17 November 2014
Consumer Panel calls for radical reform of investment management
The Financial Services Consumer Panel has today published a discussion paper[1] on the costs and charges consumers bear when investing in retail funds, whether directly or through pensions, stocks and shares ISAs, or insurance ‘wrappers’.
These costs have a significant impact on returns but new research[2] commissioned by the Panel suggests that retail customers do not know what costs they will face when they invest. Headline measures like the Annual Management Charge (AMC) may be as little as a quarter of the true costs, as many of the charges are deducted directly from the fund and remain hidden.
Sue Lewis, Consumer Panel Chair, said:
“Investment managers in the UK have stewardship of £2.4 trillion of retail consumers’ money, including through pension funds. Poor disclosure, weak governance and multiple conflicts of interest mean that competition in the investment market is not working in the best interests of consumers.
The problems our research has identified are long standing, and need fixing urgently. People are depending more and more on investment to deliver their long-term financial wellbeing, especially in the light of the recent pension reforms. It is completely unacceptable that consumers do not know what firms are charging them to manage money on their behalf, and cannot compare different offers. While we recognise that the industry is working to improve disclosure, this does not go far enough.”
Based on the independent research, the Panel suggests that:
- Investment managers could be required to quote a single and comprehensive annual charge, including estimates of forward costs like transaction charges. All other costs, currently deducted by the investment manager directly from the fund, would be borne by the investment management firm. This would enable consumers to compare different firms’ charges, and also act as a powerful incentive on firms to improve efficiency.
- Investment managers could have a strengthened legal obligation to put the interests of their customers first, the fiduciary duty. The current regulatory requirement to ‘treat customers fairly’ does not tackle the multiple conflicts of interest in the investment industry.
The Panel will host a roundtable with stakeholders early in the New Year to discuss the findings of the research and suggested solutions.
Notes to editors.
- Figures from the Investment Management Association show that the UK’s fund management industry in 2013 had assets totalling £5 trillion. 20% (£1 trillion) of these assets were held on behalf of retail clients. Pension fund assets account for 36% (£1.4 trillion).
- Costs have a significant impact on the overall outcome of an investment. For example, the DWP has highlighted that an annual management charge (AMC) of 1.5% p.a. reduced a final pension pot by 22% after 40 years because of the lost compound growth potential.
- Undeclared charges can be a multiple of the costs declared directly to retail investors. An investigation by pension fund Railpen found that additional underlying fees were three to four times higher, totalling between £210 to £280 million annually on total investments worth £20 billion.
- In 2012, the ABI found that between default pension schemes, which presumably have very similar asset allocations, charges range from below 0.3% to 2.11%, a sevenfold difference despite the similarity in service offering.
- Changes made to European legislation (MiFID 2 and PRIIPS) are expected to lead to an obligation on investment funds to make full disclosure of fixed and anticipated costs to retail investors. However, these changes will not come into effect until the end of 2016 and it is not clear in what format disclosure will have to take place.
- A single charge would put the onus on investment managers to manage their businesses more efficiently to ensure their funds are competitive in terms of cost and performance. By making investment managers bear the costs and risks of 'doing business', such as trading in shares, the multiple conflicts of interest in industry conduct identified in the Panel's research would be largely eliminated.
- The Consumer Panel is a statutory body under the Financial Services Act 2012. It was initially established by the Financial Servicse Authority in December 1998. The panel advises the FCA on the interests and concerns of consumers.
- The Panel's membership is drawn from a broad range of backgrounds with expertise including market research, law, financial services industry, financial inclusion, European Regulation, financial regulation, consumer advice, campaigning, communications, compliance and later-life issues.
- The emphasis of the Panel's work is on activities that are regulated by the FCA, although it may also look at the impact on consumers of activities outside but related to the FCA's remit. More information about the Panel's work is available here[3].