Central Bank to launch fund fee probe

The largest ever investigation in Europe into the fees asset managers charge investors will begin next year amid widespread accusations of overcharging within the fund management industry.

The financial watchdog in Ireland, which oversees more than 6,000 funds, including 3,725 mutual funds, is to examine whether the investment products offer “value for money”.

A spokesperson for the Central Bank of Ireland, the regulator, said: "In 2016, an area of focus will be fees charged by Irish-domiciled investment funds. Value for money for the end investor is an important part of the central bank's mandate to protect investors' interests."

Industry figures say the probe will be a concern for asset management companies, where profit margins have already come under pressure due to increasing demand from regulators and consumers for lower-cost products.

However, Mick McAteer, director of the Financial Inclusion Centre, a think-tank, said: “It is good news that the Irish regulator is looking at fees. EU investors [IN FUNDS]pay far too much for inferior performance.”

Guillaume Prache, managing director of Better Finance, a consumer lobby group, added: "Overall, fees are too high in Europe and still not always transparent."

Fund fees have been scrutinised in recent years due to claims that asset managers are charging investors large sums for active management despite closely following an index, a practice known as “closet tracking”.

It is understood the Irish regulator is separately carrying out a review of closet trackers, but its 2016 fund fee probe will go further.

The investigation of Ireland’s $2tn investment industry will initially focus on total expense ratios, which is a measure of the total cost of a fund to the investor. It usually includes the manager’s annual charge as well as the cost of other services paid for by the fund, such as fees paid to custodians and auditors.

The Irish watchdog is looking for “outliers”, funds that have very high total expense ratios. They will then be examined more closely. It is not clear how long the investigation will take.

Gina Miller, partner at SCM Private, the wealth manager, campaigns for greater fund fee disclosure. She said the probe should not just focus on the total expense ratio, claiming this can represents less than 50 per cent of the true cost. It often does not include performance fees and dealing costs, she said.

Fund professionals in Ireland have suggested the central bank’s investigation is unnecessary and smacks of “interference with the free market”.

A fund director who sits on the board of several Ireland-domiciled mutual funds, who requested anonymity, questioned whether it was the “regulator’s business to look at fees”, suggesting European-wide rules already address issues such as fee transparency.

“I am not sure it is up to the regulator to police what is good value,” he said.

However, Mr McAteer said: “The investment industry is one of the worst-performing industries consumers deal with and a range of interventions is needed to make this market work.”

Irish Funds, the local asset management industry association, declined to comment on the probe.

The financial regulator in Luxembourg, the largest domicile of funds in Europe, did not respond when asked if it also planned to investigate fund fees.

– Copyright The Financial Times Limited 2015