A new report from the Financial Conduct Authority (FCA) has found evidence of high charges and weak competition in the asset management sector.
The regulator is proposing a single ‘all-in’ fee to make it easier for investors to know exactly how much they’re paying in charges.
Which? has highlighted the lack of transparency in the investments industry on many occasions, most recently in a Which? Money investigation into the impact of pension charges. Our research found that rip-off charges can erode pensions by up to a third.
High charges and poor value
The fund management industry is not competitive or transparent enough and must lower costs to offer a better deal to savers and investors, according to today’s damning report.
The FCA’s findings are the interim results of a year-long market study into the asset management industry which found ‘limited’ competition in actively managed funds – these account for 77% of the total market.
Even though a large number of firms operate in this area, the industry as a whole has enjoyed sustained, high profits over a number of years, the FCA said.
Its says that competition is being hampered by ‘considerable price clustering’, with most active equity funds charging between 0.75% and 1%. Asset managers are reluctant to offer lower rates to beat each other and economies of scale aren’t passed on to consumers.
This sector comprises nearly £7 trillion of institutional and individual assets, of which £3 trillion is in UK pension funds, so you are probably among the three-quarters of UK households that have occupational or personal pensions that use (either directly or indirectly) asset managers’ services
A number of possible remedies have been suggested by the FCA. The main suggestion is an all-in fee among to help investors decide which fund is the best for them.
The regulator also wants a standard set of information across the sector that make costs and charges clear. It is currently extremely difficult for investors to have a clear understanding of how much they are paying in total for platform and investment charges.
The FCA is also consulting on whether to make a market investigation reference to the Competition and Markets Authority (CMA) on the investment consultancy market and has recommended that HM Treasury considers bringing the provision of institutional investment advice within the FCA’s regulatory perimeter.
The regulator is now going to consult with key participants in this market and has asked for responses to the interim report by 20 February 2017.
Call for greater transparency
Andrew Bailey, chief executive of the FCA, said at the launch of the report: ‘Asset managers are responsible for the savings of millions of people in the UK, making decisions which affect their financial well-being both now and in the future.
‘In today’s world of persistently low interest rates, it is vital that we do everything possible to enable people to accumulate and earn a return on their savings which can meet their lifetime needs. To achieve this, we need to ensure that competition in asset management works effectively to minimise the cost of investment.
‘We want to see greater transparency so that investors can be clear about what they are paying and the impact charges have on their returns.
‘We want asset managers to ensure investors receive value for money through pursuing energetically their duty to act in their customers’ best interests. The remedies that we are proposing today aim to achieve these outcomes.’