Red sky in the morning... 

The week has felt 'busy' from the perspective of regulatory announcements.

Earlier in the week, the FCA announced that in 2017/18 it will be introducing a new regulatory levy to pay for MiFID 2, to be stacked on top of FOS and FSCS, and no doubt adding a further tier of unconscionable complexity to the RMA-J component of the Gabriel reporting system.  It appears that the prospect of Brexit has not in any discernible way depleted the enthusiasm for levies, and so there are few signs of hope for the Regulated Classes.

The other (main) anticipated announcement this week was the publication of the FCA's interim findings from its asset management market study, which became available to us today.  You can find industry commentary on it by clicking here.  The full interim report runs to some 208 pages, so we have not had opportunity as yet to review the entire content, but the FCA helpfully provides a summary of what it feels are the main points.  At ValidPath, we've also been able to review the contents of Annex 7, the 'Fund Charges Analysis'.  Whilst this, in absolute terms, tells us relatively little that is new, it does very helpfully track the trends in fund charges from 2010 through to 2015.

Thus, in 2010, the average total annual charge, right across the industry was 1.07%:  by 2015 this had reduced to 0.91%.  As a measure of improvement, given all the upheaval of the RDR, this does not seem to us to be all that significant.  It is when you break this data down into the main sectors (active and passive) that the relative degree of change becomes evident, thus:

  Total Charges
Year Active Passive
2010 1.15% 0.39%
2015 1.05% 0.21%


Hence, whilst (on average) there has been a reduction in active fund charges of some 8.69% of their 2010 value, there has been a corresponding reduction in active fund charges of some 46.15% of their 2010 value - and that from a much lower initial level.  In many ways, this bears out our own experience: the average TER for the portfolios in the ValidPath Investment Proposition is currently around 0.14%, and thanks to our due diligence process with Parmenion, has been steadily reducing since 2011.

There are, of course, a few minor problems with the FCA's analysis.  Whilst the regulator does, quite rightly, comment that "on average, these costs (for active management) are not justified by higher returns", it does so from the perspective of a big picture which does not, apparently, take into consideration market phases when one might reasonably expect active management to outperform relative to passives.  I do not think that the FCA's general conclusions, however, are invalid - active investors have seen a disproportionately low benefit arising out of the RDR, whereas passive investors (on average) should have rather more to be thankful for.

Ominously, the FCA (in its summary) talks about the "sustained, high profits over a number of years" enjoyed by the active fund management industry within the context of "price clustering".  A reasonable subtext here is:  "Brace yourselves".  Indeed, the FCA is now consulting on "whether to make a market investigation reference to the Competition and Markets Authority (CMA) on the investment consultancy market", so we think it safe to conclude that intermediaries offering investment or wealth management services will find themselves under further scrutiny.