The City regulator must resist the lobbying backlash and follow up its call for reform of the fund management industry.
The fund management industry has become an elaborate exercise in siphoning savers’ capital for the benefit of insiders, critics have grumbled for years, with strong justification. Now the Financial Conduct Authority finally agrees – roughly speaking.
The regulator’s language is softer, but many of its findings support familiar complaints about opaque fee structures, conflicts of interest and inadequate governance oversight. Price competition is “weak in a number of areas” to the point where average profit margins are 36% for asset managers and fees for active funds haven’t changed in 10 years. There is no relationship between charges and performance. Investment objectives aren’t communicated clearly. Benefits of scale aren’t passed onto retail investors. The charge sheet is long.
The question is whether the FCA’s proposed remedies go far enough. There are some easy wins like banning the grubby practice known as “box management” – managers pocketing the difference between the “buy” and “sell” price when a unit in a fund is merely being transferred between customers. That some managers currently feel entitled to help themselves to this risk-free income is outrageous.
A push for greater transparency – the big theme in the report – is welcome. The FCA supports the disclosure of all-in fees, including transaction charges. About time, too: all-in fees should mean what they say. The idea that fund managers should have at least two independent directors is sensible, though the FCA could have been bolder on numbers. The voice of customers is more likely to be heard if their interests are represented in the boardroom.
Yet one gets a strong sense that the FCA, having lifted the lid on an industry that has escaped scrutiny for too long, knows its work has only just started. The list of other financial players scheduled for investigation is also long: investment consultants, fund platforms such as Hargreaves Lansdown (whose profit margins can be as high as 70%), hedge funds and the private equity brigade. Delivering a blast of transparency to all those corners of the investment game is not going to happen overnight.
But the FCA should keep going and resist the inevitable lobbying backlash. Over the past 20 years, the fund management industry has exploded in size and its top individuals grown immensely wealthy. It’s about time somebody asked whether it is delivering value for money for customers. The answer in too many cases is no.
Ploughing on at the Co-op bank
Hurrah, the Co-operative Bank is saved. In truth, a successful recapitalisation never seemed in serious doubt, even when buyers didn’t show up with decent takeover offers. The hedge funds who have supported the bank since 2013 knew their best interests were served by finding fresh cash and supporting a debt-for-equity swap.
Even after five years of losses in a row, there is still a decent retail bank at the core of the operation. Customers, including 1.4 million current account holders, have stayed loyal. The technology has been expensively overhauled. Sometime around 2021, the hedge funds may be able to sell. Their returns may not match their original expectations but, in current circumstances, ploughing on makes more financial sense for them than giving up.
Can the Co-op Bank credibly still travel under a co-operative banner, though? Its chairman, Dennis Holt, protests that the ethically minded punters either don’t mind, or don’t notice, that the Co-op Bank is controlled by hedge funds. They are more interested in the bank’s trading values, he says. Well, okay, but Holt is dodging the question: the word “co-operative” in this context surely describes an ownership model, not a set of business principles.
In practice, the polite fiction can probably continue harmlessly. Certainly, the business secretary, who has powers to intervene, would be unwise to upset the financial reconstruction by insisting on a change of name. It wouldn’t be worth the hassle.
Tesco workers may well question Lewis’s bonuses
Another day, another round of job losses at Tesco. This time 1,200 posts are going at head office. All supermarkets are reining in costs, of course, and Dave Lewis, Tesco’s chief executive, has more reason than most to cut. The share price, at 172p, down 16% this year, betrays the worry that his turnaround programme is losing puff. Some of Tesco’s soon-to-be-former employees may wonder if the £5.3m paid to Lewis in bonuses over the past two years was a reward for a commercial revival that hasn’t yet happened.