FCA fund manager report met with disappointment and relief

The Financial Conduct Authority’s final report into the £7 trillion fund management industry has received a mixed reception amid claims that its findings constitute a capitulation to pressure exerted by one of the finance sector’s most powerful lobbies.

The City watchdog’s review of fund managers had caused considerable tension prior to its publication yesterday amid fears it was to crack down significantly on the industry and push through better terms for investors and pension savers.

However, while the final report confirmed its key interim finding that price competition was weak in parts of the industry, the FCA appears to have diluted several measures mooted in its interim findings published last November.

A proposed requirement that serially underperforming fund managers alert investors to their poor performance has been dropped altogether and what was to be the centrepiece of reforms; the requirement that fund managers produce a single, easy to understand number showing all charges, was now merely “supported” rather than mandated.

And, strongly voiced support in the interim report for lower-cost passive investment over expensive active fund management has also been toned down.

Martin Gilbert, the soon-to-be co-chief executive of Standard Life Aberdeen, the emerging juggernaut resulting from the £3.8 billion takeover of Aberdeen Asset Management by Edinburgh-based giant Standard Life was among those happy with the watered down report.

Mr Gilbert, who is currently chief executive of Aberdeen Asset Mangement, which saw shares rise along with other industry heavyweights Schroders and Jupiter as the report was published, said: “I strongly welcome the FCA’s market study as it provides clear guidance on how the FCA wishes the industry to operate in the future.

“Its recommendations to improve investor protections through better governance and to drive competition through greater transparency of fees and fund objectives are constructive and sensible.

“I firmly believe that these remedies will not only benefit customers but will ultimately strengthen confidence and competitiveness in the UK asset management industry.”

However, David Morrey, head of investment management at Grant Thornton, said the FCA had “pulled their punches”.

Mr Gilbert’s assessment also stood in contrast to that of Justin Modray, of Candid Financial Advice, a low-cost advice service, who said: “Last year’s interim report was one of the FCA’s finest pieces of work, clearly detailing the ways in which the fund management industry is failing its customers. Unfortunately, extensive lobbying by fund managers since then appears to have worked, because the FCA’s proposed remedies in today’s report are a damp squib and unlikely to make a tangible difference to most investors.”

The negative reception was echoed by Alan Miller, of wealth manager SCM Direct who added: “While the FCA is finally pursuing a pro-consumer agenda, it is disappointing that they still appear to be dragging their feet on some key aspects. The UK investment industry has been ripping off the consumer for decades.”

Proposals aired in November that will go ahead include the requirement of fund managers to appoint a minimum of two independent directors to their boards in order to strengthen the duty on fund managers to act in the best interests of investors and hold senior managers more accountable.

The FCA also said it is consulting on outlawing “box profits”, currently legal practice used by fund managers to pocket the difference between the “buy” and “sell” prices of fund units when matching buyers with sellers.

The regulator says its proposed rule change would result in at least £20m in risk-free box profits, that several firms retain, being transferred to investors in the future. The changes are also likely to incur a one-off cost of £5,000 per firm.

David Morrey of Grant Thornton said the changes would hit a number of asset managers hard.

He said: “As external investors enter or leave the fund, the manager essentially trades its investment with that external investor. It is possible for a manger to make sizeable profits by doing so.

“A small number of managers have enjoyed large box profits for some time and they have resisted giving them up as they are explicitly permitted under current rules.”

Announcing the FCA’s findings, chief executive Andrew Bailey said: “The asset management sector is important to the economy, managing the savings of millions of people, and in the current low-interest environment it’s vital we help people earn a return on their savings.

“We need a competitive sector attracting investment into the United Kingdom which also works well for the people who rely on it for their financial wellbeing.

“We have put together a comprehensive package of reforms that will make competition work better and help both retail and institutional investors to make their money work well for them.”

Shares in fund managers including Schroders, Jupiter Fund Management and Aberdeen Asset Management all rose as the final report appeared