Gina Miller critical of City watchdog's new rules to shake up the asset management industry

Lucy White
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The FCA's new rules promise to be the start of a broader clamp-down (Source: Getty)

The Financial Conduct Authority (FCA) has today announced a set of new rules for fund managers, to help reduce costs for end investors and improve transparency.

The new rules follow a consultation and review of the asset management industry, which the FCA completed last year.

They will include requirements for fund managers to annually assess the value they are providing, and appoint a minimum of two independent directors to their boards.

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

The senior managers' accountability regime – which currently applies to banks – will also be extended to fund managers, to help identify a responsible person if any misconduct is suspected.

Technical changes will also be introduced to reduce the "box profit" fund managers make from investors buying and selling their funds, and to help investors move into cheaper share classes.

However, prominent asset management campaigner Gina Miller was critical of the changes.

"It is shocking how long it has taken the FCA to achieve nothing more than restating the obvious," she said.

They have dealt with important but relatively minor negative industry malpractices, such as box profits, but not the substantive issue of misleading fees through the various distribution channels.

Miller also restated her intention to consider "legal remedies including seeking a Judicial Review" if the FCA did not address the anti-competitive fee misstatements which she is alleging occur in the industry.

Cleveland & Co, a boutique legal adviser to the investment management industry, was critical of the new rules for a different reason.

The firm said the cost of the changes could in fact prevent new firms from setting up, as creating the "value for money" report would likely incur significant costs.

"Everyone wants to improve transparency but the detail of the proposals means smaller fund managers will have to pour more time and money than ever into meeting these reporting requirements," said Cleveland & Co's managing director Emma Cleveland.

Read more: Gina Miller releases dossier of investment firms breaking rules as she challenges the City watchdog to form better guidelines

A generally positive response

Fund management firm Orbis Investments, which takes fees from investors when it outperforms but returns them if it underperforms, said it was happy with the FCA's decision not to intervene in fees.

"It’s particularly encouraging to see that the FCA remains supportive of innovative fee models which help improve the alignment of interests between managers and their clients. In our view, the best outcomes tend to arise when managers and their clients are ‘in it together’," said Orbis's Dan Brocklebank.

Martin Gilbert, the co-chief executive of Aberdeen Standard Investments, said his firm was already in advance of the measures.

"Aberdeen Standard Investments has been undertaking value for money analysis on a trial basis for some time so we are well placed to implement the FCA’s recommendations," he said.

The firm would be appointing two independent directors, he added, one of whom would take the position of chair at the UK subsidiary. This would not affect chairman Sir Gerry Grimstone, chair of the group.

There were also signs that today's new rules are only the start of the FCA clamping down on the asset management industry, as the watchdog said it would propose further changes to make fund objectives clearer to investors and let them know when the fund was closely tracking an index.

This should help allay fears about "closet tracker funds", which an investor may believe are actively managed and which incur higher fees but which in fact only slightly differ from a benchmark.

"In addition to the final rules, the FCA's consultation proposals will go some way to helping investors compare funds and decipher some industry jargon," said PwC's Andrew Strange.

Chris Cummings, chief executive of industry body the Investment Association, added: "We strongly support a greater emphasis on communication as well as governance to help customers better understand what they are investing in, what they are paying for and what they are getting in return."

EY said that though one of the more simple steps, the need to appoint independent directors was a significant move.

"The requirement to appoint independent directors to the board reinforces the regulator’s commitment to make governance a major element in investor protection, and gives clarity to what fund managers now need to consider when acting for their clients, which in its most basic form is to focus on good outcomes, not just rock bottom prices," said EY partner Simon Turner.

What the rule changes entail

The FCA found that investors could often benefit from being moved to "cheaper but otherwise identical [share] classes of the same fund", but this was often not done in practice because the fund manager had to get the investors' consent.

The need to obtain this consent will now be removed.

Some fund managers were also found to be making a risk-free profit from "dual-priced" funds, when dealing in the shares of the funds. The FCA said it would ensure these profits could be returned to investors.

Read more: Jupiter vice chair says asset managers are on the cusp of a revolution, as regulation remains a worry according to a PwC survey

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