1. In April The Financial Conduct Authority investigated how the financial system would cope in the event of a fund manager failure.
2. The regulator is concerned that a 'disorderly failure' of investment managers and/or their portfolios could disrupt the financial system.
3. The regulator examined the design of investment products, probing investment managers' oversight of investors' portfolio oversight and questioning some of the motives behind the launch of new funds.
OVERPAYMENTS AND RESEARCH COSTS
1. Although there is stronger competition on price for passive funds, FCA found there is limited price competition for actively-managed funds, meaning investors often pay high charges that are, on average, not justified by higher returns.
2. Investment managers purchase two key services on behalf of investors; third-party research to inform decisions, and execution services to implement decisions in the wholesale markets for their portfolios. Portfolios pay for these services through transaction costs on top of the annual management fee.
3. Research and execution costs are bundled together by the sell-side, who cannot provide a clear price to the investment manager. The investment manager is therefore unable to value the services accurately.
4. Some investment managers may pay too much for services on behalf of investors due to: lack of transparency of information regarding some fees and charges failure to consistently monitor, assess and deliver on ‘best execution’
DISORDERLY WIND-DOWN
1. A number of large property funds were suspended following high levels of redemptions following the Brexit vote in June.
2. Market stability could be affected by the failure or disorderly wind-down of a very large asset manager or several asset management firms as "end-investors attempt to redeem their holdings on demand, creating a downward selling spiral."
CUSTODY BANKS
1. There were concerns on issues within fund administration and custody banks in its latest paper, including competition and fund groups being forced to sign up to services they do not necessarily need.
2. Because of low profit margins, many custody banks do not offer core custody as a single service. Instead, investment managers need to sign up for ancillary services such as FX trading and securities lending. There is some evidence that custody banks will charge low fees for core services. Additional revenue generation will be sought from ancillary services.
3. There are also concerns low profit margins would deter custody banks from investing in modern technology systems, and failure to upgrade could "negatively affect the sector".
4. The reliance on out-of-date systems could create an additional barrier, preventing asset managers from switching to other providers. Considering these switching barriers, the low number of suppliers and the lack of investment in new technologies, the prudential and operational risks associated with a significant service outage within the sector are high.
5, Because of business model pressure and the relatively low margin nature of this business, the incentives to invest and replace legacy IT systems may not exist.
PRODUCT DESIGN AND OVERSIGHT
1. Providers tend to focus on designing investment products that are easy to manage, or suit advisers, rather than delivering products that meet end-investors’ needs.
2. The FCA found some charges, such as transaction costs, are not disclosed to investors, or are estimated in advance, so they run the risk of being inaccurate for FCA's proposed All-in fee options.
FCA SUGGESTIONS ON ALL-IN FEES STRUCTURE
1. The first is that the current ongoing charges figure (OCF), which is supposed to bring together all of the charges with managing a fund, becomes the actual charge taken from the fund, with fund managers making up any shortfall.
2. A second variation on this would see the OCF become the actual charge but with the fund manager estimating transaction costs.
3. The third route would be for a single charge including all transaction costs, but with an option for ‘overspend’ if additional trading was necessary.
4. The fourth would be a single charge with no overspend option, so the asset manager would have to fund any difference between the forecast and actual trading costs.
(Source: Fundstrategy, Citywire, Investmentweek)
