The Financial Conduct Authority will have a blockbuster moment some time in the next two weeks when it publishes its final report into the UK asset management sector.
At the interim stage in November, the UK watchdog said investors were being short-changed by a sector bloated by fat profits earned by actively managed funds delivering sub-par returns. It found investors were not getting value for money and the sector was rife with potential conflicts of interest.
One of its more punchy proposals, and one dreaded by the industry, is to force fund companies to present investors with an all-encompassing annual fee. That would chime with Mifid II rules due to come into force next year that require asset managers to disclose all charges and express them in hard currency terms and as a percentage.
With many investors in the dark about complex charging structures, the FCA argues the annual-fee proposal would improve transparency and competition.
The FCA is a young institution that came into being just four years ago, with its “promote competition” mandate effective a year later.
But it needs to demonstrate it has sharp teeth. It must force the industry to move beyond its “tick the box mentality” when it comes to compliance. “Asset managers too often observe the letter of the law but not the spirit,” is the view of one industry veteran.
History is not on the FCA’s side.
Previous UK regulators have struggled to police the industry properly. And concerns over high fees, performance and opaque structures are hardy perennials for an industry that has been around for centuries.
Dating back to 2001, the City regulator at the time, the Financial Services Authority, had a good regime in place, including the Treating Customers Fairly (TCF) guideline. TCF is one of 11 overriding FCA principles for financial services businesses, which also include managing conflicts of interest and communicating in a manner that is clear, fair and not misleading. But the FSA (dubbed the Fundamentally Supine Authority by Private Eye magazine) was ineffectual.
“The UK asset management sector has flagrantly breached these principles for decades by hiding key fees and charges from clients, not showing these clearly and operating with huge conflicts of interest, and misleading clients, for example with closet indexing,” Gina Miller, co-founder of SCM Private, a wealth manager, tells FTfm.
So the big question for the FCA is how strong it can be on enforcement.
There are concrete steps the FCA should consider to stamp out bad practice, including naming and shaming individuals. There should be financial penalties on individuals as well as companies when rules are breached. There could also be periodic audits to check how the rules are being implemented.
Ms Miller goes further: “Any chief executive reporting costs or performance to their shareholders or investors in a manner that is found to be unclear, unfair and misleading should be removed from the FCA register as a fit and proper person.”
She also wants a formal investigation by the Financial Reporting Council into how UK fund managers report performance. “This should be in consultation with independent experts to give the public confidence that it would not be a whitewash,” she adds.
The FCA will argue that it does use its powers adequately. On top of public enforcement actions, it also works behind the scenes to stamp out bad practices.
It has imposed some big fines on high-profile names: Invesco Perpetual (£18.6m) for breaching investment limits and introducing leverage into funds — including those run by Neil Woodford — without proper disclosure; Aviva Investors (£17.6m) for failing to prevent an “abusive practice” known as cherry-picking for as long as eight years; Threadneedle Asset Management (£6m) for failing to supervise its trading desks appropriately and supplying the regulator with “inaccurate information”; and Aberdeen Asset Management (£7.2m) for failing to make sure client money it deposited in outside money market funds was protected in case of a financial collapse. In 2012, BlackRock was fined £9.5m by the then UK watchdog for failing to make sure that £1.3bn in client assets were properly ringfenced for more than three years.
Last year, the FCA said it had found evidence of closet tracking — funds that charge high fees for a manager’s stockpicking expertise but in reality closely mimic their benchmarks — and accused five investment managers of incorrectly marketing actively managed products. That finding came after it examined 19 asset managers and 23 actively managed funds with combined assets of £50bn. But no names have been made public. And it is unclear whether any sanctions were imposed.
That raises the question of how widespread closet tracking is and which other managers are doing the same thing.
When the FCA releases its final report and proposes final remedies, subject to consultation, there will be a blaze of publicity. But the real test will be in the follow-through. In that, the FCA must show it will not tolerate bad practice.
Peter Smith is the editor of FTfm