The Financial Conduct Authority (FCA) has once again criticised the asset management industry for making high profits at the expense of investors and outlined plans to impose a ‘single all-in’ fee.
The final report into asset management published by the UK watchdog explained persistently high levels of profits earned at buy-side firms suggest prices lie above competitive levels.
It found some firms do not disclose some charges to investors before they make investment decisions, in particular transaction costs.
Charges are also estimated in advance meaning investors often bear the risk of the actual charges being different from the fund manager’s original estimate.
“We consider that these issues are likely to contribute to limited price competition for actively managed funds and to asset managers being weaker at controlling more complex costs,” the FCA said.
In response to this, several ways to implement a previously proposed single all-in fee were outlined in a bid to drive competitive pressure on asset managers.
The changes would see the ongoing charges figures become the actual charge and fund managers provide estimates of implicit and explicit transaction costs. The single charge would also include all charges taken from the fund, but with an option to ‘overspend’.
The FCA first outlined plans for its single all-in fee last year after slamming buy-side firms for enjoying high profits as investors pay extortionate charges often not justified by returns.
The regulator’s latest assessment has found continued evidence of “sustained, high profits over a number of years” with fund performance not always reported against appropriate benchmarks.
Respondents to the FCA’s latest asset management review agreed increased transparency around fees would help investors compare prices and access information about the true costs of investments.
Although some respondents warned against investors becoming too focused on charges or not understanding the charge and described the single all-in fee as costly and too complex.
The Investment Association’s CEO, Chris Cummings, welcomed the review and explained he will work closely with the FCA as it looks to provide more transparency and clarity for investors.
“Asset managers compete every day to attract clients and investors and are focused on delivering the best outcomes for them.
“Our priority now is to have a meaningful dialogue with the regulator about the implementation of the recommendations, to ensure savers are getting the best possible deal,” he said.
The review has been welcomed industry-wide, although some market participants have stated the practicality of introducing a single all-in fee will prove to be difficult.
“Value for money and introducing the all-in-fee remain the prerogatives and the industry must deal with a regulator set on giving more protection to consumers and increasing competition between providers.
“[It] will inevitably exert pressure on margins and operational efficiency,” said Andrew Glessing, head of regulation at consultancy firm, Alpha FMC.