#BetterFinance congratulates UK finance supervisor for defending victims of closet indexers and calls on all EU supervisors to take similar action

Better Finance, the European Federation of Investors and Financial Services Users which acts as an independent financial expertise centre on financial services calls on all EU supervisors to follow the action of the UK’s Financial Conduct Authority (FCA) and indemnify all those funds that are ‘closet’ index funds, writes Catherine Feore.

The FCA has decided that fund managers will indemnify investors from 64 UK domiciled funds for £32 million (€36.5m) following the supervisor’s investigation  into the allegedly ‘actively’ managed funds. Closet index funds are funds that claim to be actively managed, and charge management fees, but closely track the market indices and essentially act exactly like index funds (which charge  much lower fees). The UK FCA is the first EU supervisor to force closet indexers to indemnify the victims.

In 2014, BETTER FINANCE asked the European supervisor for a Europe-wide investigation of the closet indexing problem after the Danish financial supervisor raised this issue locally.

In 2016, the investigation by ESMA found that up to 16% of UCITS equity funds were potentially closet indexing ones. But ESMA did not sanction anyone and did not even disclose the suspicious funds, leaving investors in the dark.

Last year, BETTER FINANCE replicated the ESMA study, published the names of all suspicious funds, and, in addition, found that several of those funds violated the UCITS fund disclosure rules.

BETTER FINANCE Managing Director Guillaume Prache said: “It is worrying that it took so long for the UK supervisor to tackle the issue, but even more so to see that so far most Continental EU supervisors have not followed suit at all, especially those who watch after important fund domiciles. Even the European Commission itself has so far not reacted to the cases we brought to their attention a year ago about potential closet index funds which - in addition - did not disclose their benchmark’s past performance in their Key Information Document (KIID), thereby preventing clients from being able to spot index hugging practices, and violating UCITS fund disclosure rules.

"The current reform of the EU system of financial supervision must finally ensure a better enforcement of investor protection in Europe."

Share this article: