Fund management sector needs radical shake-up, says regulator

Sweeping reform of the UK's £7 trillion asset management industry is necessary because of its failings towards customers, the financial regulator has declared.

The City watchdog found that price competition is weak and investors may not be clear on a fund's objectives. Picture: Daniel Leal-Olivas/AFP/Getty Images

It came as the Financial Conduct Authority (FCA) detailed a series of concerns around the industry as it published the final findings of its study into the sector.

The FCA found that price competition is weak, investors are sometimes unclear on what the objectives of funds are, and fund performance is not always reported against an “appropriate benchmark”.

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The watchdog added that, despite a large number of firms operating in the market, there was evidence of sustained high profits over a number of years and there were concerns about the way the investment consultant market operates.

As a result, the regulator said it was proposing a series of remedies including supporting the disclosure of a single, “all-in” fee to investors. In addition it wants “consistent and standardised disclosure” of costs and charges to institutional investors.

The FCA also wants to strengthen the duty on fund managers to act in the best interests of investors, using the senior managers regime to bring individual accountability.

Fund managers will also be required to appoint a minimum of two independent directors to their boards, and examine the way fund managers profit from investors buying and selling their funds.

Andrew Bailey, chief executive of the FCA, said: “The asset management sector is important to the economy, managing the savings of millions of people, and in the current low-interest environment it’s vital we help people earn a return on their savings.

“We have put together a comprehensive package of reforms that will make competition work better and help both retail and institutional investors to make their money work well for them.”

Initial response from the industry to the shake-up was positive. Chris Cummings, chief executive of the Investment Association (IA), the fund management trade body, said the organisation strongly supported the FCA’s objective of serving its customers “in a competitive, accountable and transparent manner”.

He said: “Many of the key recommendations work with the grain of European legislation already in the pipeline to introduce more clarity and transparency for consumers.

“We will work closely with the FCA as it looks further into the detail of how to present costs and charges in the clearest way for savers and how it will develop more independent oversight of investment funds in a way that is effective and proportionate.”

Martin Gilbert, chief executive of Aberdeen Asset Management, in the process of an £11 billion merger with Standard Life to create a fund management giant, said the recommendations to improve investor protection were “constructive and sensible”.

He added: “I have stated several times that I am in favour of all-in fees including all costs as the industry has an obligation to deliver what the customer wants.

“I am a vocal advocate of the benefits of involving independent directors in fund governance, having seen how they help elsewhere in the world. While supporting the FCA’s general moves in this direction, Aberdeen would advocate going further than the FCA currently suggests by introducing two independent directors on to the boards of UK open-ended fund ranges. This introduces a separate and independent level of oversight from that undertaken by the manager.”