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FSA launches probe into £800bn unit-linked fund sector

by Michelle Abrego on Jan 31, 2013 at 16:29

FSA launches probe into £800bn unit-linked fund sector

The Financial Services Authority (FSA) is conducting a thematic review into the governance of unit-linked funds run by life insurers, a sector it estimates to account for £800 billion in funds under management.

The FSA highlighted the governance of unit-linked funds by life insurers as an emerging risk in its Retail Conduct Risk Outlook in 2012.

In its insurance conduct supervision newsletter, the FSA said: ‘The funds under management in the unit-linked sector are currently over £800bn and will grow significantly with the introduction of pension auto-enrolment. Due to the size and importance of this sector, any failures pose a high risk to our statutory objectives, particularly the protection of consumers.’

The review will assess whether firms have adequate systems and control in place to ensure that funds are administered and managed fairly and in accordance with customer expectations, it said.

The FSA will also asses if assets backing unit-linked policies are appropriate for policy holders and that policy holder benefits are calculated fairly and accurately.

It has taken a sample of firms covering a large proportion of the market and incorporates firms of different size, nature and business models.

It expects to share the results of the thematic review in the autumn.

25 comments so far. Why not have your say?

The Expat

Jan 31, 2013 at 17:22

What the SHOULD investingate are the high fees and all hidden costs in OEICs and SICAV funds. They should also look in to the structural flaw in these fund structures where there is no price for liquidity and small investors are disadvantaged by larger once - like fund of funds.

Most retail investors are better off in investment trusts and ETFs. However, as these products have lower charges and so not pay any commissions to intermediaries, they are not being promoted.

Having worked as a fund manager for many years, it is just shocking to see how Mrs Miggins is getting a raw deal.

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Simon Kershaw

Jan 31, 2013 at 17:23

Another piece of job creation. Why are all of these thematic reviews being announced in the dying days of the FSA.

Just go.

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Daniel Elkington

Jan 31, 2013 at 17:30

Dear Mr. Expat.

Commission is now banned and not really part of the equasion any more.

Investment trusts can gear and are more complex products. They are closed ended meaning that they are less liquid than OEICS.

ETF's are great, however there is a deal of counterparty risk.

Having worked as a fund manager for many years you appear to have forgotten that Mrs. Miggins has relatively little knowledge of the underlying mechanics and her comprehension of the term gearing is limited to how mechanical devices operate.

Additionally, you are forgetting that some OEIC tracker strategies are actually lower cost than ETF's and are less risky because of the lack of counterparty risk etc.

This is a good step as a lot of these funds represent poor value for money at present and I look forward to the findings.

I agree that the TER measure is not a true measure of the overall charges of an OEICUT, however I'd rather people were overcharged in an OEIC than sat in cash.

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Dante

Jan 31, 2013 at 17:30

M&G Global really should think about their advert with a Lance Armstrong lookalike cyclist that pops up next to this blog string....

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Anitaki

Jan 31, 2013 at 17:31

In the meantime, whilst the FSA are creating life long employment opportunities from themselves, l have just received an illegal, unsolicited phone call from a Manchester area number (0161-826-xxxx) telling me that "as l am under 60" (not true) by "pressing 5 now" l can immediately get a bonus of over £1,000 added to my pension fund (which, unbeknown to them is already in payment!)

The fraudsters are still out there in droves, whilst honest IFAs head towards extinction.

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Robin Hood

Jan 31, 2013 at 17:31

A pity they didn't do this in 2007!

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Paul Barnard

Jan 31, 2013 at 17:34

@The Expat - you may have heard of RDR, so your commission argument is redundant. Also, many of us have used wraps for years and commission has been totaly irrelevant here too.

What is the average volatility between IT's and OEICs from similar sectors please?

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Guy Hammett

Jan 31, 2013 at 17:34

Although they will all be still there in April the FSA technically only has 3 months to live so maybe they are thinking "I think I'd like to do all the things I meant to do before I died" - that's why they are suddenly rushing around doing busy work.

Aone way trip to Switzerland for an early exit might be more suitable but that's not legal yet!

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Simon Webster1

Jan 31, 2013 at 18:31

I learnt yesterday that from a legislative perspective FCA is a name change to FSA. So why they needed a new long term lease on another buiidling is beyond me...

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John Phillips

Jan 31, 2013 at 18:42

I know where I'd like to launch a probe.

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John Borgars

Jan 31, 2013 at 19:24

@ Anitaki

Only one?

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Cavalaf via mobile

Jan 31, 2013 at 23:46

Does no one remember the investment trust split cap scandal ? They, nor etfs, are not covered by the fscs. They are not suitable for retail customers.

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Certified Professional Stander

Feb 01, 2013 at 09:07

@ John Borgars

Only one?

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Certified Professional Stander

Feb 01, 2013 at 09:09

Sorry, meant @ John Phillips

Only one?

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John Phillips

Feb 01, 2013 at 09:25

@cps

Yes but a very big one

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Andrew Moreton

Feb 01, 2013 at 09:27

I would encourage anyone with an interest (the expat guy included) to do a bit of quick research on trustnet or similar to compare life coy balanced managed funds against the FTSE All Share - the results may surprise you. Ditto their "managed" UK equity funds. Many of these funds are essentially closet trackers with high costs.

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P L H

Feb 01, 2013 at 11:05

Think there is a misprint in para 5. Should read: "The FSA are all asses"

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Polfers

Feb 01, 2013 at 11:09

@ The Ex Pat - sorry, your argument is fundamentally flawed even leaving aside the tired and entirely questionable commission argument. Others have already said why.

@ Simon Webster: yes. Quite!

I note that the Papers are busy slagging off "money - grabbing, greedy IFA's" for charging "outrageous" fees. They of course haven’t the faintest clue as to why those fees are (sadly), barely realistic for survival. Meanwhile the big boys in the Insurance companies and fund management houses - and (I couldn't NOT mention), the Banks, carry on regardless.

Anyone with any common sense (and please, all you snorting “what-ho!” IFA good- two-shoes out there, kindly spare me the old “day’s of the Raj”, goofy, self righteous vitriol of your stuffed hair-shirt, turkey's voting for Christmas platitudes on this one), a ‘hem... (calm down polfers, calm down, mop off the foaming spittle..)....... can see that despite the noises-off, in the great scheme of things, the regulatory focus remains firmly on the paltry and inconsequential (it's a good diversionary tactic to keep us plebs running around in pre-occupied and impotent circles), whilst the real elephant in the room charges on un-checked in any meaningful or effective way.

PS - suggest you add some razor wire to the tip of the (large) probe.

~;o)

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John Phillips

Feb 01, 2013 at 11:19

@ Polfers

No room for it as I've covered it with broken glass already.

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Neil Telford.

Feb 01, 2013 at 14:39

@ Daniel Elkington

>> "I'd rather people were overcharged in an OEIC than sat in cash."

No, I'd rather sit in cash rather than invest in some crap fund and lose money.

>> "Investment trusts can gear and are more complex products"

Are they more complex ? Not really. There are countless examples of good investment trusts who constantly chug out steady returns and dividends. They are not all esoteric entities.

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The Expat

Feb 01, 2013 at 15:36

My comments were clearly more controversial than I thought they would be. So, just to clarify:

Of course there are complex and risky investment trusts and ETFs that are inappropriate for many retail investors, but that is where advisers come in and can add real value. There are many investment trusts that are effectively identical to unit trusts, some times even managed by the same fund managers, but with substantially lower charges. (Lower still if you factor in that they often trade at a discount to par.) Historically IFAs had little incentive recommending these structures as there was no commission to be had and fund management firms had little interest in promoting them as their profit margins are lower on these products. In the RDR world, advisors now have the opportunity to add real value by putting clients into more cost efficient products. I still think it is a very good thing to look in to practices surrounding unit trusts and the way fund management firms market them.

Also, the argument regarding better liquidity in unit trusts is simply wrong. There is no “free liquidity” in the market. Investors being able to buy and sell units flat to NAV doesn’t mean the liquidity is free. It simply means the dealing cost is born by investors who remain in the fund. When market volatility increase and the liquidity premium goes up, the cost of trading increases. (After the Lehman collapse, for example, the bid offer spread on some corporate bonds could be 5% or even more!) In that kind of market, the very high liquidity cost is born by investors who do not sell out. When large fund of funds start selling down its holding in a unit trust, it is the small retail investor who pays the price. In theory fund management firms should apply dilution levies to large in or outflows. In practice it is very difficult to calculate and fund on fund managers have learned how to get around the triggers. Contrast that with investment trusts where market volatility and a large seller means widening bid/offer and greater discount to NAV. That means those who want to trade in volatile markets have to pay up for the liquidity. That protects smaller and long term investors.

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Neil Telford.

Feb 01, 2013 at 16:09

@ The Expat

Thanks for your "Janet and John" explanation. I think most of us lesser mortals do grasp concepts such as liquidity and fund structures.

But I would be interested to find out how many IFA's in this post-RDR world actually recommend investment trusts and ETF's.

Probably very few. It's out of their comfort zone. It's always easier to recommend Invesco Perp High Income rather than other generalist investment trusts which have consistently performed better but don't spend huge amounts of money promoting themselves.

That's another point. Who pays for the vast amounts of money that many OEICs/UTs spend on marketing? The mugs who buy the funds.

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The Expat

Feb 01, 2013 at 16:36

@ Neil Telford

Judging from some of the replies to my first comment, it seemed that some of the readers needed a "Janet and John" explanation. Didn't mean to offend anyone.

Apart from that, I fully agree with your comments....and it doesn't seem you fundamentally disagreed with mine.

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Richard Hardy

Feb 01, 2013 at 16:58

The only reason to invest is to try and make your money grow.

It will be interesting to see if they will make fund managers amend their charging structures so that they can only charge an AMC if they make a profit for a client.

No profit no AMC

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Jonathan Kirby

Feb 04, 2013 at 13:57

Surely we all recall the disaster of the FSA investigating with-profits funds, many of which had performed extremely well over the years.

The outcome of the realistic accounting rules in 2002 was that they killed off with profits almost entirely for new business by their meddling and the consequence of their actions probably did more to damage peoples pensions and investments than anything up to Lehman's demise.

Let the managers manage the funds, in accordance with the sector they are in, and without interference from regulators who have no place in determining how funds are managed just that sensible rules are not broken.

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