FCA demands ‘all-in’ charge in active management crackdown

By International Adviser, 18 Nov 16

The FCA has criticised the “weak price competition” among asset managers, attacking actively managed funds for failing to outperform their benchmark once fees have been taken into account.

While the watchdog recognises that many investors may choose to invest in funds with higher charges with the expectation of higher returns, the regulator found “no clear relationship between price and performance”.

It added: “…the most expensive funds do not appear to perform better than other funds before or after costs.”

Absolute return funds were pointed to as a particular problem area, with the FCA highlighting two concerns.

“First, many absolute return funds do not report their performance against the relevant returns target. For example, an absolute return fund may be failing to achieve its performance objective of beating a cash benchmark by 2%. But these funds show their performance against a cash benchmark only, giving the impression that they have outperformed.

“Second, we have concerns about absolute return funds that charge a performance fee when returns are lower than the performance objective the fund is aiming to achieve. The manager is rewarded despite not achieving what the investor considers to be target performance.”

A series of reform measures are being suggested to improve value for money, accountability, transparency and disclosure, and clarity of communication.

Additional charges, such as transaction costs, are not disclosed to investors before they make their investment decisions, often with discrepancies between the estimated and actual charges.

Currently, investors take on this element of risk, as they have no influence over the difference between the estimated and actual charges taken from the fund.

As such, the FCA is suggesting an “all-in” single-fee approach to fund charges to improve visibility and impose greater discipline on fund groups.

It has proposed four ways in which this might work: the current ongoing charge figure (OCF) becomes the actual charge taken from the fund – with the asset manager covering any variation between the (now estimated) OCF and the actual ongoing charge, currently taken from the fund.

The second option would be the current OCF becomes the actual charge, with managers providing an estimate of any implicit and explicit transaction costs, enabling an easier comparison of the likely total charges across funds.