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FSA investigating fund companies&#39 promotional fees

The FSA is demanding that a number of fund groups explain why they are levying promotional fees on top of normal charges when its rules ban the practice.

It is concerned that some firms are seeking to recoup sub-register fees – the percentage of annual management fees paid to fund supermarkets – by charging investors directly from funds, creating higher total expense ratios. Although it clarified its position in a consultation paper issued in May, it fears that some groups are still sidestepping the rules by packaging the charge differently.

In a bid to stamp out the practice, the regulator has contacted the groups, which it refuses to name, to demand an explanation. It will not say whether any have responded nor what action will be taken if their answers are unsatisfactory, although it says it would prefer most charges to be taken from the AMC.

If the FSA succeeds in eradicating the problem, some firms believe that the groups exploiting the rules may seek to absorb the costs through performance fees, which are set to be permitted under CP185: The Collective Investment Scheme Sourcebook -A New Approach.

One industry source says: “The FSA is quite shrewd with these things. I suspect that half of the people there think the fund groups are taking the mickey although the charge is reflected in the TER. Either way, some of these firms may feel they can soak up the costs through performance fees.”

FSA spokeswoman Louise Buckley says: “The latest proposals make clear that promotional fees – however labelled or structured – are not allowed and, in particular, that, before payments to other third parties may be made from the scheme property, there must be a corresponding benefit to investors.”

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