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Fund giants won&#39t have Sandler kicked in their face

Consultation on the Sandler report is now closed and the investment industry has more than six months to wait before the conclusions are published. But already there appears to be growing anxiety about what the final report will bring.

The nature of the questions asked in the consultation paper has raised fears that the industry is about to be subject to a shake-up.

While most accept the need for some minor tinkering, the opinion of fund managers is that the industry isn&#39t really broke and doesn&#39t need fixing.

At Cadogan International&#39s annual unit trust and investment fund conference last week, Fidelity managing director Simon Haslan voiced concerns that an overhaul of the investment industry would ruin consumer confidence and send out the wrong signals.

He pointed out that fund managers were not caught up in the recent misselling scandal and Equitable Life deb-acle and argued that a complete overhaul would do more damage than good.

“People will think they may as well spend their money or put it under the mattress. The regulator needs to identify the points that need to be brought out,” said Haslan.

The industry&#39s concerns have surfaced principally from the questions asked in Ron Sandler&#39s consultation paper. From its first page, the document talks about the inefficiency of the industry. But fund managers dispute whether the industry is inefficient.

Speaking at the same conference last week, Threadneedle deputy chairman and former Autif chairman Alan Ainsworth said his main concern was that Sandler had based his review on three different examples of market inefficiency, all of which were subjective.

He said Sandler had assumed that consumers lack information and expertise; that, as a result, IFAs dominate distribution; and that products are often bundled, obscure and charges difficult to understand.

But Ainsworth insisted that these assumptions do not on the whole stand up and were driven by the Government to suit its own political agenda. He said: “I would argue that at least some of the Sandler inefficiencies are, at best, tendentious and that there are more important inefficiencies which have been squeezed out by the political agenda.

“Lack of technical knowledge does not mean consumers do not set their own yardsticks as to what is good and, experience suggests, actively pursue them. The effect of lack of technical knowledge has been overestimated.”

Ainsworth also argued that Sandler had failed to take into account the importance of factors such as taxation distortions when criticising the recommendation of higher-commission products. He said: “Any salesman will sell a more remunerative product, particularly when differences in tax treatment can be made to support the argument that the high-charge product is best advice. So what is the real problem? No discussion of market inefficiency is credible without an analysis of the distorting effect of tax.”

Further criticism from Ainsworth was levelled at the Government&#39s 1 per cent charge caps, which he blamed for causing inefficiencies which had been ignored by Sandler.

Ainsworth said life offices were being forced to write unprofitable business and, as a result, subsidisation would become inevitable, accidents would happen and only a small number of firms would survive.

It is perhaps no surprise that providers – especially the likes of Fidelity and Threadneedle which are sitting comfortably at the top of the retail fund market – disagree with the Sandler report.

But the claims of industry figures such as Ainsworth and Haslan appear to ring true and highlight that, once again, the Treasury and FSA may be inadvertently working against the interests of consumers rather than helping them.

In response to the concerns of Ainsworth and Haslan, FSA consumer director Christine Farnish was quick to reassure conference-goers that the murkier waters, such as with-profits, would see “a very different regulation to mutual funds”. But there was no assurance that the investment arena was not about to see substantial changes.

Farnish said she believed financial services was one of the most inefficient retail markets and in need of substantial improvements.

The result of the Sandler consultation is now largely out of the industry&#39s hands. If Ainsworth is right about the review being driven by the Government&#39s political agenda, then even the FSA will have no say in the result. However, from Farnish&#39s comments, it would appear that the regulator has few issues with the Government&#39s agenda, anyway.

For supporters of the status quo, the good news is that companies such as Fidelity and Threadneedle do not look set to take any changes sitting down. Fidelity has begun lobbying against commission caps before any one has even tried to implement them. Perhaps this is the way forward. Prepare for the worst and start taking action to insure the industry never gets there.


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