I have long wondered where the expression “Kick the can down the road” comes from. Some people have suggested it refers to the game, first described in the early 1800s, where the can is kicked in the course of a variant of hide-and-seek.
If so, it is hard to see how that game translates into the current sense of the phrase, which means to postpone a decision or action in the hope that the issue will either go away or a decision will be taken by someone else.
Sources I looked up last week suggest the first references to “kicking the can” in the sense that is now widely understood were made in newspapers in the 1980s. If true, there is a neat symmetry at play here, as this is probably about the length of time the fund management industry has been raking in excessive profits out of investors putting money into their funds.
Last week’s 112-page FCA final report of the asset management market study was a classic exercise in can-kicking. Coming less than nine months after its interim report in November, the final version simply confirms the conclusions it drew earlier. The regulator said its additional analysis has not “materially changed” the first report’s overall conclusions, namely that there is a singular absence of price competition in the fund management industry.
The final report confirms there is “considerable price clustering” in retail funds. The FCA says: “We continue to believe that price clustering, when combined with our understanding of how firms set prices, the profitability analysis, and the absence of relationship to performance, demonstrates price competition is weak for actively-managed products.”
In the wake of the interim report, sections of the fund management industry attempted to contend that the lowering of charges on passive funds was helping to bear down on the costs levied for active funds.
That argument is nonsense, of course. Over the past 20 years the active side of the fund management industry has deliberately built a massive ideological wall between itself and the passive sector, arguing there is no comparison between the two in terms of potential long-term performance. These hypothetical gains, whether achieved or not, justify the massive difference in charges. When it suits the industry, however, they are prepared to link the two sides together again, suggesting lower passive fund charges are influencing those levied by active ones.
The FCA’s final report neatly skewers that argument, noting average charges for active funds have remained more or less the same for the past decade. The minor rider that – potentially – passive management fees will have more of a competitive effect in future seems more of a polite sop than a genuine agreement with the view that the former will impact on the latter.
While the FCA report is good at identifying the problems of uncompetitive fund management charges, it is far less good at coming up with speedy solutions to the issue. Let’s be clear here: what the regulator is describing is something akin to price-fixing. It may not legally fall foul of the Competition Act 1998 or the Enterprise Act 2002, but the outcome for consumers is very much the same as the market-rigging and cartels described in competition legislation.
It is in that context we should view the remedies proposed by the FCA. To give a multi-billion-pound industry up to 12 more months to surrender a mere £20m in annual box profits – where managers pocket the difference between the “buy” and “sell” price when a unit is transferred between customers – is gob-smacking. While the sums involved are relatively minor this is a scandal that journalists – the Financial Times in particular – have been writing about for many years.
Then there is the question of an all-in fee for funds, where a fund’s entire costs – including trading costs – are set out clearly for investors. The FCA is in favour of it, or so we are told, which is hardly surprising as that would allow consumers to start making comparisons between fund managers in terms not just of performance but of charges.
Yet we are also told by the regulator the introduction of all-in fee, or a variant of it, is subject to further consultation with fund managers. Apparently, sections of the industry feel there are “practical complexities” involved in creating a workable form of all-in charging disclosure.
This is an industry with massive technical capacity and many decades’ worth of dealing data, claiming it is unable to work out what typical trading costs are over a rolling 12-month period. It makes you wonder how they manage to work out which shares to buy or sell in their funds. Then there is the question of benchmarking. This is an issue that has been known about for over a decade, with many managers creating meaningless performance yardsticks for their funds to justify paying themselves additional fees when they achieve that so-called outperformance. Yet, again, the FCA is saying it needs consult further before tightening benchmarking rules.
The sense one gets is of a regulator attempting to gently shepherd the fund management industry down a certain road, while remaining unwilling to do anything that might cause managers anything but the most minor distress. While this can-kicking continues, consumers will continue to pay the price – literally, in this instance.
Nic Cicutti can be contacted at email@example.com