UK regulators to blame for rise of passives

UK regulators are to blame for the rise of passive funds amid feelings that active managers have fallen short of expectations, according to Alan Steel

UK regulators to blame for rise of passives


With the escalating popularity of tracker funds, there has emerged a view that the growing demand is in large part down to active managers not living up to their supposed potential during the past decade.

However, rather than allow the role of scapegoat fall on the fund managers themselves, Steel, chairman of Edinburgh-based Alan Steel Asset Management, laid the blame at the door of the regulatory bodies.

“The regulators in the UK are a mess and an utter disgrace,” he said. “They are supposed to be helping advisers, and they have delivered nothing towards that.

“People say that fund managers are not doing terribly well, but no one mentions the regulators. Since 1985 [the inception of the Financial Services Authority], billions have been spent – allegedly – on consumer protection. It has visibly failed, and a lot of that failure is about how all they [the authorities] see is risk.”

Steel outlined the current ratings for UK government bond yields as prime example of a wider trend among the regulators to overrate risk, resulting in fund managers being ‘afraid’ to stray from the mainstream.

He explained: “Even with bond yields being at their lowest level for 30 years, regulators still describe them as a two or three out of 10 on the risk scale. It is nonsense.

“It has an impact on fund managers because they are essentially afraid to deviate from the FTSE or the All-Share in case they are labelled as ‘higher risk’.

“Therefore we end up with ‘closet trackers’, which most fund managers are. It is easy to understand why – if they move too far away [from the mainstream] then compliance comes down and they are afraid of losing their job. It also makes the financial advisory service a total waste of money.”

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