Watching over our unit trusts

THE abuses of the retail fund management industry in the US in recent months have not been replicated to any great extent in this country but change in the way retail funds are governed appears to be in the offing. This is despite the fact that a search by the Financial Services Authority for evidence of abuse through either late trading or market timing found no widespread problems.

But it did discover some little local difficulties and the issue has clearly given it a nasty fright. As a result it is now considering whether it should shake up the boards that govern unit trust and similar retail fund groups with a view to bringing in much more independence to protect the retail investor interest. Though the FSA has yet to confirm that this is its intention, there have been a couple of straws in the wind.

Paul Myners, who follows these things more closely than most, thought he saw a hint in the FSA's announcement on market timing 10 days ago. He believes the FSA may be thinking about the feasibility of independent boards which would have the power to dismiss underperforming or overcharging managers, and thereby bring to the retail investor the kind of equivalent protections and disciplines which apply in the institutional fund arena.

A recent speech by the regulator's chief executive, John Tiner, to the National Association of Pension Funds did nothing to dispel such a view. Tiner dealt at length with the difficulties fund managers face in managing conflicts of interest when they have to choose to put clients' interests above and before their own. He concluded with the ominous words: 'We will increasingly be looking to fund managers to demonstrate to us - and their investors - that any potential conflicts have been managed effectively.'

It is hard to see how such a demonstration can be achieved without independent oversight. But even if that is the preferred outcome it is not going to be easy to achieve. Ridiculous though it may seem, there are now more retail investment funds in Britain than there are quoted companies, so the demand for directors would be vast. Unfortunately, when they are in place there is no guarantee they will be any use.

Recent experience in the US, where such boards exist, is not encouraging. Over there, most were directors of far too many funds to offer effective oversight and as a result they missed the great scandals happening under their noses.

The lesson is that an indepedent board will only be as good as the people on it. But one does wonder, given the way former Equitable Life executives are being sued, how many people would want such a job.

Breathing space

INVITATIONS to tea at No 11 Downing Street have become something of a trial for the fund management industry since publication of the Myners Report, so there was understandably no great enthusiasm ahead of today's session with Treasury Secretary Ruth Kelly to review progress on the industry's 'voluntary' efforts to reform.

What they heard from the Minister and her team was predictable. The Treasury starts from the perspective, highlighted by Myners, that pension fund trustees frequently lack the knowledge and professionalism to do the job properly. So the fund management industry is not effectively called to account by them, and allocation of capital is not as efficient as it should be.

The Treasury is satisfied with progress in some areas in the two years since Myners, but restive about others. It notes signs of greater professionalism in asset allocation, benchmarks and performance measurement. It is less impressed by the more-moderate advance in developing clear objectives for funds and explicit mandates for investment managers.

So the Treasury today sought to explore with the investment managers and representatives of pension funds and insurance companies what scope there is for enhancing further the expertise of trustees, clarifying the investment time horizons of fund managers to dispel accusations of short-termism, broadening the sources of investment advice available to pension funds away from the tight-knit group of actuarially-based consultants, increasing resources devoted to asset allocation as opposed to fund management, and keeping up the pressure for shareholder activism.

Faced with such an onslaught, all the industry can really do is stress how it is doing its bit for change. But one wonders whether we are reaching the limits of what might be achieved by exhortation. The Treasury has shaken up the industry. Perhaps it is time is was allowed to get some of its breath back.

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