The FCA Consumer Panel has called for urgent reform of investment management charges, saying it is “unacceptable” that costs are not disclosed to consumers.
Research commissioned by the panel, published today, found that the full costs borne by investors are not known, with a number of costs not properly measured or declared.
It concluded that explicit costs charged to the customer, such as the annual management charge and the ongoing charge figure, are a poor guide to the full costs.
Consumer Panel chair Sue Lewis says: “The combination of poor disclosure, weak governance and multiple conflicts of interest means 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 the industry is working to improve disclosure, this does not go far enough.”
The panel suggests investment managers should be required to quote a single and comprehensive annual charge, including estimates of forward costs such as transaction charges.
All other costs, currently deducted by the investment manager directly from the fund, would be borne by the investment management firm.
The panel says this would enable consumers to compare different firms’ charges, and act as an incentive for firms to improve efficiency.
The panel also recommends investment managers should have a strengthened legal obligation to put the interests of their customers first. It argues the 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.
The Investment Management Association says it has developed a measure which tells consumers in pounds and pence how much a unit in a fund grew over the course of a year and how much it cost.
IMA chief executive Daniel Godfrey says: “That is a backward-looking measure whereas what the Consumer Panel is talking about is a forward-looking measure.
“The criticism that consumers are unable to compare costs before investing is a valid one, and one the industry has tried to address. Where I would disagree is fund managers charging for transaction costs in advance, because at the beginning of the year a firm has no idea how much trading they are going to do. If you include it in the price then you create a conflict of interest.”