The Financial Conduct Authority (FCA) has called for greater fee transparency in the asset management industry as part of a package of remedies to address concerns highlighted by a recent market study. The move is expected to increase demand for low cost, transparent products, such as ETFs, by bringing to light hidden charges contained within many actively managed funds.
The FCA has pledged to support the disclosure of a single, all-in-fee to investors as a means to boost the transparency of fund costs.
Ian Peacock, head of UK and Ireland at IG Group, commented: “Hidden charges have been materially eating into investment returns for years. Being upfront about charges, allowing investors to see their total cost of ownership, will inevitably lead to fee savings overall, meaning a greater portion of an investor’s returns can be reinvested, generating further earnings.
Fee transparency in the wealth management industry has come under increased scrutiny in recent years, but, while there has been some downward pressure on fees, the sector has been slow to change. We have long held the view that many wealth management providers fall short when it comes to fee transparency, leaving investors in the dark about the true cost of investing and the impact it will have on their returns. The changes from this review will hopefully mean that investors are finally no longer blindsided by fees.”
In order to fulfil one of the FCA’s three stated objectives, to drive competitive pressure on asset managers, the FCA has pledged to support the disclosure of a single, all-in-fee to investors and support the consistent and standardised disclosure of costs and charges to institutional investors.
Sean Hagerty, managing director at Vanguard, an ETF provider focused on low cost funds, said: “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.
“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. 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.”
Lynn Hutchinson, senior analyst, Charles Stanley said that investors should look beyond costs when selecting an ETF: “While it is important to look at costs (OCF/TER) of the ETF product and therefore the returns of the index tracking ETF against the index returns, here at Charles Stanley we review ETFs not just based on the OCF/TER but also a number of other factors including, but not limited to, the underlying index, bid and offer trading spreads, liquidity and the number of authorised participants involved in the trading of the product.
“Some ETF managers enhance returns versus the underlying index in how they manage the product through stock lending, managing dividend receipts and trading capabilities around rebalancing and optimisation (where not every share in the index is held in the ETF itself) which are important factors to look at. Like many countries there are also withholding tax treaty agreements between countries whereas the underlying index accounts for full withholding taxes which can enhance returns of the ETF versus the underlying index being tracked.”
To help improve the effectiveness of intermediaries, the FCA has also announced it will launch a market study into investment platforms. Peacock said: “We welcome the upcoming market study into investment platforms. IG’s Share Dealing offering has a standard trading charge from just £5 for UK shares, a focus on promoting low-cost ETFs and does not charge investors platform, custody or transfer charges. We believe that a low cost online service should not compromise at all on customer service, resulting in greater consumer control and clarity.”
To help provide protection for investors who are not well placed to find better value for money, the FCA proposes to strengthen the duty on fund managers to act in the best interests of investors, require fund managers to appoint a minimum of two independent directors to their boards and introduce technical changes to improve fairness around the management of share classes and the way in which fund managers profit from investors buying and selling their funds.
The implementation of the remedies will take place in a number of stages. Some do not require consultation and are now being taken forward while some will require further work in light of other legislative initiatives, including MiFID II and will be consulted on later in the year.
Andrew Bailey, chief executive at the FCA said: “The asset management sector is important to the economy, managing the savings of millions of people and in the current low interest environment it’s vital we help people earn a return on their savings. We need a competitive sector, attracting investment into the United Kingdom which also works well for the people who rely on it for their financial wellbeing.
“We have listened carefully to the feedback we received in response to our report last November. We have put together a comprehensive package of reforms that will make competition work better and help both retail and institutional investors to make their money work well for them.”