How the FCA's asset management reforms could affect your money

Katherine Denham
General Election - Economy
Savers could see a direct impact in light of the industry shake-up (Source: Getty)

It's been a long time coming but the City regulator’s asset management report has finally landed, all 114 pages of it.

For years, investors have seen their returns eroded by costly fees, while the profit margins of these investment companies have been “persistently high”, averaging at 36 per cent.

But this report looks to change that with sweeping reforms which will force the £7 trillion investment industry to cut costs and increase transparency for millions of savers in the UK.

With three quarters of UK households relying on the services of these investment firms to build their pension pots, and 11m investors using products like stocks and shares Isas, this shake-up is set to affect most of us in one way or another. But what direct impact could the Financial Conduct Authority’s (FCA) proposals have on you?

Read more: FCA asset management market shake-up: How the City has reacted

Introducing an all-in fee

One of the most radical changes is arguably the overhaul of the way companies charge investors.

Under the current system, you pay a range of fees for each product you are invested in, but the new proposal means you will instead be charged a single fee. This should make it easier to compare products and crackdown on firms that sell to investors without disclosing the full price.

Ryan Hughes, head of fund selection at investment platform AJ Bell, warns this change will mean fund charges seem higher than they are today, adding: “it will take some time to help investors understand and interpret these new figures to ensure that fair comparison is able to be made between different funds.”

The point of contention with this proposal revolves around transaction costs, which occur when a fund manager buys or sells a stock. If investment managers have to estimate the trading costs they will incur for the next 12 months and pay any excess themselves, then they might be deterred from trading, which could have an adverse impact on the performance of funds.

Hughes says it will also take time to assess what is a “fair” level of transaction cost and to understand the impact it has on the overall performance.

Jason Hollands, managing director of the Tilney Group, doubts whether the report will actually lead to lower fund costs, saying in-demand funds with very strong performance will be able to sustain existing fee levels and might have to ration availability. This means potential investors might no longer be able to access some of the best funds.

Appointing independent members to boards

The FCA wants to create more independence between fund managers and governance bodies, and has said firms should appoint at least two independent members to their boards.

While Hughes says investors are unlikely to notice any direct impact from this change in the short term, this increased scrutiny could eventually lead to the closure of investment funds which fail to perform.

You could also find funds you’re invested in merging with others to create alternative products.

Changing how managers assess performance

Fund performance is usually reported without taking fees into account, and many asset managers have been criticised for choosing the most flattering benchmark, which can make it confusing for investors when trying to draw comparisons.

The FCA wants to help investors draw meaningful conclusions about whether a fund is achieving what it set out to do, which means you should expect to be given documents that present information in a clear and consistent way, without the use of misleading language and figures.

Better movement of assets to cheaper share classes

The regulator has proposed measures to make it easier for investors to switch into cheaper share classes.

Ben Yearsley, director of Shore Financial Planning, points out that investors were first given the opportunity to move into cheaper unit classes by their platform or fund provider when commission was banned a few years ago. “However they haven’t been compelled to do it and fund groups couldn’t force it either,” he says.

This proposal would remove the need for investors to give explicit permission before moving them into different share classes, which means if you’ve been invested in expensive shares, you could see a fall in fees.

Removing barriers to pension scheme pooling

Smaller pension schemes are less likely to be able to exert pressure on asset managers because they have fewer resources. The FCA therefore proposes pooling investments to save costs and improve outcomes through economies of scale, which ultimately means schemes should become more efficient and well-managed.

Darren Philp, director of policy and market engagement at the People’s Pension, says this means you should no longer find yourself stuck in legacy pension products. “Removing costly and pointless barriers to consolidation should make it much easier to get people into good value, modern schemes.”

However, the benefit structures of these schemes are often complex, which Redington’s Dan Mikulskis warns could be a barrier to this proposal, particularly as members all need to be treated fairly.

Roll out

While all this sounds like good news, don’t expect these changes to happen overnight, as the proposals still need to be finalised, phased in, and the industry will need time to adapt.

Mark Hardwicke, managing partner at Invenio Corporate Finance, warns that the increasing regulatory burden imposed by these reforms could force many asset managers to consolidate in an already shrinking market, which means you could actually end up with less choice and competition.

But if this overhaul stamps out the weak players, then it should benefit you in the long run because you won’t be paying a pretty penny for shoddy performance. Ultimately you should end up with more money in your pocket.

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