THE investment management industry has long seemed like the naughty kid who somehow keeps getting off lightly – but its luck could finally be running out.
While banks, insurers and pension providers have been under the full regulatory glare in recent years, the fund firms running the billions of pounds that ordinary investors and pension savers diligently put away have had an easy ride.
That it’s still not possible for those investors to know exactly what they’re paying for their Isas and pensions – regardless of how a fund is performing – or why, is apparently acceptable.
The UK has fallen well behind both European and certain national regulators in making fund houses come clean. Is this about to change?
Last week the Financial Conduct Authority (FCA) announced that later this year it will launch a “market study” on asset management to scrutinise the charges paid by investors and the factors driving those charges.
It’s been here before, of course, but previous investigations into the industry have generated only half-hearted action. An FCA review last year found that the information provided on charges was too often unclear and misleading. So how did it respond? It effectively left the industry trade body, the Investment Association, to put things right. The association’s tactic of making just enough concessions to buy time and keep the regulator happy is working too. But this won’t wash for much longer. The pressure on the regulator to go a step further is growing, not least due to moves in Europe (particularly in the Netherlands) towards full disclosure.
From next month, the UK will impose a new 0.75 per cent charge cap on default funds in defined contribution schemes used for automatic enrolment. But while this is welcome, industry lobbying resulted in a range of costs that are ultimately borne by pension savers being left outside the cap. So it’s the kind of measure that in seemingly addressing the level of charges obscures the wider issue of transparency.
The fund industry insists, often very persuasively, that it’s not possible to know, let alone disclose, the full cost of investment. This simply isn’t true. There’s a growing army of activists out there working tirelessly to analyse data and show that it can be done.
Up to four-fifths of fund costs are being kept hidden, according to research published last year by The Pensions Institute. It found that the “visible” costs (covered by fees, taxes and so on) accounted for just 18 per cent of the actual costs incurred by investors.
How is this good enough, more than a decade after the Sandler Review accused fund managers of reporting charges in a way that was “neither clear nor consistent”?
Next month the biggest pension reforms in generations will result in many more people managing their own pension investments, while automatic enrolment means millions more people are saving into workplace schemes.
Yet there’s still no way they’ll be able to know how much they’re paying for their investments or make fully informed comparisons. There’s no reason to expect the regulator to get it right in its next look at the sector. But sentiment is changing and as others shine more light on fund charges, the FCA may have no choice but to finally act decisively.