Fund groups are preparing for additional costs to their business as a result of new rules announced by the FCA today.
The regulator also launched a further consultation today, in which it asks fund groups to give feedback on how they can improve the way they communicate fund objectives to clients.
The policy statement includes introducing new rules forcing fund managers to ensure their products provide value for the end investor.
The regulator also introduces a requirement for fund managers to appoint a minimum of two independent directors to their boards.
Orbis Investments UK head Dan Brocklebank warns such a change could increase costs and lead to a potential conflict of interest.
Brocklebank says: “There is a potential conflict for independent directors on the boards of those fund managers, because they have a duty towards shareholders of the [company] and the clients of the fund.”
He adds: “In our [feedback to the regulator], we put in that if you are going to put independent directors in, you need to put them in at the fund level, rather than at the fund manager level.”
In order to improve transparency, ‘box profits’ will now be passed back to a fund’s investors rather than to the asset manager.
Box profits are generated from the spread between bid and offer prices and it is estimated the change could cost asset managers £20m a year.
The FCA has given firms 18 months to implement the rules on assessment of value and appointment of independent directors and 12 months for the rules related to the way in which fund managers profit from investors buying and selling their funds.
SCM founder Gina Miller questions why the rules around box-profits are not being implemented immediately.
Miller says: “[The rules] appear to be sensible in what is quite a complex area, but why are firms allowed to pocket these risk-free box profits until 1 April 2019? Two years after they identified the seriousness of the issue in 2017.”
The FCA also decided not to introduce a ban on trail commission paid to advisers on legacy products.
AJ Bell chief investment officer Kevin Doran says this decision was most likely taken to protect smaller IFA firms.
He says: “The FCA has come to the conclusion that if it were to introduce a sunset clause on trail commission it could lead to a revenue shortfall for smaller IFAs, which would probably put them out of business.
“The FCA has put the ball back in the court of the customer. As a result of that I would not be surprised to see a heightened campaign to raise awareness that is possible to lower charges.”
Miton Group chief executive David Barron says: “The FCA statement highlights the real issue is about whether the industry delivers meaningful value to investors so the revised focus on value is to be welcomed. Low costs don’t necessarily equate to value, which is a much broader issue.”
In November 2016 it published a highly critical interim report which found active management fails to justify high fees for lacklustre returns.
After a near two-year investigation the FCA delivered its final report into the UK’s asset management sector last June, confirming a number of measures to tackle weak price competition and the lack of clarity in fund objectives.
In the report, the FCA proposed a series of reforms, including an “all-in fee” for funds, greater clarity on charges and easier switching into better-value share classes for retail investors.
Following this, the regulator launched a consultation with the industry to gather input on its “package of remedies”.