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Nic Cicutti: FCA will fail to curb fund groups’ ‘collective rip-off’

Nic Cicutti

Many years ago, while he was still at working at another institution, the current Rathbone Unit Trust Management chief executive Mike Webb summed up for me his view of the differences between active and passive fund management.

You are in hospital after falling down the stairs at home. Both your legs are encased from hip to toe in plaster. Hardly surprisingly, you are feeling sorry for yourself. Then the consultant comes by on his rounds. “Cheer up,” he says, “the patient in the bed next to you has broken both his legs – and an arm too.”

Mike was describing a situation, shortly after the stockmarket crash in 2000, where fund managers faced telling their clients that the performance of their investments had dropped by up to 20 per cent in value. In such a scenario, being able to compare oneself against a fund that had fallen by 30 per cent held a definite attraction.

The issue for Mike was not about whether some form of benchmarking was necessary. His concern was  too many fund managers were simply trying to avoid falling below those benchmarks, rather than focusing on stock-picking skills and delivering the best possible growth for their investors.

For people like Mike Webb, there has always been a strong personal sense of ethos involved in trying to deliver what you promise investors, even if at times you risk underperforming because some of the decisions you took had turned out wrong.

The evidence, sadly, suggests a significant proportion of the fund management industry operates to different standards than his own.

What the FCA is hoping is the fund management industry
will finally engage in a self-regulatory process on charges and transparency it has spent years desperately avoiding

Last week, the FCA published its asset management market study, which found £109bn is sitting in “partially active” funds that charge higher fees than passive funds. Yet they take only “modest positions” close to the benchmark average and their returns are linked to that benchmark.

FCA chief executive Andrew Bailey was quoted in Money Marketing, querying this approach: “There are some active managers that are less active, so we question the fees and the transparency of those fees.”

For FCA director of strategy and competition Christopher Woolard, the issue is not just of excessive charges being levied by managers for not doing very much at all, but of investors being unaware they are paying high fund charges for returns that are statistically unlikely to materialise.

Shorn of all diplomatic language, another interpretation of the FCA’s report is the fund management industry is swindling investors to the tune of at least £1bn a year. This is the difference in the mark-up between what active managers would charge and the passive index-linked funds they are aping.

This collective rip-off involves a private sector job creation scheme on a scale that left-wing Labour shadow chancellor John McDonnell could only dream of, with tens of thousands of people employed to perform tasks any machine could do almost as well. If a cowboy builder were to engage in similar practices, they would take pride of place on BBC Watchdog’s Rogue Traders weekly TV segment. Yet beyond a few polite platitudes and mild murmurs of disapproval no one really seems to be blinking an eyelid.

It is in that context we need to understand the FCA’s remedies to this issue. Bailey told journalists attending the FCA’s press conference that to impose a fee cap on investment funds would be a measure of “last resort”, because it was not an effective way to drive competition in the market.

FCA supervision director Megan Butler added the FCA would only take enforcement action “when there is a breach in this area”.

In a brilliant evocation of Horatio Nelson at the Battle of Copenhagen in 1801, the regulator does not need to do very much at all because it has not identified a breach in its rules. Truly brilliant thinking: used elsewhere, for example with burglary statistics, such an approach could be used to cut crime at a stroke of the pen.

Instead, the regulator is focusing on number of reforms for the market, including an “all-in fee” that takes in all costs, to improve transparency and competition among asset managers. It also wants an overhaul of internal governance standards for investment fund boards to ensure they consider value-for-money issues.

Boards should be comparing equivalent retail and institutional share class prices and considering how to pass on economies of scale to investors – using sliding-scale fee arrangements, for example.

Among improvements to fund charge communication the regulator is suggesting the publication of an annual report detailing how boards are ensuring value for money, including assessments and negotiations on charges.

Hands up anyone who thinks it will work.

At the end of the day, what the FCA is hoping is – against all available evidence – the fund management industry will finally engage in a self-regulatory process on charges and transparency it has spent years desperately avoiding like the plague.

The defenestration a year ago of Daniel Godfrey from his chief executive’s role at the Investment Association for proposing such reforms serves to puncture such optimism. Daniel, who acted as an adviser to this report, is now hoping the industry leopard will change its spots.

Well, in 12 months’ time – and another £1bn lining industry pockets – we will know, won’t we? I am not holding my breath.

Nic Cicutti can be contacted at



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There are 2 comments at the moment, we would love to hear your opinion too.

  1. Hard to argue with the content or tone of your piece Nic. It lays it bare and tells it like it is. The FCAs hopes of competeition finally levelling the field may eventually work its way into the fabric of the sector and the charges that are levied, as passive and smart beta increasingly bring focus on firms that seek to charge extra for active fund management alpha. Eventually I fully expect the main markets will be traceable for free, with behemoth funds instead making money (single digit basis points pa) through things like stock lending: the cost/benefit analysis of seeking out alpha will be even more directly obvious then, with any amc charge for an active fund seeking alpha avoidable by investors who would be content with beta for free. Of course, it’s not just active funds that are charging too much for quasi / closet tacking. Some trackers do themselves: does the regulator not have views on the likes of Virgin charging 100bps pa, on £2-3bln AUM, for the nothing more valuable, over and above giving it any one of the firms changing sub 10bps pa, than the warm glow that the bloke in the jumper with the beard engenders.

    The debate will finally focus on the investment ‘value’ of active fund management – which you / Mike Webb point to. If there is value there, then a price for it can be justified. We are living in historic times, economically, politically, etc. Active fund management should, in theory, seldom have a better opportunity with which to prove its merits and it’s worth.

  2. It is worth standing back and asking why funds behave this way in the first place. Perhaps it’s the use of benchmarks that is the problem. They should be a reasonable way for clients to compare the performance of the investment manager (applies to discretionary managers as well). However, apply basic behavioural principles (the same ones underlying behavioural economics of which the FCA is a big fan), and ask yourself what happens when you measure someone against a standard? Add the fact the downsides are more prominent than the upsides. Throw in the spectre of regulatory scrutiny if you deviate too much from your benchmark (only on the downside – questions over inappropriate risk, etc.). Tail wags dog. Surprise. Not.

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