British watchdog loses patience as asset managers flout fees rules

LONDON — An asset management firm has been told to repay customers after using their money to settle its market data bill, Britain’s Financial Conduct Authority (FCA) said in a crackdown on commission charges.

The watchdog’s chief executive acknowledged that it is losing patience with firms that fail to comply with stricter rules imposed to help safeguard the UK’s position as a leading centre for asset management — a sector crucial to government efforts to encourage more people to save for their old age.

British asset managers pay brokers about 3 billion pounds ($5.1 billion) a year in dealing commission, which is passed on to customers, but FCA investigations found that many firms have been using this as cover to get customers to pay for market data and research of questionable value.

Only trading fees and useful research can be passed on to customers as dealing commission, but the watchdog’s Chief Executive Officer Martin Wheatley said the review of 17 investment managers and 13 brokers found that only two investment managers were fully in line with the new rules.

“We are in active discussion with one firm on redress for clients after we found it used dealing commission to pay for market data services in full, despite clear statements that this was not consistent with our rules,” Wheatley said.

Given poor compliance with the regulations, Wheatley added that the FCA is now backing a European Union (EU) law to separate research and trading fees to encourage greater competition and transparency.

Britain must comply with EU law in any case, but in the past the watchdog had been willing to “work with the grain of an industry-led solution”.

“The UK is a global centre for asset management — to keep this position it is crucial that investors are confident that they get a fair deal,” Wheatley stressed.

The Investment Management Association sought in February to head off a tougher regime by issuing its asset management members with guidance on dealing commission.

It said this month that it is considering the FCA review and remains committed to supporting a regime that operates in the best interests of investors.

Also this month, the FCA launched a wide-ranging review of competition in wholesale financial markets, which will also take in investment firms. 

Separately, the Bank of England (BoE) said British banks had a “dreadful record” on mis-selling complex interest rate hedging products to small businesses and warned that it would keep a close eye on them.

Before the financial crisis, many businesses bought the products to protect against interest rate rises, but ended up facing crippling costs after the BoE cut rates to a record-low 0.5 per cent in March 2009.

Last year, the FCA ordered Barclays, Royal Bank of Scotland , HSBC and Lloyds Banking Group to investigate nearly 30,000 cases of potential mis-selling.

To date, the banks have paid out just a third of the 3.75 billion pounds ($6.38 billion) they set aside to pay compensation.

BoE Governor Mark Carney, speaking to a panel of lawmakers about financial stability, said there had been clear malpractice and that firms’ problems should not be viewed as an inevitable side-effect of low interest rates.

“This just goes right back into the mis-selling issue and it’s not a monetary policy issue,” he said.

Andrew Bailey, the BoE deputy governor responsible for bank regulation, said the “dreadful record of British banks and selling hedging products to customers” meant he would be looking closely to see if they bent new rules meant to stop this.

“We will have to be very vigilant about this,” he remarked.

British banks have also set aside more than 20 billion pounds to compensate individual borrowers who were mis-sold so-called payment protection insurance policies to help them service loans if they fell ill or lost their job.

Some lawmakers were not happy with the BoE’s assurances that it was keeping an eye on allegations of malpractice in high-frequency trading of shares in London.

New York’s attorney general has filed a securities fraud lawsuit against Barclays, accusing the bank of giving an unfair edge to US high-frequency traders.

Carney and Bailey said the FCA was looking at high-frequency trading in London, something that was not a BoE responsibility.

Some lawmakers said that kind of approach was responsible for the central bank’s delay in spotting the risk of malpractice in currency markets, something it is now investigating.

Referring to a previous committee hearing where this topic had come up, Labour Party lawmaker George Mudie said Carney had appeared disingenuous. 

“Your face... was just so sly, I would have never played cards with you,” Mudie said.

Carney and Bailey said the current set-up — where the FCA is responsible for rooting out malpractice and the BoE is in charge of financial stability — had been agreed by lawmakers.

Last month, Mudie’s party colleague Pat McFadden had described the BoE under Carney as an “unreliable boyfriend” because of the mixed signals he had given on interest rates.