LONDON Britain's financial regulator plans to crack down on the 5.2 trillion pound ($8.4 trillion) fund management sector for unfairly making customers pay too many of its costs, its chief executive said on Wednesday.
Asset managers pay brokers commission to cover trading fees and for research to help work out investment strategies, and are allowed to pass the cost on to their own customers, who also pay an investment fund an annual management fee.
Customers - institutional and retail investors - have long complained about high charges and the funds, already sensing a change in mood among regulators, have been trying to head off intervention by developing industry-based solutions.
A specific concern is that some asset managers stretch the definition of research and use client commissions to cover non-eligible costs and services, Martin Wheatley, chief executive of the Financial Conduct Authority (FCA), told the watchdog's annual asset management conference.
Wheatley give two examples of practices he wants to stop.
"Examples of this poor practice include firms allocating significant sums of their Bloomberg and Reuters subscriptions, not all of which could be justified as viable research," he said.
He also cited funds' payments to brokers for arranging meetings with top company managers being passed on to customers.
"We estimate that anything up to 500 million pounds of dealing commission was spent in 2012 to facilitate corporate access," Wheatley said.
"As an example, last year we discovered a firm that was rewarding brokers predominantly based on the corporate access they provided. This averaged out to each individual investment manager paying over 100,000 pounds just to gain access to the management of companies they wanted to invest in."
One senior manager at a UK-based stockbroker said that because of pressures on costs, reform was likely to mean a reduction in payments to the broking industry as a whole.
He also said on condition of anonymity that ill-thought-out action may prompt brokers to focus mainly on funds based outside Britain as they would pay more.
Matt Huggett, a partner at law firm Allen & Overy, said the FCA should not take an isolated position on a complicated issue as it could create problems for UK asset managers and brokers.
And Nicola Higgs, a financial regulation lawyer at Ashurst, said that lawyers were expecting new rules on corporate access in November.
"We are already seeing many firms implement new processes to address the FCA's concerns on the way corporate access is provided to managers," she noted.
Wheatley will consult with asset managers from November to see what changes are needed to rules on research that have been in place since 2006, or just before the 2007-2009 financial crisis put emphasis on transparency in financial services.
"The system is not quite working the way it was originally designed. We need to look again, we need wider reform to address the flaws that cannot be addressed by incremental improvements to the existing rules," Wheatley said.
Mutual funds are regulated under European Union rules and Wheatley said he would include policymakers from the bloc in the consultation in order to have a pan-EU approach.
The review be accompanied by a separate look of conflicts of interest generally in the asset management sector.
Daniel Godfrey, chief executive of the Investment Management Association, a trade body, said it will publish its own review early in 2014.
Policymakers across the EU want people to save more for their retirement and keeping fees competitive enough is seen as a vital part of that.
($1 = 0.6228 British pounds)
(Additional reporting by Clare Hutchison Editing by Louise Ireland)