The UK’s Financial Conduct Authority (FCA) has criticized the country’s fund managers for poor transparency and a lack of oversight of legacy products.
Some managers failed to disclose their products’ reliance on passive strategies, the FCA said in a thematic review of communications and documentation. Of 23 funds analyzed, three were found to be following “enhanced index strategies without adequately disclosing this.”
“The strategy, indexes, and degree of freedom the fund manager had in relation to each index were not adequately disclosed to investors,” the regulator said. “Investors did not know the fund’s strategy and were unable to judge the level of risk and return they might get from the fund compared to the index.”
Two more funds in the sample were found to have “material passive holdings that were not adequately disclosed.”
Such issues were more likely to emerge on funds that were not actively marketed, the FCA added, as these products often lacked adequate oversight or governance.
“Firms must monitor funds and treat customers fairly throughout the lifetime of the product irrespective of whether the fund is being actively marketed,” the FCA said.
Regulators in Sweden and Poland have recently turned their sights on “closet tracker” funds, while campaigners have lobbied the European Securities and Markets Authority to take action against managers that overcharge for passive products.
The review also analyzed four segregated institutional mandates but found these to be “closely overseen by the client through regular reporting and meetings with the asset manager.”
No specific asset managers were named in the FCA’s report, but firms exercising poor practice will be contacted by the regulator and “required to make improvements.”
The “meeting investors’ expectations” thematic review forms part of a wide-ranging asset management market study, in which the FCA aims to review all parts of the distribution chain including asset managers and consultants.
Related: ‘Closet Indexing’ Costs Pensions £1.7B a Year & The Best Thing for Active Managers? Passive Investors.