An independent U.K. financial watchdog has laid into the country's asset management industry, saying that competition is not working effectively in several areas.
The Financial Conduct Authority's (FCA) interim review kicked off a year ago, looking into whether institutional and retail investors are getting good value for money when buying services from the near £7 trillion ($8.6 trillion) national asset management industry.
Amid the scathing criticisms lobbed at practitioners, the FCA says fund objectives are not always clear and that the performance of funds is sometimes compared to inappropriate benchmarks. Above all, the regulator accused asset managers of asking for indefensibly high fees.
According to the review, "There is limited price competition for actively managed funds, meaning that investors often pay high charges. On average, these costs are not justified by higher returns."
"We want to see greater transparency so that investors can be clear about what they are paying and the impact charges have on their returns. We want asset managers to ensure investors receive value for money through pursuing energetically their duty to act in their customers' best interests," added the paper.
In response to the review, the U.K.'s trade body, the Investment Association, issued a preliminary press release which stated, "We support the FCA's objectives to ensure that competition in the industry works to the benefit of its customers, whether individuals, families or institutions. Over the coming weeks, we will engage closely with the FCA to understand its findings and the full implications of potential remedies."
The FCA's negative comments were largely directed at active managers with the observation, "There is stronger competition on price for passively managed funds, though the FCA did find some examples of poor value for money in this segment."
The review also sharply criticizes the work done by investment consultants who act in the capacity of experts to select the most appropriate funds for clients, such as pension funds.
According to the study, "The FCA found that investment consultants undertake valuable due diligence for pension funds but are not effective at identifying outperforming fund managers. There are also conflicts of interest in the investment consulting business model which require further scrutiny."
Graham Vidler, director of external affairs at the Pensions and Lifetime Savings Association told CNBC via email that the longer-run effects of the review were likely to be positive.
"When considering investments, pension funds take the long-term view and are therefore unlikely to make changes in the short-term."
"The FCA's report has highlighted the key issues of cost, transparency and alignment of interests which we expect will result in better value for money across the whole sector," he added.
The FCA review ends by proposing what it describes as a"significant package of remedies" including ideas such as all-in fees rather than a stack of separate charges and more standardized communications to improve investor understanding.