By Huw Jones
LONDON (Reuters) - Britain's financial regulator plans to crack down on the 5.2 trillion pound fund management sector for unfairly making customers pay too many of its costs, its chief executive said on Wednesday.
Fund managers pay banks and brokers annual fees as well as commission to cover trading fees and research to help work out investment strategies, passing this on to their own customers.
Customers - institutional and retail investors - have long complained about charges and the funds, already sensing a change in mood among regulators, have been trying to head off intervention by developing industry-based solutions.
A specific concern is that some asset managers stretch the definition of research and use client commissions to cover non-eligible costs and services, Martin Wheatley, chief executive of the Financial Conduct Authority (FCA), told the watchdog's annual asset management conference.
He cited funds' payments to brokers for arranging meetings with top company managers being passed on to customers.
"We estimate that anything up to 500 million pounds of dealing commission was spent in 2012 to facilitate corporate access," Wheatley said.
"As an example, last year we discovered a firm that was rewarding brokers predominantly based on the corporate access they provided. This averaged out to each individual investment manager paying over 100,000 pounds just to gain access to the management of companies they wanted to invest in."
Wheatley will consult with asset managers from November to see what changes are needed to rules on research that have been in place since 2006, or just before the 2007-2009 financial crisis put emphasis on transparency in financial services.
"Are we internationally competitive? Are charges and fees transparent? Are there inherent conflicts within the system? Today we start a debate," he said.
"The system is not quite working the way it was originally designed. We need to look again, we need wider reform to address the flaws that cannot be addressed by incremental improvements to the existing rules."
Mutual funds are regulated under European Union rules and Wheatley said he would include policymakers from the bloc in the consultation.
The review be accompanied by a separate look of conflicts of interest generally in the asset management sector.
Daniel Godfrey, chief executive of the Investment Management Association, a trade body, said it will publish its own review early in 2014.
Policymakers across the EU want people to save more for their retirement and keeping fees competitive enough is seen as a vital part of that.
(Editing by Louise Ireland)