A paper being reviewed by the House of Lords has launched an attack on the Investment Management Association (IMA), saying it is ill-equipped to decide on sector classifications, and the job should fall to a more impartial body.
Michael Johnson, author of the paper and research fellow at the Centre for Policy Studies, criticised the IMA for not being able to categorise funds fairly.
"The IMA is an industry body and is paid to represent industry members. It is not impartial in categorising funds because ultimately its interest is attracting more business to the industry," he said.
Johnson referred to the recent industry criticism of the Managed sector categories for being unclear and misleading, as an example of the flawed nature of the classifications. The IMA moved to reclassify the sector at the end of last year.
"It turned out that this label was fundamentally wrong because it did not give us enough information about what is in the fund or the level of risk involved," said Johnson.
He argued it would be safer for the industry as a whole to delegate the responsibility of categorising funds to a more impartial body.
"The person labelling these funds should be squeaky clean and wholly independent," he added.
"Before we decide who should do the job, we need to look at what the labels are for. They tell us nothing useful at present. They do not answer the fundamental questions, what is in the fund and what is the level of risk," he said.
Instead Johnson suggested a more suitable body to decide the sector labels would be government body the National Employment Savings Trust, which is part of the industry but also an "organ of the state".
"Other possibilities include a body funded by the taxman, rather than one with a vested interest, or a third sector entity, such as a charitable organisation, which would have more of a national interest," he added.
"The fact is consumer and customers know nothing about finance. They need help but not from people who have a vested interest," he added.
The IMA has responded by arguing the purpose of the sector classifications is not to describe the risk rating of the funds.
"The sectors are there purely to break down the thousands of funds into smaller and more manageable groups, so investors can compare funds on a like for like basis. If investors want more information about the funds they can go on to our website where the information is more publicly available," said the spokesperson.
The IMA added a detailed review of the sector classification scheme in May last year concluded that overall it was fit for purpose. The spokesperson added the body is reviewing the Absolute Return sector but said there are no plans to review the whole scheme to include risk ratings.
The paper is in draft stage and is due to be published in early June. It also suggests IMA disclosure tables be expanded not just to include the total expense ratio but also the cost of investment.
The core focus of 220-page review, which identifies 100 proposals, ultimately argues for increasing the importance of the saver in the financial services industry.
Putting the tech into protection
Square Mile’s series of informal interviews
Fallout from Haywood suspension
Launching later in 2019
£80bn funds under calculation