This morning’s report from the City watchdog on asset managers identified many areas of concern, but what it to be done to address them?
A little while ago we were told there was no “magic money tree” only to find out later there is, so one should be reticent about making claims that there is no magic wand that the Financial Conduct Authority (FCA) can wave, but it seems that its solutions boil down to a certain amount of cajoling and yet more consultation.
So, more stress is going to be put upon ensuring asset managers act in the best interests of their clients.
One can imagine the furore should the British Medical Association come out and suggest that, on the whole, doctors should act in the best interests of their patients, but apparently the FCA felt the need to remind fund managers that they are primarily there to make money for their clients.
To ensure that fund managers are not naughty boys (or girls), the FCA plans to introduce a minimum level of independence in governance structures.
Introducing non-executive directors on to boards has not always prevented executive directors from planting their snouts deeply into the trough, but we rarely get to find out about the well-timed bit of sage advice behind closed doors, so on balance this seems like a sensible recommendation.
The City watchdog said it is also consulting on requiring fund managers to return any risk-free “box profits” to the fund, rather than trousering them themselves.
To the uninitiated, which included me until about five minutes ago, this refers to the difference in the bid/offer spread on units in a unit trust. The FCA said it has no problem with a fund selling units at a higher price than it buys them at any given moment, but it thinks the monies should flow back into the fund or, failing that, investors should be aware that the company managing the fund is pocketing the difference.
The FCA said it also wants to make it easier for fund managers to switch investors to cheaper share classes. It said it is consulting on whether it should introduce a phased-in “sunset clause” for trail commissions – the annual fee paid to financial advisers by their customers over the lifetime of products such as pensions, with-profits bonds and unit trusts.
For a long time, the City watchdog has been banging on about introducing the disclosure of a single all-in fee to investors. It could be the equivalent to the health warning on the fags packet, ensuring investors enter into a commitment at their own risk.
On top of that, the FCA is also in favour of consistent and standardised disclosure of costs and charges to institutional investors.
The Department of Work and Pensions has been called on to review and, where possible, remove barriers to pension scheme consolidation, so that economies of scale can be brought into play.
Meanwhile, the FCA has taken aim at the three largest investment consultants and said it is still mulling whether to refer them to the Competition and Markets Authority – the old Monopolies Commission but in newer clothes.
It is also recommending that the Treasury considers bringing investment consultants into what it calls “the regulatory perimeter” – making it sound like a corral where wayward cattle are herded.
It also announced that it would be launching a market study into investment platforms.
So, in summary, some sensible suggestions and plenty of consultations ahead giving the extremely wealthy, well-connected fund management industry the opportunity to bend the FCA to its will.
Shares in fund management companies did not exactly fall out of bed following the publication of this review, which suggests that, well-meaning though the recommendations are, the cosy world of fund management is not yet thinking of cancelling the Bolli and switching to Prosecco just yet.