The FCA’s damning report on the fund management industry

The Financial Conduct Authority finally published its report on the fund management industry in June 2017 after spending 19 months gathering its findings into it. The FCA has set out a number of remedies to address the concerns about the industry.
 
The report addresses concerns over so-called “closet tracker funds,” the lack of competition in the market and the hurdles to switching from expensive shares classes to cheaper ones with the same fund manager!
 
Amongst other things the FCA has looked closely at fees proposing solutions that will give greater transparency and full disclosure of all costs.
 
Key findings
 
The final report confirmed the findings set out in the interim report published last year – noting
• There was evidence of sustained, high profits over a number of years.
• The objectives of funds are not always clear to investors and fund performance is not always reported against an appropriate benchmark
• The FCA found concerns about the way the investment consultant market operates.
 
The FCA has proposed a number of remedies for what it deems to be weaknesses within the industry. These proposals can be split into four specific areas: investor protection, price competition and addressing concerns around investment consultants and intermediary platforms.
 
On investor protection, the FCA is seeking to:
 
• Stop fund managers from receiving box profits, which eat into investor profits
• To ensure that all managers have two independent directors on the boards of their funds
 
On price competition:
 
• To ‘support’ the disclosure of an ‘all-in’ fee to investors
• To ‘support’ a standardised disclosure process for costs/charges to all institutional investors
 
On intermediary platforms:
 
• Predominantly, to launch a market study into investment platforms
 
On investment consultants:
 
• To ask HM Treasury to give it greater regulatory control over the investment consultants market.
 
They do not believe that the industry has gone far enough in improving competition, raising the possibility of a referral to the Competition and Markets Authority.
 
What is disappointing about this report is that whilst the FCA has a number of justifiable concerns about the industry it has been relatively light touch in the way it has tackled the issues raised. The report does not include any measures to enforce a reduction in charges, it contains a number of recommendations and proposes further consultations.
 
Some commentators think the report doesn’t introduce tough enough measures because of possible negative repercussions over Brexit adversely affecting the fund management industry. Personally I take the opposite view. Anything that improves the industry for investors has to be a good thing and has to enhance the industry rather than to diminish it.
 
Of course none of this should surprise anybody. The bottom line is that the larger fund managers are of course the paymasters of the FCA. Why would the FCA enforce stricter regulation and price capping if it led to a large shrinkage in the number of fund managers in the UK hence much less fees to the FCA! It is a clear conflict of interest for the FCA. After all turkeys don’t vote for Christmas!
 
Why not invest in the CCM Intelligent Wealth Fund instead of the fund of a large and much maligned fund manager? That way you will know you have invested your money into a fund run by a fund manager that doesn’t act like the fund managers most criticised by the FCA. Your investment returns are likely to be higher too! You know it makes sense.