A triumph for “transparency” – the FCA’s Market Study



“Where costs are less transparent, we have identified some specific examples where firms place less emphasis on controlling them”

FCA Asset management Market Study 7.54 (p135)

Yesterday I wrote about the savage treatment meeted out to Investment Consultants in the FCA’s Asset Management Market Study

Today I will focus on issues to do with value for money (VFM) and specifically on how the FCA want the “money” part of that equation to be better defined and communicated

The problem with getting value for other people’s money

The quote that opens this article, informs the sections of the Study which deal VFM.

Asset Managers are reckoned to manage around 80% of their costs in-house with around 20% outsourced to third party service providers. Some of the internal and external costs are met from within the Annual Management Charge (so diluting profitability to the asset manager), some met from the value of the fund (so diluting the performance of the fund to the consumer).

A simple analogy is the personal shopper, who finds limited numbers of bargains on the shelves of the supermarket, should the shopper put the bargains in his/her personal basket or in the person’s basket for whom he or she is shopping?

The conclusion from the FCA is repeatedly, that where scrutiny is off, malpractice creeps in

“However, we have concluded that most firms are still not applying the same rigour and oversight to the way in which they spend client’s research budgets as when they spend their own money”

The purchasing of research (especially “free research# paid for through higher trading costs) continues to be a thorny issue for the FCA but it is one that they are beginning to get on top of.

But there are areas where the Study finds new conflicts

The opacity of bond pricing where Over the Counter Pricing prevails.

Issues around Stock lending (despite its 2013 review) where losses are no indemnified and fees from the lending are retained by the asset manager (see my recnt blog on B&CE and State Street)

Similarly, some asset manager’s practice of profiting from Risk- Free Box management


As with Stock Lending, the payment of research costs and the execution of trades, Risk Free Box Management can substantially improve or diminish member outcomes.

What is clear is that

“Where costs are less transparent…… firms place less emphasis on controlling them”


Remedies for the consumer

The FCA divide the remedies for the current lack of transparency into two

Strengthening the independence and powers of fund governance

For fund governance bodies , there is no better sanction than this ongoing obligation

“to perform an annual, arm’s length reassessment and , where appropriate, renegotiation of the investment management agreement (IMA) with the asset management company”.  (10.10 -p 184)

Trustees’, IGCs and even the Authorised Fund Manager (AFM) Boards – were they to properly perform this function would become increasingly relevant to consumers. Charges that such fiduciaries are “paper tigers” only hold where the governance bodies are disinclined to exercise sanctions or not empowered to carry them out effectively.


The FCA are looking at the constitution of Authorised Fund Manager (AFM)  Boards ; making them proper fiduciary boards with a duty of care to the customer, thus realigning the needs of the customer against the needs of the shareholder.

I cannot see how this will be achieved without making AFMs independent of the Asset Manager’s management board (as IGCs are independent of contact based workplace pension providers. Reforming existing structures will rearrange the deckchairs but not save the ship.

Here are the options the FCA are considering to improve independence.

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Here the FCA see the obligation to demonstrate that the fund is giving “value for money” as critical.

But here we get to the thorny question of measuring value for money; I’m pleased to say that the FCA do not duck this issue.

The “remedy” to ensure that both fiduciaries and consumers can see what they are paying for focusses on a single measure of charge that builds on the current OCF methodology

The first suggestion doesn’t give transparency and doesn’t seem to add greatly to customer outcomes and presents a maintenance of the status quo


I hope my reading of the rest of the paper suggests that maintaining the current status-quo is not the intention of the FCA; I am hopeful that one on the remaining options will be adopted.


The three options escalate the obligation on managers to the point in (D) where the manager is effectively underwriting all costs within the fund as part of the single charge. This actually happens in Turkey though it creates a very high ceiling for the charge which I doubt would be acceptable to many UK consumers or fiduciaries.


An interim solution for IGCs?

The final report from the FCA is due in Q2 2017, after the next round of  chair statements from the IGCs and workplace trustees.

So it looks like they will be left in limbo as to how to measure value for money till the April 2018 statements appear. This is a shame, but an accident of time.

It will be interesting whether the IGCs and Trustees are reactive , and simply wait to see what the FCA deliver, or proactive (and tell the FCA what they think best).

My view

In my view we need the highest level of independence and the strongest powers we as customers can get. I want to see more independence on fiduciary boards (especially AFMs). I would like to see option “C” implemented for the single charge, with “D” as a sanction against repeated over-spending where no value is forthcoming.

I would like to see an annual review of the IMA with a statement from the IGC/Trustee/AFM that it is still appropriate (or renegotiation).

Above all else, I would like to see Transparency and personal accountability in all things. For as the FCA points out

“Where costs are less transparent, we have identified some specific examples where firms place less emphasis on controlling them”

Taps FCA

Personal accountability

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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4 Responses to A triumph for “transparency” – the FCA’s Market Study

  1. George Kirrin says:

    Yes, NMG did a focus group among 40-odd customers.

    PLSA did something similar recently when their DB Task Force filmed roundtables with “representative” members of DB schemes and scared them witless about “risk”.

    This feels like low denominator researching to me (note I don’t say “lowest”). Where are the non-aligned academic researchers when we need more of them to set the bar rather higher?

    But maybe the FCA has a vested interest in keeping the asset gathering agents in charge (even if, as you point out, Henry, more and more of the so-called assets are of the derivative variety)?

    There are investment solutions, but I suspect those who’ve found some of them will steer well clear of the FCA and its kind when they call for evidence.

    Some of the better research papers (and books) on investment are little read, while paid-for research is over-rated, surely?

  2. Con Keating says:

    I very agree with George’s comments above.
    It should not be that difficult to measure value for money. It is simply the net output divided by the gross input. We only need to get into the disclosure and detail if or when we want to improve if.
    I also agree with George’s take on the PLSA – if you are in the fund management or consultancy business, risk is your greatest markeing tool. It is the all-purpose bogeyman; to be wheeled out whenever you need or just want to keep the children in line.

  3. henry tapper says:

    Fundus the bogeyman?

  4. Tony Filbin says:

    Option F should be pursued even if one of the other options is also chosen.Extending the VFM/Chair statement to DB would be a good start.However there are weaknesses in Trustee Boards,the Trustee toolkit does not prepare you for fund manager discussions and with the paper revealing that 83% of Trustees only sit on one board their effectiveness and ability to discern best practice must be in question.The need for a professional,independent Trustee has never been greater (I would say that obviously) but time and again they have been proved their worth in helping drive down all supplier costs by understanding what best practice is,and what is available.

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