The UK financial regulator has unveiled its conclusions into a two-year long investigation of the £7 trillion asset management industry – with a mixed response, writes Rebecca Morton
Sections of the UK’s wealth management sector are breathing a sigh of relief today after the long-awaited publication of the Financial Conduct Authority (FCA) final report into the asset management industry.
While the FCA report announced that so-called risk free box profits for fund managers should be banned and that it would consult on the appointment of a minimum of two independent directors to boards, it watered down a number of proposals from its interim report in November notably on mooted measures intended to counter opacity in fund manager fees. In particular, a proposed mandate for fund managers to combine all charges into a single, easy to understand figure is now merely ‘supported’. Instead of imposing new regulations, a period of further consultation was announced.
As a result of the news, share prices of several leading firms, including Schroders, Jupiter Fund Management and Aberdeen Asset Management rose overnight.
Tamasin Little, of legal firm Reed Smith, calls the report ‘a work in progress’, noting that firms will be pleased to avoid ‘the imposition in the short term of additional rules which might have failed to align with MiFID II’. ‘The proposals for an "all in fee" could have been an industry disruptor – and potentially the genesis of an increase rather than reduction in investor costs, or creation of a new type of conflict of interest for managers,’ cautions Little, who notes, that they ‘are recognised to be subject to the new disclosures MiFID II will require in any event in this area.’ She adds: ‘It should be a significant relief to the industry that the FCA has recognised this and is only proposing further consultation later in the year on the most effective means of disclosure.’
Advocates of improved transparency, including Gina and Alan Miller of SCM Direct, said that the FCA should have gone further. ‘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,’ they said in a statement. ‘The UK investment industry has been ripping off the consumer for decades and it is time for the UK regulator to act now rather than have further consultations with the industry and its shoddy trade bodies.’
Justin Modray, of Candid Financial Advice, was eqally damning, calling the proposed remedies ‘a damp squib’, saying they are ‘unlikely to make a tangible difference to most investors’.
Indeed on the eve of publication of the FCA report, research from SCM Direct shed new light on the issue of transparency. Taking the form of a ‘mystery shop’ of 31 leading UK wealth managers, which were asked four basic questions from a potential £1 million-plus client, fully 52 per cent of wealth managers refused to disclose all charges payable in a single figure and 69 per cent failed to include VAT or underlying fund costs within their initial reply. SCM Direct also claims that the predicted rate of return, put at an average of 7.1 per cent per annum, was unrealistically high. It estimates that clients should expect a return closer to just 3.9 percent per annum after costs. Responses indicate a reluctance among a majority of managers to give straight answers to straight questions, the firm found.
Concerned investors and campaigners will no doubt be mollified by the arrival of MiFID II in January 2018. The EU regulation will require managers to reveal their total expense ratio (TER) – the total fees should add up to. They will also have to inform clients of fund devaluations of more than 10 percent and produce annual reports detailing all costs purchases and sales of funds.
MiFID II has been hailed by many as a step in the right direction, but the industry will have to remain vigilant even after its introduction. Clients could well still have difficulty in understanding fees because managers do not have to express their TER in any specified, standard, and therefore comparable format. The information will be there for customers to see, but shopping around for the best rates will continue to be time consuming and perplexing.
With the UK on course to leave the European Union in March 2019, the wealth management sector must be wary of stagnation in respect of reform. Evasion by individual managers, alongside the FCA’s reluctance to ruffle any feathers, suggests the industry remains as intransigent as ever. Without the driving force of external regulation, it’s hard to imagine that pro-consumer change will continue.