Business Irish

Tuesday 20 August 2019

Central Bank probes fees on 'auto-pilot' funds

Head of financial conduct at the Central Bank Derville Rowland
Head of financial conduct at the Central Bank Derville Rowland
Donal O'Donovan

Donal O'Donovan

The Central Bank has launched an investigation of fund managers who may be charging clients for actively managing large investment pots while actually just tracking stock markets or other indices.

The practice is known as closet indexing or index hugging. In a statement likely to be seen as a shot across the funds industry's bows, regulators said they had identified 182 funds for closer scrutiny after a trawl of data from the 2,550 authorised here and classified as actively managed.

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The Central Bank review found that investors were not always given "sufficient or accurate information" about funds' investment strategies.

The Central Bank said it has already followed up with 62 of the funds identified for further review and found that 57 of them had failed to provide investors with enough information to assess sufficiently whether the fund was right for them. The regulator will engage with the rest in the coming months.

Head of financial conduct at the Central Bank Derville Rowland said funds have until March to amend any information provided to investors.

The active management of investment portfolios commands higher fees because it relies on individual fund managers making ongoing investment decisions in a bid to generate returns.

Passive fund management, tracking designated market indices, can essentially run on auto-pilot most of the time and therefore charges lower fees. "Investors... have a right to rely on the information in the... (fund documentation), and funds have an ongoing duty to ensure that this information is accurate and that the fund is managed in investors' best interests," Ms Rowland said.

Ireland's €2.4trn asset management industry is concentrated in Dublin's International Financial Services Centre, serving mainly the global investment industry, rather than domestic investors.

The Irish probe follows investigations elsewhere, including the UK, where the Financial Conduct Authority (FCA) estimated around £109bn was managed by closet trackers. Last year, the FCA told 64 funds to clarify information given to investors, and a group of funds paid £34m in compensation to investors.

Irish Independent

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