Janus Henderson has been fined almost £1.9m by the UK’s financial regulator after the dual-listed asset manager admitted ripping off 4,700 of its retail customers.
It marks the first time the Financial Conduct Authority has publicly named and fined an asset manager for being involved in the controversial practice of closet tracking, where fund managers charge for active stockpicking but instead closely mimic an index.
Retail customers were essentially overcharged by almost £1.8m in fees by Henderson Investment Funds when it failed to inform them it was reducing the amount of active management of its Japanese and North American funds, the FCA said on Wednesday.
The investment house, which has since merged with US asset manager Janus, took nearly five years to let customers know they were being charged management fees for what amounted to a tracker fund, the FCA said.
By contrast, nearly all of Henderson’s institutional investors were informed of the strategy change and were offered management of the two funds without charge, according to the FCA’s findings.
“The FCA requires firms to treat all its customers fairly, not just some customers. In this case, retail investors paid fees for active investment management they did not receive,” said Mark Steward, the FCA’s head of enforcement.
“For retail clients, the Japan and North American funds were in effect operating as ‘closet trackers’ as the fees charged to them were inappropriate given the diminished level of active management.”
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Janus Henderson, which oversees £289bn in assets, said the investment house accepted the FCA’s findings. “Affected clients had already been separately contacted and fully compensated,” it said. “Since the incident, Janus Henderson Group has improved its systems and controls.”
While small, the fine is significant as it highlights the FCA’s scrutiny of the sector — particularly the treatment of retail customers — in the wake of the collapse this year of Neil Woodford’s equity fund.
Andrew Bailey, FCA chief executive, said in an interview with The Times last month that there were dangers when retail customers and institutional investors invested alongside each other, and suggested the FCA may look to introduce separate investment classes in future.
Regulators across Europe have opened investigations into closet tracking over the past five years on the back of concerns the practice is rife among active asset managers, which are under pressure from the rise of passive investing.
Since the financial crisis, investors have flocked to passive funds that track common indices for a fraction of the cost of active funds. This has benefited industry groups such as BlackRock and Vanguard that dominate passive investing, but has heaped pressure on smaller and midsized fund groups that charge higher fees for their purported skill in stockpicking.
The European Securities and Market Authority found in 2016 that up to a sixth of actively managed equity funds sold in Europe were potential closet trackers, while the UK regulator estimated in 2017 that there was £109bn in active funds that closely mirror their benchmark.
Last year the FCA said it had identified 84 potential closet tracker funds and told the managers of 64 of the products to make it clearer to investors that they were “constrained” in some form. At the time, the watchdog refused to disclose the names of any of the managers or funds.
Gina Miller, founding partner of SCM Direct, who has spoken out about closet tracking since 2013, said Wednesday’s fine was “too little, too late”.
“It is scandalous that it has taken the FCA so long to address the closet index mis-selling scandal,” she added.
The episode took place before Henderson’s 2017 merger with Janus to form the dual US-Australian listed fund group. Henderson co-operated with the FCA’s investigation and qualified for a 30 per cent discount on a fine that otherwise would have been £2.7m.
In all, 4,713 retail investors were affected, along with 75 intermediary companies and two institutional investors.
