Financial watchdog's push for reform of the £7 trillion asset management industry could sideline active funds

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Moody's believes that the extra expenses caused by the FCA's reform proposals could see active funds lose popularity (Source: Getty)

A push by the Financial Conduct Authority (FCA) to reform the UK's £7 trillion asset management industry has garnered a mixed reception, with some predicting that the shake-up could drive certain managers out of the market.

Designed to increase transparency and lower costs for investors, the FCA's 112-page report published today included recommendations that fund managers charge a single, “all-in” fee and strengthen the accountability of individuals in the organisation.

Yet ratings agency Moody's believes that the extra expenses this will pile on managers could see active funds, which aim to outperform an index but at an additional cost to investors, die out.

“Momentum in the shift to passive investing accelerated today with the FCA’s proposed remedies, which will negatively pressure active asset managers’ profit margins,” said Marina Cremonese, Moody's vice president and senior analyst.

“Initiatives like these which aim to promote transparency of fees will lead to greater usage of lower-cost passive options.”

The all-in fee proposal, which is subject to a consultation later this year, could mean managers incurring increased costs as it would bundle together the manager's fee and the estimated value of transaction costs (the dealing charges a fund faces when it buys and sells investments).

If the estimate is too low, the manager could have to make up the shortfall itself.

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According to David Morrey, head of investment management at law firm Grant Thornton, this could make managers choose “not to incur the costs of extra trading even though market conditions may warrant it”.

However, the proposed new fee structure was praised by others in the industry.

“Ultimately retail investors should benefit from the package of remedies being proposed by the FCA today, through more competitively priced products with greater transparency on costs,” said Ian Manson, managing director of compliance consulting at corporate financier Duff & Phelps.

Another recommendation of the report, that two independent directors be appointed to fund boards, might also help to reduce costs to retail investors.

In particular, James Trask at consultancy LCP welcomed “a requirement for the fund board to justify differences in fees charged to different sizes of investor”.

“This has potentially huge ramifications for asset managers who charge retail clients fees that are multiples of those levied on large institutional clients,” he said.

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