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Damp squib or frontal attack? 15 voices on the FCA funds study

We highlight 15 top views on the Financial Conduct Authority's eagerly awaited final report into the asset management industry.

A landmark moment for asset management

The financial industry watchdog’s final report on asset management said that many actively managed funds were not ‘value for money’ and outlined a raft of proposed remedies, with the ‘all-in' fund management fee grabbing the headlines.

While the final study did not deviate too far from the FCA's interim report released in November 2016, the funds industry is still facing some major changes.

However, while some experts welcomed the report and its goals, others criticised the City regulator for not going far enough.

We highlight 15 of the top views.

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Please sign in or register to comment. It is free to register and only takes a minute or two.

A landmark moment for asset management

The financial industry watchdog’s final report on asset management said that many actively managed funds were not ‘value for money’ and outlined a raft of proposed remedies, with the ‘all-in' fund management fee grabbing the headlines.

While the final study did not deviate too far from the FCA's interim report released in November 2016, the funds industry is still facing some major changes.

However, while some experts welcomed the report and its goals, others criticised the City regulator for not going far enough.

We highlight 15 of the top views.

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Please sign in or register to comment. It is free to register and only takes a minute or two.

Sean Hagerty, managing director, Europe for Vanguard

‘This is an important moment for UK investors. We support the FCA’s efforts to lower the cost and complexity of investing. Consumers always benefit from lower prices, better quality products, and clearer information.

‘Costs matter. Every pound that investors pay in charges is a pound out of their potential returns, reducing their chances of being able to afford a comfortable retirement or save for a mortgage deposit.

‘Our own proprietary research demonstrates the impact of cost on performance. Our findings show that too many funds fail to meet their performance benchmarks, largely because of the charges they levy.

‘As an industry, we have an opportunity to reassure people that investing can be a force for good, and for many people, a sensible way of providing for the future.

‘This includes ensuring investors have access to all the information they need, including costs, in a format they can understand. The increased transparency proposed by the FCA will enable an informed investor to choose high-quality, low-cost products which will lead to better financial outcomes for UK investors.’

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Keith Skeoch, chief executive, Standard Life

‘Standard Life Investments welcomes the FCA’s Market Study Report and wholeheartedly supports its core principle of delivering better transparency, value and outcomes for clients and customers.

‘We remain committed to supporting a market and environment that meets the needs of investors over their designated time horizon. As a business we continually seek to improve the service that we offer existing and potential investors especially in the areas of governance, disclosure and advice.

‘A true active asset manager, we have always focused on delivering consistent, long-term investment outperformance and we welcome any moves which help individuals understand the merits of different approaches to investing. This includes ensuring that outcomes and charges are presented in such a way that they are easily understood.

‘The asset management industry plays a crucial role in the UK, helping individuals save for the future and supporting economic growth. We will continue to work closely with the FCA on this comprehensive package of reforms.’

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Justin Modray, director, Candid Financial Advice

‘Last year’s interim report was one of the FCA’s finest pieces of work, clearly detailing the ways in which the fund management industry is failing its customers. Unfortunately, extensive lobbying by fund managers since then appears to have worked, because the FCA’s proposed remedies in today’s report are a damp squib and unlikely to make a tangible difference to most investors.

‘The key proposal appears to be a desire to move towards ‘all in one’ annual charge, which would include investment dealing fees. Of all the various issues considered, dealing fees are perhaps one of the least offensive since they are reflected in performance, so while this move is probably positive overall it won’t fix other more troublesome issues affecting investors.

‘We remain concerned that the FCA’s proposals will not fix three key issues hurting fund investors: price collusion, failing to pass on economies of scale and profiting from inflated admin expense claims.

‘Fund management has always been a one-sided affair, in that investors take the lion’s share of risk while fund managers enjoy high profit margins. Today’s FCA report was a real opportunity to re-address that balance, but sadly I just can’t see that happening as the FCA is relying too heavily on non-existent price competition.’

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Odi Lahav, CEO, Allenbridge, part of MJ Hudson

‘Overall, we believe that much of the FCA’s findings and proposed remedies, on their face, are sensible and will be, in the long-term, in the best interests of investors.

It is, however, important to note today’s context and current economic climate in implementing these requirements, particularly in light of Brexit and the coming implementation of a multitude of new regulations such as Mifid II, Priips, etc... It’s encouraging that the FCA has considered some of these regulations and intends to pursue a course of action that will be aligned and compliment those. Nonetheless, the FCA will need to take great care to ensure that it doesn’t damage the UK’s asset management industry.

Too much regulation can damage an industry and stifle innovation; too little has clearly shown not to work in the best interests of all stakeholders.’

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Andrew Glessing, head of regulation, asset management consultancy Alpha FMC

‘The FCA’s determination to reform the sector remains as strong as ever. Asset managers will at least appreciate the FCA clarifying its direction of travel, and active managers in particular will surely breathe a sigh of relief that the regulator has expressly stated that it is not against active funds in principle.

However, value for money and introducing the all-in-fee remain the prerogatives and the industry must deal with a regulator set on giving more protection to consumers and increasing competition between providers, which will inevitably exert pressure on margins and operational efficiency. For the first time, the FCA has begun to define value and how they intend to measure and enforce it through the Senior Managers Regime.

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Bob Campion, senior portfolio manager, Charles Stanley Asset Management

‘Measures designed to improve transparency and outcomes for investors are welcome. However, in delivering this wide ranging package of reforms and proposals, the FCA will no doubt be conscious of unintended consequences. Additional regulation has in the past raised costs for the industry, which could prove counter-productive to the FCA's goal of improving value for money for investors.’

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Chris Cummings, CEO, Investment Association

‘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 welcome the regulator’s recognition of the industry’s work to date on developing a consistent and transparent disclosure code for charges and costs which can be built on further with consumer groups. The FCA has listened to our calls to make it easier for savers to switch between share classes, which we welcome.

‘Asset managers compete every day to attract clients and investors and are focused on delivering the best outcomes for them. Our priority now is to have a meaningful dialogue with the regulator about the implementation of the recommendations, to ensure savers are getting the best possible deal. A pragmatic timetable is key to achieving this, given the major regulatory changes already in the pipeline and the preparations for Brexit.’

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Paul Mumford, fund manager, Cavendish

'Much of the active share discussion so far has focused on the lower end – where closet trackers barely move from the underlying index. Investors looking to beat the market should always steer clear of this, but does this mean investors should always look for funds with the highest active share ratios? Not necessarily.

'To an extent this will be a consideration because a counter-cyclical approach – the best way to drive outperformance in the long run – would automatically mean moving away from the benchmark (e.g. buying un-favoured stocks or taking profits during bull runs).

'However, it’s unlikely that a 100% for-the-sake-of-it contrarian approach will prove the best strategy, because the best managers don’t purposely strive for a high active share.'

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Mark McNulty, head of investment solutions, JLT Employee Benefits

‘The proposed measures around transparency are particularly pertinent. Bringing investment consultants into its regulatory perimeter will improve competition and value for money for clients.

‘The FCA will likely expect that consultants measure the quality of their advice so that clients can assess their performance relative to the costs they are paying for advice. We call on the FCA to introduce regulation of investment consultants as soon as possible and avoid further delays by referring to the Competition and Markets Authority.’

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Darren Philp, director of policy and market engagement, The People’s Pension

‘Today’s FCA report shows an important shift in the regulator’s tone but further steps are required to deliver tangible change for all retirement savers.

‘The drive to ensure consistent disclosure by asset managers of the underlying investment costs will go a long way to delivering greater transparency in the industry and with it, greater member confidence. However, we are concerned that the FCA isn’t going as far as producing a standard, cross-industry template but is relying on the industry to take this forward. This could make it difficult to compare costs and we firmly believe that mandatory standardisation is the way forward.

‘Whilst the report stops short of putting a full fiduciary duty on asset managers to act in the best interests of investors, we welcome the clear focus on accountability on this. However, only time will tell if this has a real impact and changes the behaviour of asset managers.’

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David Morrey, partner and head of investment management, Grant Thornton UK

‘The regulator has shown itself to be largely impervious to the lobbying efforts of the industry, who found fault in both the analysis and conclusions of the interim report published by the FCA in late 2016. If you didn’t like the interim report, you won’t like the final report.

‘[There are] Two notable shifts in the tone of the report in its final form, however:

‘It has backed away from the frontal assault it began on whether actively managed (and generally more expensive) funds could ever be a better choice than cheaper passive (index tracking) funds. The argument that passive funds are, in all market conditions, better than active funds is hard to make, and the FCA probably realised the dangers of driving investors to passive funds where managers have no discretion to avoid market train wrecks.

‘It has also backed away from considering whether managers should have an additional duty to spell out to investors when they are in serially underperforming funds. The general appetite to improve disclosure remains but it doesn't single out funds which fall below a theoretical, and the FCA admits, likely impossible to set fairly, performance threshold.

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Graham Vidler, director of external affairs, Pensions and Lifetime Savings Association

:

‘The report’s proposals on consolidation and governance reflect our Defined Benefit Taskforce’s work in this area. The taskforce’s research suggested that larger schemes could use their size to achieve savings on their asset management fees. We also believe that common governance arrangements, where schemes are brought under the supervision of fewer but more experienced trustees, could also mean schemes are better able to scrutinize and hold their asset managers to account. We strongly welcome the FCA’s commitment to working with the DWP to remove barriers to consolidation and pooling.

Institutional investors, however large and however well-governed, need a competitive, transparent market in order to deliver the best outcomes for their members. This report makes important recommendations relating to the disclosure of investment costs and scrutiny of consultants working in the institutional market. We look forward to continuing to work with the FCA to develop these proposals and support the development of an investment management sector that works in the best interests of pension schemes and their members.’

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Richard Theo, CEO, Wealthify

'We warmly welcome the recommendations outlined in today’s FCA report and hope that it prompts the industry to wake up to modern investing client needs. To implement these recommendations across the board would be a significant leap forward for the old guard of asset managers who for far too long have relied on convention, switch apathy and lack of competition as an excuse to hit clients with high fees and substitute customer service for complicated and opaque practices that are in the best interests of the business, not the client.

'With technology now improving so many aspects of financial services, there’s simply no excuse for continuing to treat clients this way. Investors are fed up with the expensive fees charged by ‘celebrity’ fund managers that eat away at their returns, particularly now that active fund managers increasingly fail to add enough value for clients to warrant the higher fees they charge.'

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Andrew Carter, CEO of Royal London Asset Management

‘The FCA has chosen a sensible way forward, both in how it will engage with the industry and with its implementation timetable, taking account of upcoming EU legislation and Brexit.

‘At the heart of its proposals stands the customer. As an asset manager owned by a mutual company this is already very much part of our ethos. Transparency is an important guiding principle, which benefits not just consumers but also the industry at large and therefore we support the move towards clearer presentation of costs and charges for consumers.

‘As an active and passive manager we are pleased to see recognition that both active and passive strategies are valid and can complement one another in the best interests of consumers.’

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Jason Hollands, managing director, Tilney

‘While the FCA’s measures are unlikely to placate the most vocal critics of the industry, some of whom want ever greater regulatory intervention on pricing, over-regulation can often lead to standardisation which risks reducing choice and competition.

Improved transparency is clearly laudable in so far as it can help investors make better informed decisions and we certainly hope this will provide additional pressure on managers offering ‘fake’ active funds that are, in practice, heavily aligned to benchmark indices but levy unwarranted fee levels that are considerably higher than a tracker fund. We have long been critical of these types of pedestrian products – as well as outright ‘dog’ funds - which offer very poor value for money.

If you are going to invest in actively managed funds, it is vital to be highly selective as only relatively modest number of managers have worth backing and there are way too many also-rans.

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