New regulations are likely to lead to a significant shake of the asset management industry with implications for anyone who invests in funds.

The Financial Conduct Authority, a UK regulator, wants to make investing in funds better value for money. In a policy statement released on 5 April it outlined several measures to help it achieve this aim which includes:

A ban on ‘box profits’ – i.e. stopping asset managers from keeping as profit the difference between the bid (the price at which the provider buys back fund units) and offer (the price you pay to buy in) on a fund.

An end to the practice of taking performance fees based on a fund’s gross performance; instead these added charges will be based on performance net of other fees.

A requirement to publish a report annually that proves the value for money a fund delivers to investors. This will be based on elements such as whether charges are reasonable relative to costs incurred, the quality of service provided and the robustness of the internal investment process. Corrective action will have to be taken if a fund is not providing value for money.

Fund managers will also have to appoint at least two independent directors to their boards.

Automatically moving investors into the cheapest share class when it is in their interests.

Requiring an explanation of why a fund manager uses a particular benchmark.

A proposed all-in fee for funds disclosed in pounds and pence.

Back in June 2017 the FCA noted the industry’s high level of profit was an indication that investors were not ‘achieving value for money’.

It noted that the average asset manager had an operating margin of 36% and some as high as 45% in a sample of company results over the last six years. These margins are significantly higher than those generated by most other industries.

This is a good illustration of a risk faced by firms which enjoy abnormally high margins, that ultimately either competition or, in this case, regulation will intervene to bring profitability down to more grounded levels.

WHEN WILL THE CHANGES TAKE EFFECT? 

Firms have 18 months to implement the rules on assessment of value and appointment of independent directors and 12 months for the rules related to the way in which fund managers profit from investors buying and selling their funds.

WHAT DOES IT MEAN FOR INVESTORS?

Anything which reduces costs and increases the level of transparency is in theory a good thing for fund investors. Investment consultant The Lang Cat describes the new FCA rules as a ‘huge change for asset managers, and one which should benefit all investors’.

A report from the FCA ahead of these changes, published in 2017, suggested that £6bn worth of assets were in so-called expensive trackers, essentially funds which simply offer the performance of the market at an inflated price.

A whopping £109bn was held in ‘closet trackers’. These are actively managed funds which deviate so little from their benchmark that they effectively just track the performance of  the market.

‘The majority of the population simply don’t understand percentage-based charging, the impact charges have over the long term, or whether their investments are value for money,’ The Lang Cat adds.

‘This allows providers to hide potentially expensive products in plain sight. Something had to change. And the final rules now published should help with that.’

However, Martin Bamford, managing director of financial planning group Informed Choice, believes the changes announced do not necessarily go far enough, noting there is no ban on trail commissions.

These were payments made to advisers and platforms out of the performance of a fund as an alternative to charging an upfront fee.

Trail commissions have been barred on the sale of products since the Retail Distribution Review was introduced at the beginning of 2013, being a set of rules aimed at introducing more transparency and fairness in the investment industry.

‘The FCA decision not to ban legacy (pre-Retail Distribution Review) trail commission was a missed opportunity to modernise the fee structure for all investors, ensuring money isn’t unnecessarily taken out of investment charges on funds sold before the end of 2012.’

HOW IS THE INDUSTRY RESPONDING? 

The body which represents fund managers – the Investment Association – has welcomed the changes.

Chief executive Chris Cummings says: ‘Our industry is committed to demonstrating, and delivering, good value to the millions of people who entrust their savings to us. We welcome the FCA recognising that people judge their asset manager by investment performance and service, as well as cost.’

Some figures from within the industry have been more critical, arguing they will add costs which will ultimately be passed on to investors.

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