With the countdown ticking on Britain’s exit from the European Union, huge attention is being given to what it all means for the City of London. This, of course, is only right. The City is a huge contributor to the Exchequer, and it employs a great many people. Whatever deal is agreed regarding the City (assuming there’s one at all), it’s going to have significant implications.
There is, however, some very woolly thinking on this issue. In particular, some commentators seem to equate the City’s interests to the nation’s interests, when they are, in fact, two very different things. But more concerning still is the lack of attention given to the interests of the people who really matter, namely consumers.
Whatever your views on the European Union, there is no doubt that, on balance, its regulation of the fund management industry has benefited investors. No, MiFID II is not the cleverest piece of regulation ever written, and we could have done with it a long time ago, but it has finally put a legal requirement on the industry to be more transparent.
This, alas, is something that successive UK regulators have failed to achieve — despite a mountain of evidence over the last two decades that consumers weren’t being given the full picture. We’ve had plenty of talk, with reports and consultations galore, but it was left to the European Commission to get on and do something about it.
Of course, regulation is not the same as enforcement, and right across Europe, fund management companies continue to flout the legislation, while national regulators, in most cases, stand idly by.
A recent report by the Brussels-based pressure group Better Finance, for example, found that at least 30% of actively managed funds still aren’t complying with disclosure rules for the two-page Key Investor Information Document, or KIID. Without the necessary information, it’s very difficult for customers to assess how a fund has performed in relation to its benchmark, or to work out whether a fund that’s billed as active is not in fact a closet index tracker.
Along with Luxembourg and Ireland, the UK is one of the worst offenders. 156 UK-domiciled funds — 46% of the total — are not in compliance with the KIID regulations. The report singles out Fidelity, Janus Henderson and Standard Life Aberdeen for particular criticism. It’s a very different picture in France, where 99% of funds are compliant with the regulations; in Spain the figure is 97%.
To give credit where it’s due, the UK regulator, the FCA, is the only one in Europe to have taken action against closet trackers. In March this year, it forced 64 UK-domiciled closet index funds to indemnify clients. Also, despite it being a watered down version of the interim report, the FCA’s final report on its market study on competition in asset management at least signalled its intention to get tough on firms that don’t disclose the full cost of investing, or who mislead consumers in their reporting of fund performance.
That said, we’ve been here many times before. The FCA, and the FSA before it, have talked about transparency and then failed to act on it — often after concerted industry lobbying. The campaign for greater transparency has made strides, but it has reached a critical juncture. Will the FCA act on the Better Finance report and force the likes of Fidelity and SLA to meet their legal obligations? I wish I could say with confidence that it will.
I share the concern of Daniel Godfrey that Brexit threatens to derail the process. Godfrey, you may recall, was removed from his post as Chief Executive of the industry trade body, the Investment Association, after urging members to sign up to a voluntary code of conduct.
Speaking on Radio 4’s In Business in January, Godfrey said this: “Brexit has provided a reason for the industry to say, ‘This is not a good time to attack us’… and I think that reduces some of the pressure for greater regulatory and political scrutiny.”
There are doubtless many in the fund industry who are rubbing their hands at the prospect of less regulation and scrutiny post-Brexit. That would be bad for consumers and bad, ultimately, for UK asset management.
Of course, let’s try to get the best possible deal for Britain’s financial services sector. But let’s remember, too, that it’s the consumer’s interests that matter most of all.