A new study from KPMG underlines how the Financial Conduct Authority's (FCA) 'tough talking' asset management study has split opinion.
In its annual Evolving Investment Management Regulation report, KPMG highlighted how the regulatory debate on the level of fund management fees has widened over the last 12 months.
The trigger was the FCA's review of the asset management industry last December, which presented some damning findings and proposed a series of 'remedies'.
One of the watchdog's major criticisms was that active funds rarely outperform and are guilty of 'considerable price clustering'. It was
also critical of the industry’s failure to promote passive products to retail investors.
'Its stance would appear to indicate an endorsement, intended or
not, for passive products,' KPMG noted. 'The regulator seems to suggest that active funds are appropriate only if there is no passive
vehicle that can offer similar exposure.'
This stance has raised eyebrows in the likes of Hong Kong, which is concerned that the 'rise of passively-managed index-tracking
funds could harm corporate governance standards in the territory'.
Meanwhile the UK funds trade body, the Investment Association, has expressed doubts over the reliability and accuracy of the FCA data. It said the report does not 'distinguish between different types of
active funds and seems to suggest that active funds should take on more risk to justify higher fees'.
KPMG also pointed out that ratings agencies have also expressed doubts over the FCA findings.
'In November 2016, Moody’s noted that the regulator’s proposals could squeeze the profit margins of active fund managers, saying the FCA’s proposed fee structure will require significant expense reduction.'
Moody's said this competition from passively-managed funds would require investment managers to 'adapt their business models', with those that move first being the 'most resilient' to regulatory changes.
One of the FCA's proposed remedies is the introduction of an 'all-in fee', highlighting all the charges investors will pay, including transactions costs linked to fund manager trades.
Of the four options proposed for the all-in fee, three would require the
manager to predict future transaction costs (as will be required by the Packaged Retail and Insurance-based Investment Products (PRIIP) Key Information Documents (KID).
Currently, fund managers are required to disclose through Ucits KIID as an ongoing charges figure based costs incurred by each fund over the previous year, excluding transaction costs and any performance fee.
'One option would require the manager to pay for any overspend in predicted transaction costs. Another would require the manager to pay back to the fund any underspend,' KPMG noted.
The FCA said an all-in fee would allow investors to 'easily see what is being taken from the fund'.
KPMG suggested this might backfire for the FCA however, resulting in higher fees. 'Some may set the all-in fee figure at a level that is high enough to generate certainty for investors, which could result in higher fees.'
KPMG also points out how the UK funds regime could operate under a quite different regulatory climate to the rest of Europe.
It said that while some of the FCA's proposed 'remedies' are in line with the thrust of PRIIP KID and Mifid II regulations, other proposals indicate the UK regulator is prepared to consider more detailed, or perhaps different solutions.
'Coupled with the already stringent UK requirements on
inducements, this approach could lead to a greater differential in the regulation of UK investment markets versus the rest of Europe,' KPMG said.