High charges of fund managers scrutinised

London's fund management industry came under attack yesterday following a scathing interview from a leading executive at the Financial Services Authority.

Hinting at tougher rules in future, Peter Smith, the head of investments policy at the City watchdog, said that he found it hard to understand why fees charged to investors are rising.

"In what is allegedly a competitive industry, the UK funds market, how is it that the average cost of funds has risen over the years rather than fallen?" he told Bloomberg. "That's something we're going to be thinking about."

His comments follow similar complaints from upstart fund management firms such as FundSmith, run by Tullet Prebon's Terry Smith.

Equity funds typically cost 2.48 per cent in annual charges in the UK compared with 1.53 per cent in the US, while bond funds cost 1.73 per cent in Britain and 1.05 per cent in America.

So UK investors are paying twice as much for mutual funds as those in the US and getting worse returns as a result of hidden fees costing as much as £18.5bn a year, say critics.

Richard Saunders of the trade body the Investment Management Association defended the industry. He said: "Disclosure of fund charges in the UK is mandated by European rules set by regulators after rigorous analysis and research. Some of the claims about fund charges are completely unfounded.

"Typical expenses for an active equity fund are around 1.75 per cent, and there are no hidden charges which investors are having to pay on top. Trading costs have negligible impact on the returns investors receive. Comparisons of costs in different markets are very difficult, since distributions costs are frequently treated in quite different ways."

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