Chance to Start Big Bang No 2

Article excerpt

Byline: ANTHONY HILTON

AT the annual meeting of the National Association of Pension Funds in Edinburgh next Wednesday, the Treasury's Financial Secretary Ruth Kelly has the opportunity to launch the City's second Big Bang.

The first, 18 years ago, was struck after a deal between Stock Exchange chairman Sir Nicholas Goodison and Tory DTI Minister Cecil Parkinson to end fixed commissions in stockbroking. This one will do something similar to the cosy fees and opaque financial arrangements that shelter the fund management industry.

As with the first Big Bang, getting at the money is a means to a bigger end.

Then the issue was to kill the Stock Exchange club, to open up the industry to outsiders, bring in new capital and make London ready to grab its share of the embryo market in international securities trading.

The result was a period of unprecedented turmoil and change in which most of the original players were wiped out or taken over. But in the short term at least, it had the desired result. The City got the business and embarked on the period of explosive growth that transformed the London economy in the 1980s and 1990s.

Now it is the turn of the fund management industry. If Kelly seizes the moment, she will seek to blow away the restrictive practices, featherbedding anti-competitive relationships and overcharging that dominate the arrangements between fund managers and stockbrokers and which their unwitting clients pay for.

The crisis in pension funds has made the issue even more topical.

The costs incurred by the fund managers as they buy and sell shares for the funds are estimated to be between u8 billion and u13 billion a year and most likely to be towards the upper end. The message seems to be that more efficient and cost-effective dealing would go a long way towards offsetting the problem of black holes in funds. If pension funds want to remain solvent and deliver benefits to members, they do not need to close schemes down.

Their managers need to deal less and to make sure that when they do it is at minimum cost. There is a lot of fat to be cut.

So the case against the current arrangement is that it adds greatly to the costs borne by the owners of the underlying funds, inhibits their performance and finances overstaffing, inefficiency and an excessively comfortable lifestyle for the fund managers. Not that different in fact from stockbroking before Big Bang, and Kelly's motivation for opening up the industry would, like that of her predecessor, be to force the industry to modernise so it will not only provide a fair and efficient service for its domestic clients but also be lean enough to grab its share of the international fund management business. …