, observing that 'it brings focus, and a sense of urgency, to confronting some key industry issues impacting customers'.

He adds: 'There is a need for increased transparency in relation to the services provided and the costs of such, and also for ensuring value for money.

'Asset managers play a vital role in helping investors achieve their financial goals and the FCA's proposals will help deliver this. We look forward to working with the regulator and the industry to ensure all investors, large or small, receive the best possible service.

'The FCA's suggested remedies will also help to strengthen confidence and competitiveness in the UK asset management industry, making it more attractive on the global stage by leading the way in best practice.'

The proposed remedies have been put out to a consultation, which will end in February. The final report and remedies will be published next year.

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