FUND managers and stockbroking firms are leaving themselves open to a competition commission inquiry unless they take steps to reform their “cosy relationships” and the way they charge their clients, a leading industry figure warned at a pensions conference in Edinburgh.
Paul Myners, ex-chairman of investment managers Gartmore, who was behind the Myners Report a Treasury-sponsored report into the pensions and institutional investment industry, delivered his wake-up call on Friday.
Speaking at a National Association of Pension Funds conference at the Edinburgh International Conference Centre (EICC), Myners accused fund managers of dragging their feet more than any other interest group. He said fund managers seemed to be turning a blind eye to government demands that they improve the transparency of pension fund costs, which Myners estimated at £8 billion a year.
Myners said: “Why are the fund managers not forcing the sell-side [stockbrokers and related intermediaries] to disaggregate the services they provide? Why are they still content to go along with bundling? Quite frankly, there’s a cosiness here that needs to be exposed and needs to be broken open. We are continuing to face resistance from fund managers in going towards full and complete disclosure.
“I continue to be amazed that soft commission exists. I hear fund managers say they secure valuable services through soft commission. Independent advice, conceivably. But Bloomberg terminals? Reuters terminals? These are core costs and should not be charged back through an opaque commission charge of which there is no close scrutiny and no real accountability.”
He said the UK government will have a strong case to refer the industry to the competition authorities if there isn’t more evidence of reform by the Treasury’s deadline of March 2003.
“If in a year’s time there is no evidence of a real decline in the use of soft commissions and no evidence of fund managers making more clear statements about their commission policies, then one of the 10 tests will have failed,” he said.
In October, the UK government published a code, based on Myners’ review, which included a call for pension funds to avoid entering soft commission deals and to allow more competition on transaction charges. The government has said it will review in March 2003 the extent to which the industry has adopted the code and could legislate to enforce compliance.
Speaking at the NAPF conference on Thursday, Ruth Kelly, economic secretary to the Treasury, warned fund managers that the industry needs to do more to improve transparency and competitiveness on costs.
She added that guidelines introduced last week by the NAPF and the Investment Managers Association to improve disclosure fell short.
Myners also criticised fund managers for failing to use their influence as shareholders to encourage reform in underperforming companies or ones where corporate governance is weak.
He said that fund managers were seeking all manner of reasons to duck their responsibilities in this area. “It needs a fundamental change in attitude from one in which fund managers see themselves as owners of a piece of paper — a share certificate — into becoming true owners of a business.”
Unless there is more action, “this is one of the tests we are likely to fail over the next 12 months,” he said.
The government is considering legislation making it a duty for fund managers and pension fund trustees to play an active role in the companies they invest in, for example by exercising their vote on decisions needing shareholder approval.
Reviewing the industry’s reaction to his review and the government’s code, Myners congratulated both trustees and consultants for showing greater willingness to adopt his principles. But he added that they still had some way to go to ensure they comply with the code.
Trustees needed to devote more time and energy to asset allocation, and too many pension schemes are still using peer group benchmarks, which set asset allocation for funds based on industry averages, he said.
“There is real evidence that we are moving in the right direction,” said Myners. “I focus my disappointment on activism and transaction charges where I don’t think the message has got through.”
This article was published in the Sunday Herald on 17 March 2002