Agathangelou: Why the TTF rejects the Investment Association’s cost disclosure code proposal

The Investment Association should not be responsible for creating a code to govern its members because it is inherently conflicted says Transparency Task Force founding chair Andy Agathangelou

Andy AgathangelouThe overall purpose of greater transparency on costs and charges is to improve the efficiency of the market and enable investors to get the best possible value for money. Several weeks ago, volunteers from the Transparency Task Force formed a response team to provide a consensus-based response to the Investment Association’s Draft Cost Disclosure Code.

A key question the volunteers considered was whether it should be the Investment Association that was responsible for the development of a Cost Disclosure Code. We concluded that if you come at this question from the position of ‘What is the best way for the asset management industry to defend its commercial interests from the ever- strengthening demands for transparency on costs and charges?’ the answer is yes. But if you come at the issue from the position of ‘How can we provide investors with the best possible outcomes?’ the answer is ‘No’.

Why? – because the IA is a trade body and trade bodies have a primary duty of care for the commercial interests of their members. As such, they are too conflicted to be responsible for the development of a costs disclosure code. The extent to which the Investment Association is conflicted with what is best for the consumer has already been seen by their unwillingness to wholeheartedly embrace the idea of putting the investors’ interests first; as evidenced when a clear majority of their members refused to sign up to a code that included the requirement to put the interests of the consumer first. That resulted in the departure of their Chief Executive who had been attempting to introduce the ‘put the investor’s interest first’ Code, with unsurprisingly, a great deal of adverse publicity for the Investment Association and consequentially for the asset management industry.

Similarly, the infamous ‘Loch Ness Monster’ research published last summer and the barrage of criticism about it from right across the industry will have undermined consumer confidence in the credibility of the Investment Association. This is exactly the kind of publicity that results in the Financial Services sector routinely being at the bottom of consumer trust ratings. Furthermore, the reputational damage this kind of behaviour causes must contribute to the UK’s appallingly low savings ratio – just 3.8%, which is the worst it has been since 1963. This is a huge problem for our economy and society as a whole today, and it has the potential to drive serious social unrest in decades to come – a systemic risk that must not be ignored by Government.

The Investment Association’s proposed Code falls short of the mark in so many ways, such as, there is no effective quality control over the cost data being gathered; there has not been any open scrutiny of the development of the Code; the code is merely voluntary; the Code is not comprehensive i.e. not all costs connected to the asset management industry that adversely impacts the investor are covered; it does not take care of retail investors at all; the terms used to describe costs do not have legally-binding definitions; and the Code has not been produced as part of an integrated, industry-wide effort

Because the Investment Association is the fund industry’s trade body it is fundamentally conflicted and cannot therefore objectively introduce a Cost Disclosure Code

We cannot support the Financial Conduct Authority adopting the fund industry’s trade body code. We reject that notion that the Investment Association’s Code is recognised in the Financial Conduct Authority’s Rule Book.

It should be the Financial Conduct Authority and not a conflicted trade body that initiates and leads the development of a regulatory framework that mandates for comprehensive cost disclosure, with full industry consultation

It is vital that all is done to ensure value for money for consumers so the regulatory framework the Financial Conduct Authority creates must cover the entire value chain – not just asset management

Furthermore, as a member of the Independent Advisory Board to the Cost Disclosure Code I believe the Independent Advisory Board has failed to perform adequately as an independent Advisory Board, for the very long list of reasons given in our response. As a consequence, a golden opportunity has been missed to help rebuild trust and credibility for the asset management sector, which is so desperately needed.

The Transparency Task Force’s firmly held belief is that ‘sunlight is the best disinfectant’ and as such we hope that our hard-hitting response to the Investment Association’s Draft Code and my observations about the shortcomings of the Independent Advisory Board itself are all taken in the spirit in which they are meant – fair, reasoned and balanced constructive criticisms intended to encourage the Investment Association and the Independent Advisory Board to raise their game.

I’d like to express my deepest thanks to the volunteers that kindly stepped forward to provide what I hope will be seen by the Investment Association, the Independent Advisory Board, the Financial Conduct Authority and the industry as a whole as a remarkably forthright, honest and helpful piece of work.

We can now just hope that the recent media reports that Mr. Woolard, director of strategy and competition at the FCA, does not want to be bound by industry initiatives in making new rules for asset managers if they fall short of the mark, are in fact true.