The asset manager Janus Henderson has been fined £1.9m by the City watchdog for mistreating and overcharging thousands of ordinary investors in a controversial practice known as “closet tracking”.
The Financial Conduct Authority (FCA) said the firm’s Henderson Investment Funds Limited division failed to tell 4,713 small savers that their investments were no longer being actively managed, but continued to charge them the same fees.
However, the fund did tell nearly all of its institutional investors – clients such as pension funds and banks – about the change, introduced in 2011, and even offered to continue to manage the funds free of charge.
By keeping its retail customers in the dark about the changes to its Japan and North American Funds, Henderson was able to pocket an extra £1.8m in fees between 2011 and 2016. HIFL has since notified and compensated all of the affected customers.
Mark Steward, the director of enforcement and market oversight at the FCA, said: “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.
“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. The matter is aggravated by the length of time HIFL took to identify the harm being caused to the retail investors and to fix it.”
It is the first time the regulator has publicly fined an asset manager for closet tracking, where a fund charges a premium for active stock picking, while in reality treating the assets like a passive or index tracker fund that usually charges a much lower fee.
Index tracker funds use algorithms to follow major stock exchange indices such as the FTSE All-Share and are not actively managed.
The fine is not financially significant for Janus Henderson, which manages £289bn worth of assets. However, it signals a fresh crackdown on the investment management industry following the collapse of Neil Woodford’s fund management empire.
MPs have accused the FCA of being asleep at the wheel as the Woodford Equity Income Fund tumbled into crisis earlier this year.
Gina Miller, the co-founder of wealth manager SCM Private and a longtime critic of closet tracking said: “It is scandalous that it has taken the FCA so long to address the closet index mis-selling scandal.”
Commenting on the fine, Janus Henderson said the episode took place before the company was created by the merger between Henderson Global Investors and Janus Capital Group in 2017, and said it has since improved its practices.
“Janus Henderson Investors accepts the FCA’s findings and the financial penalty and has cooperated fully throughout the process. Affected clients had already been separately contacted and fully compensated. Since the incident Janus Henderson Group has improved its systems and controls.”
