Less than faithful stewards


Robin Powell is one of pension’s best investigative journalists. Here he reviews the day’s FCA press releases which suggest that despite prompting, asset managers continue to let their investors down.

Another day, another piece of evidence that the UK asset managers are less than faithful stewards of the nation’s retirement savings. Actually, scratch that — another press release has just landed from the Financial Conduct Authority, detailing a second area in which the industry’s failing. Wow.. Two official rebukes in one day. Even by the standards of the British fund industry, that’s pretty impressive.

The first rebuke regards dealing commissions. This is a complex and murky area. Suffice it to say that dealing commissions are worth about £3billion per year and there’s been concern for some time that customers have not been getting a fair deal in the way they are handled.

An example of this is the widespread use of dealing commissions to pay for corporate access or investment research — in other words, passing on to the customer an expense that really should be met by the asset manager.

In May 2014, the FCA published a policy statement on this issue, in which it said that money managers should only use client dealing commissions to pay for “substantive research” or the cost of executing trades.

This morning the FCA provided us with an update on how investment firms have responded to that policy statement in the intervening two-and-a-half years. The answer, it turns out, is that most firms have done very little, if anything, about it.

To quote the FCA:

“The majority of firms we visited are still falling short of our expectations.

“We identified poor practices at the majority of firms we visited and several could not demonstrate meaningful improvements in terms of how they spend their customers’ money through their dealing commission arrangements.

“Some continued to use dealing commission to purchase non-permissible items, such as corporate access and market data services, contrary to our rules.”

In conclusion it said:

“More work needs to be done by investment management firms to ensure they spend their customers’ money with as much care and attention as if it were their own.”

So, that was the first stinging rebuke of the day. What about the second? Well, that concerns what’s referred to in the industry as best execution, or the duty of an investment firm to ensure that orders executed on behalf of customers are done so in the best interests of those customers. For example, firms are required to execute orders in a timely fashion, and to ensure that the customer buys or sells at the best possible price.

The regulator issued a review in July 2014 requiring firms to up their game as far as the oversight of best execution is concerned. Today it provided a progress report which, frankly, makes for depressing reading.

Here’s its summary:

“We were concerned to find that most firms had failed to take on board the findings of our thematic review. The pace of change in improving client outcomes in best execution was slow, with few firms having a cohesive strategy for improving client outcomes.

“Many firms had not conducted a robust gap analysis since 2014 and therefore much of the poor practice we outlined in our thematic review had not been addressed.”

I dare say that these two developments will receive little coverage in the weekend money sections, but they are hugely significant. The complacency of the industry’s response to repeated attempts by the regulator to raise standards of stewardship borders on the contemptuous.

It’s very hard for us, as end investors, to tell whether asset managers are investing — and spending — our money in our best interests. We simply have to trust that they are indeed doing so.

Alas, today has brought fresh evidence that our trust is, sadly, misplaced.

This article first appeared on the Evidence Based Investor website http://www.evidenceinvestor.co.uk/less-faithful-stewards/

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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