The UK’s financial watchdog has outlined a major shake-up for the fund management industry to ensure investors get a good return in an era of low-interest rates.
The Financial Conduct Authority (FCA) said investors should be offered an “all-in fee” so they can easily see the amount taken in charges from their investment returns.
The UK’s asset management industry is the second-largest in the world, overseeing almost £7 trillion of assets, including £1tn on behalf of UK retail investors and £3tn for UK pension funds and institutional investors.
But in an interim report of its asset management market study, the FCA found that investors were being stung by higher charges because price competition was weak within the industry.
It said a difference of 0.75 per cent in disclosed charges would see an investor keep 44 per cent more of their returns on an investment of £20,000 over 20 years.
Today’s report also set out measures to make it easier for retail investors to move into better value share classes. The FCA will now put the report out to consultation, before publishing its conclusions next year.
Keith Skeoch, chief executive of Standard Life, said the Edinburgh-based life and pensions giant was “committed to improving transparency, value and outcomes for clients and customers”.
He added: “This includes ensuring charges are presented in such a way that they are easily understood. As a business we continue to identify areas where we can deliver value for investors. As a true active asset manager we have always been committed to delivering consistent, long-term investment outperfomance, and we welcome any moves which help individuals understand the merits of different approaches to investing.
“The asset management industry plays a crucial role in the UK – helping individuals save for the future and supporting economic growth by allocating capital to those companies which are the most likely to be successful. We will continue to work with the FCA throughout the consultation period.”
FCA chief executive Andrew Bailey said: “In today’s world of persistently low interest rates, it is vital that we do everything possible to enable people to accumulate and earn a return on their savings which can meet their lifetime needs.
“To achieve this, we need to ensure that competition in asset management works effectively to minimise the cost of investment. We want to see greater transparency so that investors can be clear about what they are paying and the impact charges have on their returns.
“We want asset managers to ensure investors receive value for money through pursuing energetically their duty to act in their customers’ best interests. Low interest rates are necessary for the economy, but we have to do everything else we can to ease the burden on savers.”
Joanne Segars, chief executive of the Pensions & Lifetime Savings Association, said the trade body – whose members include more than 1,300 pension schemes with 20 million members and £1tn in assets – welcomed the watchdog’s report “highlighting concerns around cost levels, transparency and alignment of interests within the asset management market”.
She added: These issues are of longstanding concern to our members. We look forward to working with the FCA and government to find solutions which address the fragmented nature of the demand side, including exploring the potential benefits of greater pooling of pension scheme assets.”
Mike Walters, head of investment management regulation at KPMG UK, said the report represented a “fundamental challenge” to value for money the industry provides to savers and investors.
He said: “Firms need to think carefully about how to communicate to investors what value they add. I expect to see some consolidation of firms and funds as governance committees, intermediaries and investors increasingly question the level of fees relative to fund performance.
“But we mustn’t lose sight of the fact that whilst the FCA found that on average the performance of actively managed funds does not represent value for money, many out-perform and some provide access to certain markets passive funds just can’t.”