Closet Tracker Funds pay out £34m over misleading marketing

Following a Financial Conduct Authority (FCA) investigation into so-called ‘closet trackers’, tens of investment management firms have compensated investors for overcharged fees to the tune of £34 million.

As reported in the Sunday Telegraph, the FCA investigation analysed the marketing materials of 84 firms, with 64 deemed unsuitable due to their misleading nature. The FCA has ordered these firms to pay compensation and to alter their marketing strategy in order to make it compliant. They are even considering pursuing enforcement action against one fund manager over potentially misleading marketing, according to reports.

The FCA determined that the offending funds cannot justify the higher fees associated with actively managed funds due to their passive-like behaviour. These closet tracker funds can charge up to ten times more than a passive tracker would do for the same job. Once these charges have been applied, investors have found themselves much worse off than they would be if they’d invested in a cheap tracker.

However, some experts are predicting that the increased regulatory scrutiny of these funds will result in further fallout. The £34 million pay-out has been described as “a drop in the ocean” compared with the estimated £109 billion of investor money still sitting in closet tracker funds across the UK.

In addition, the FCA have so far refused to reveal the identities of the offending firms. The regulator has been criticised for this decision as investment experts demand more transparency on the issue. Investment experts are concerned that without this information, investors will be unable to make informed decisions about which funds they should invest in.

Savers are being urged to review their investment funds in response to the findings of the FCA.

The action comes in the wake of the FCA’s review of fund management in its asset management study, which it unveiled in November 2016 and found that there was £109 billion in ‘partly active funds charging active fees’ across the UK.

The FCA will publish their final proposals at the end of the month.

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