Opinion & Analysis

The securities services industry has an astonishing capacity to absorb punishment without complaint. Custodian banks and their fund management clients have now effectively agreed to spend a fortune to speed up the European settlement timetable by one day no later than the first half of 2013. That means, at a time when it is already wrestling with nearly two dozen other regulatory initiatives, the securities industry has only two years to prepare for a substantial acceleration of the speed at which cash and securities must be exchanged.

The rights issue fees inquiry report by the Institutional Investor Council (IIC), published earlier this month, highlighted once again just how easy it is for investment banks to rip off institutional funds. The investigation, led by Douglas Ferrans, chairman of Insight Investment, concludes that underwriting fees are charged in an “inefficient and opaque way” that ensures “investors remain unclear about who is being paid and what is being paid for,” fuelling the “suspicion that shareholders are in aggregate paying too much.”

Is this the way to do things?

One of the enduring mysteries of the financial markets is why institutional investors are so easily exploited by bankers, fund managers and broker-dealers. Part of the explanation is that investors believe that investing and trading in financial markets requires special knowledge. They are prone to entrust the task to intermediaries – including investment consultants - who are rarely held fully to account for their performance.

No relationship in the whole of the financial services industry is more marsupial than that between a pension fund and its investment consultant. Asked who their most important adviser is, pension fund officials invariably name one of Mercer, Towers Watson, Hymans Robertson, LCP or the merging Aon Consulting and Hewitt. The tightness of the bonds between the two, reinforced by cross-subsidies between the various services supplied, are a source of perpetual chagrin to commercial competitors.