The final report for the FCA’s asset management market Study has raised concerns over closet-tracker funds, lack of price competition and the difficulty of switching from older, more expensive share classes to cheaper ones.
'Since the onset of the retail distribution review each directive from the FCA seems to reinforce the benefits of passive investing, as does today’s report,' said Allan Lane, managing partner of Twenty20 Investments.
'Making it easier to switch to cheaper share classes was never an issue for ETFs, as all investors get charged the same fees.'
Many large ETF and index fund providers, such as db X-trackers, iShares and L&G have considerable active asset management divisions, and they either declined to comment or said they would respond after fully digesting the 114-page paper.
The report was welcomed by Vanguard, one of the largest active and passive houses in Europe.
Sean Hagerty, managing director, Europe, said: 'We support the FCA’s efforts to lower the cost and complexity of investing. Consumers always benefit from lower prices, better quality products, and clearer information.'
European-wide regulation under Mifid II II will require all fees at every stage of a transaction to be added up and shown in numerical and percentage terms. The FCA, however, said it 'supported' a single fee but would consult on it.
James King, managing director of financial planning at Price Bailey, said: 'The FCA's plan to introduce an "all in fee" will expose a number of fund providers for the true cost of the investment portfolios they have been marketing.'
Passive funds did not escape criticism. The report accused some funds of failing to 'beat' their benchmarks or contribute to market price formation. It also noted that £6 billion was invested in passive funds with higher than average fees.
'One point raised in the feedback, which we want to address, was a perception that our interim findings suggested that passive funds were preferable to active funds,' the report stated. 'This is not the case.'
Data and ratings provider Morningstar compared active managed funds and ETFs domiciled in Europe investing in UK large caps, it revealed the average ongoing fee as stated in KIIDs for the former was 1.09% versus 0.31% for the latter.
A timeline for the 'remedies' proposed by the FCA has not been set, and the regulator will hold further consultations and workshops.
Robin Powell, editor of the Evidence-Based Investor and director of a documentary about active funds, said: 'Much now depends on whether the regulator genuinely has the will to follow through with these proposed reforms.'