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Irish regulator probes nearly 200 funds over closet index tracking

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Irish regulator probes nearly 200 funds over closet index tracking
FILE PHOTO: Offices in the Central Bank of Ireland are seen in the financial district in Dublin, Ireland November 8, 2017. REUTERS/Clodagh Kilcoyne   -   Copyright  CLODAGH KILCOYNE(Reuters)
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LONDON (Reuters) – Ireland’s financial regulator has identified nearly 200 funds that charge higher fees for managing investments when they in fact closely track market benchmarks, a practice also known as “closet tracking”.

After reviewing 2,550 Irish authorised funds, the Central Bank of Ireland (CBI) said on Thursday it had identified 182 that needed further investigation.

The CBI said it had already completed follow-up work with 62 funds and had found that 57 of them had failed to give enough information about their strategy to allow investors to assess sufficiently whether the fund was right for them.

Funds that openly track an index charge lower fees than funds that seek to outperform the broader market by using their expertise to select stocks. But some stock-picking funds charge higher fees when they are effectively index trackers.

“This represents our largest data driven review of the funds industry to date and we will follow through with each individual fund where we had findings,” CBI Director General Derville Rowland said.

“Investors … have a right to rely on the information in the … (fund documentation) and funds have an ongoing duty to ensure that this information is accurate and that the fund is managed in investors’ best interests.”

In a letter to fund company boards, the regulator said fund documentation would need to be corrected by March 2020.

“The Central Bank is concerned by the number of transparency issues identified during the review,” its head of securities and markets supervision, Patricia Dunne, said in the letter, adding laggards could face “future supervisory engagement”.

Ireland’s 2.4 trillion euros (2.1 trillion) asset management industry forms a central plank of its financial services sector, and has picked up business as more funds move there after Britain’s decision to leave the European Union.

The CBI investigation follows similar probes by regulators across Europe, including in Britain, where the Financial Conduct Authority (FCA) estimated around 109 billion pounds ($136 billion) was managed in funds that could be considered closet trackers.

Last year, the FCA told 64 funds to clarify the information given to investors, while a group of funds paid 34 million pounds in compensation to investors.

(Reporting by Simon Jessop and Huw Jones; Editing by Mark Potter)

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