BoE stress tests: all you need to know

The Bank of England has released the results of its latest round of its annual banking stress tests and its semi-annual financial stability report this morning. Used to measure the resilience of a bank’s balance sheet in adverse scenarios, the stress tests measured the impact of a severe slowdown in Chinese growth, a global recession […]

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Draghi: Eurozone will decline without vital productivity growth

It’s productivity, stupid. European Central Bank president Mario Draghi has become the latest major policymaker to warn of the long-term economic damage posed by chronically low productivity growth, as he urged eurozone governments to take action to lift growth and stoke innovation. Speaking in Madrid on Wednesday, Mr Draghi noted that productivity rises in the […]

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Asia markets tentative ahead of Opec meeting

Wednesday 2.30am GMT Overview Markets across Asia were treading cautiously on Wednesday, following mild overnight gains for Wall Street, a weakening of the US dollar and as investors turned their attention to a meeting between Opec members later today. What to watch Oil prices are in focus ahead of Wednesday’s Opec meeting in Vienna. The […]

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Banks, Financial

RBS emerges as biggest failure in tough UK bank stress tests

Royal Bank of Scotland has emerged as the biggest failure in the UK’s annual stress tests, forcing the state-controlled lender to present regulators with a new plan to bolster its capital position by at least £2bn. Barclays and Standard Chartered also failed to meet some of their minimum hurdles in the toughest stress scenario ever […]

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Barclays: life in the old dog yet

Barclays, a former basket case of British banking, is beginning to look inspiringly mediocre. The bank has failed Bank of England stress tests less resoundingly than Royal Bank of Scotland. Investors believe its assets are worth only 10 per cent less than their book value, judging from the share price. Although Barclays’s legal team have […]

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Categorized | Financial

FCA’s endless but worthy fight for British investors

Posted on November 20, 2016

The UK Financial Conduct Authority’s interim report on the asset management industry mostly states truths universally acknowledged — at least by anyone familiar with the investment trade. Its proposed remedies are sensible, but would not bring about drastic change.

This is not to criticise, but to point out something inevitable. Managing other people’s money always and everywhere presents opportunities for skimming and self-dealing. At the same time, investing is intrinsically complicated and time consuming. So the work of scrutinising the industry and keeping its customers alert is never done. The same problems must be unearthed again and again, and regulatory regimes, which will always fall far short of perfection, must be regularly tweaked as an industry full of clever people evolves.

The indubitable truths: most active fund managers underperform their benchmarks. Others are not really active at all — they just mimic their benchmarks. Either way they charge too much. These charges are often levied in the form of fees, and often include transactions charges that are hard to understand or anticipate.

Asset managers in the UK do not compete aggressively on price, to the detriment of UK consumers. Similarly, big asset managers do not tend to pass on economies of scale to customers. Yet keeping costs low is the most reliable way to boost long-term performance. The institutions that select the investment providers and options for pension schemes often fail to focus on cost, sometimes lack relevant experience and depend on a clubby and concentrated investment consulting industry. And so on, and on.

The FCA makes two good proposals. First, it suggests that those institutional investment consultants — which help pensions schemes do their jobs — could use some scrutiny from the competitions authorities. The industry is dominated by a few firms, and as many of them are launching their own investment services, conflicts of interest are a concern.

Second, greater competition among asset managers should be fostered by increasing the transparency and comparability of disclosures. This is a wise alternative to fee caps which, like all price controls, would be unlikely to have their intended effect.

The proposal of a universally comparable “all-in” fee disclosure could be powerful, and would therefore prompt resistance from the industry. In its strongest version, the all-in fee would have to include all transaction costs the fund incurs. The industry will object that transaction costs cannot be anticipated in volatile markets, and forcing managers to cover them could motivate actions that do not benefit clients. This is a thin argument. Lots of companies work on a fixed-fee basis, and shifting transaction costs on to clients skews managers incentives in the other direction, equally dangerously.

The FCA report implicitly but clearly encourages greater use of passive investment funds. An important objection to this is that it is active management that pushes markets towards efficiency. If too much money shifts to the passive side — free riding on the work of a dwindling number of active managers — the market could become unstable. Bubbles could form as money moves indiscriminately into poor quality or mispriced assets. This is possible, but we are a long way from there yet. The world is sloshing with capital looking for inefficiencies, and should the balance in performance shift back to the active side, the rush to passive products would reverse quickly. For now, the best advice for most investors is to keep focusing on costs.