The Financial Conduct Authority (FCA) has said a number of asset managers have taken the step of paying £34m in compensation to investors who overpaid for 'closet tracker' funds following an investigation by the regulator, while another fund group faces enforcement action for "very misleading" marketing material, according to The Telegraph.
The groups involved will reimburse investors for the higher active charges they paid on what were in reality index tracker funds, although the move is not part of an official redress scheme from the regulator, according to The Telegraph.
Managers involved will also have to change their marketing material, and in the more serious cases of misleading investors they will have to notify existing investors.
Megan Butler, FCA director of supervision - investment, wholesale and specialist, said that of the 84 potential closet tracker funds the regulator examined, the regulator demanded changes to the marketing material on 64 funds, to "make it clearer to consumers how constrained they are". However, she said the remaining 20 funds were already adequately describing how the money was managed.
In addition, The Telegraph reports another asset manager is facing enforcement action from the FCA. In this case, the regulator felt the company's marketing material was "very misleading" and so required "being taken a step further", a source close to the situation said.
The FCA's examination of this part of the market comes after the regulator flagged there is around £109bn sitting in closet trackers in the interim report of its Asset Management Market Study, which was extremely critical of the performance of many actively-managed funds.
It announced a package of remedies to address issues in the market, including beefing up fund management board independence and chairing a working group to focus on how to make fund objectives more useful and consult on how benchmarks are used and performance reported. The FCA also proposed introducing a new rule to require the AFM to assess whether value for money has been provided to fund investors. A policy statement for the first set of remedies will be released by the end of March.
However, calls for the industry to properly address the issue of closet trackers have been made for a number of years. In early 2016, the European Securities and Markets Authority (ESMA) said its research found up to 15% of UCITS equity funds examined could be 'closet' index funds, and called for further investigation by national regulators. In addition, the body said it may consider developing new definitions of active and passive management and making the distinction clearer between the two.
By: Investment Week.
Photo: Money Marketing, UK.
Review: Emerging Market Formulations & Research Unit, Flagship Records.