FCA calls for all-in fund fee

The FCA also says the UK asset management industry, which runs funds worth around £7 trillion, has failed to deliver value for money, and is uncompetitive and opaque when it comes to price and performance.

The FCA has set out a number of solutions to try to offer consumers better value for money, and increase competitive pressure on asset managers and the effectiveness of intermediaries. The suggestions include consistent and standardised disclosure of costs and charges to institutional investors, making it easier for fund managers to switch investors to cheaper share classes, and the introduction of an all-in fee that would include estimated trading costs, asset management charges and any intermediary fees. The all-in fee was first suggested in the FCA's interim report on its Asset Management Market Study last November, in which four potential fee models were suggested.

Martin Gilbert, chief executive of Aberdeen Asset Management, says: "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 that 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."

But Gina Miller, founding partner of wealth manager SCM Direct, thinks the FCA is not being bold enough. "Consistent and standardised fee disclosure in a single number is vital for ordinary investors to make better choices," she says. "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. While the FCA agrees with our long-held view that forthcoming legislation requires companies to provide aggregated and ongoing information on all costs, there is no timeline on when the future remedies to allow investors to understand the role of the prominence and formatting of charges information will actually take place."

Justin Modray, director at Candid Financial Advice, argues that the FCA has failed to tackle three key issues: price collusion, failure to pass on economies of scale and profiting from inflated administrative expense claims.

Daniel Godfrey, Founder of The People's Trust, an investment trust due to launch later this year, and former head of the Investment Association - the trade body that represents the UK asset management industry - also expressed disappointment. He said: Investment managers will be relieved today. The FCA has delivered a report that spares them the harshest potential remedies flagged in its interim report last November. The critical success factor in the [asset management] industry is short-term relative returns. The effect of this disconnect damages returns in the long term by depriving the non-financial economy of long-term investment and stewardship for positive impact."

The FCA has also raised concerns about performance fees and says: "We will further consider whether additional policy action is required to make UK-domiciled funds' performance fee structures more equitable, and as part of this we may consider those asymmetric fees that do not align investor and manager incentives."

And it will soon start a market study on how competition is working among investment platforms. Patrick Connolly, certified financial planner at Chase de Vere, argues that one of the problems is how platforms charge for passive funds: "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," he explains. "In this situation the platform represents 82 per cent of the overall charge of investing in the fund."

The FCA will continue to discuss the remaining elements of its proposed package of remedies, and has published a consultation paper alongside its latest report, which includes remedy proposals on governance and share class switching. The closing date for responses to the consultations is 28 September 2017, and the FCA expects to publish further consultation papers on most of the remaining remedies in the package before the end of 2017.

Because there are a number of other regulatory changes coming up, its proposed remedies sit within this wider policy context. These include new European Union regulations known as the Markets in Financial Instruments Directive II (Mifid II), due to come into force in January 2018.

The FCA's package of remedies

Source: FCA