Releasing the results of two independent studies the panel commissioned to look into the opaque nature of asset managers’ cost reporting against a backdrop of the growing reliance by both institutional and retail investors on asset managers as the stewards of collective savings, the panel found that the sector is “characterised by profit maximisation, combined with incomplete disclosure and poor management of conflicts of interest.”
According to The FSCP, “the full costs incurred by consumers when making long-term investments are not consistently and comprehensively defined, nor understood. This despite intensive statutory regulation, and attempted reforms by the industry itself.”
And, it added: “Moreover fund managers too frequently exercise poor control of costs, which are not necessarily visible to investors and which managers can deduct directly from the value of funds, rather than treat as a business cost that they meet out of their own pockets.”
Over time, such weaknesses can have a significant impact, the FSCP said, pointing out that over a working lifetime, a 1% annual charge can trim the value of a pension pot as much as 25%.
Among the findings the two reports generated, the most problematic according to the FSCP is the “typically poor governance of retail funds”. Others were that while new regulations have been instituted at considerable cost, they have not been “self-evidently successful”. And, importantly, that while much research has been undertaken to better understand the full costs involved with investment, “the full costs borne by savers are simply not known.
Solutions
In order to mitigate some of these weaknesses, the FSCP has proposed some reform options. While it says there is merit in the argument for allowing some of the current disclosure initiatives to bed in before making any major reforms, it said: “the history of persistent regulatory failures strongly suggests the need for structural change to align the interests of principal and agent.”
One of the options proposed would be for the Financial Services Authority to mandate full MiFID II style disclosure of all costs as soon as possible. But, it added that “Without a fundamental alignment of incentives, the industry is always likely to find ways around even the most prescriptive forms of regulation.”
Thus, for the FSCP, a longer-lasting, albeit more radical, solution would be to change to a single charge model with all other intermediation costs and expenses incurred by the investment manager. This, it acknowledges would place a much greater burden on the investment manager and would both trigger a “sea-change” in industry practices and remuneration structures and would also be challenged by firms. But, it said it is worthy of consideration.
Pounds and pence
Investment Management Association CEO Daniel Godfrey said the IMA has committed to consider the FSCP’s recommendations.
“Although cost disclosure by UK funds is already very detailed and comprehensive, it also needs to be understandable. This is not a simple task and success has eluded both regulators and the industry for many years,” he said.
But, he added: “The IMA has now developed a new measure that tells consumers, in pounds and pence, exactly how much a unit in a fund grew over the course of a year and how much it cost to achieve that performance. Every penny spent by the fund is included in this figure and so it provides a simple, accessible, all-inclusive measure of all costs. Nothing is hidden and nothing is left out.”
According to Godfrey, the new figure is expected to be in place by Spring 2015, but there is still work to do.
