Megan Butler, the British Financial Conduct Authority's supervisory director, has issued a stern warning to firms that fail to tell their customers about how they are managing funds. Meanwhile, a blizzard of reforms for the asset management sector is gathering on the horizon.

Her warning came in an opinion piece in the Sunday Telegraph. It states that clear promotional material for investment funds is a priority for the FCA.

In it, Butler takes issue with 'closet tracking.' This might be the same thing as 'closet indexing,' which Investopedia describes as a strategy used to describe funds that claim to purchase investments actively, but end up with portfolios that differ very little from the benchmark. By doing so, portfolio managers achieve returns similar to an underlying benchmark such as the S&P 500, without exactly replicating it. IG Group, in the meantime, classifies a closet tracker as a fund that is "supposed to be" managed actively but in fact is run in a hands-off manner and only manages to make returns akin to those of a real tracker fund.

The motivation for closet indexing is thought to grow out of years of poor performance and the long-term shift from active to passive management; Butler seems to attribute it to a desire for funds to charge their customers for managing their portfolios actively when they are not actually bothering to do so. She criticises passive funds that "charge like they are active." This was a criticism that an FCA report in June levelled at the asset management sector, which the regulator has long been aiming to overhaul. The report identified £109 billion in partly active funds that charge the kind of fees that fully active ones ought to be charging. It went on to speculate that all 'closet trackers' were guilty of this.

By the end of last year, the FCA had inspected 84 funds that it suspected of 'closet tracking.' It told the managers of 64 of them to tell consumers how closely they were following market indices and not to leave out any relevant details. It was satisfied with the way in which the other 20 had described their modi operandi.

In her article - which mentions no firm or fund by name - Butler also reveals that someone has paid £34 million in compensation to consumers - presumably in the last few days, although an FCA spokesman was later unable to give Compliance Matters any idea of the time period. The spokesman did, however, go one better than Butler by explaining that it was some of the 64 funds that had paid the money. Although Butler does not say so, the FCA prompted the fund firms to make these payments purely by moral suasion and not by any disciplinary action - this revelation came from the spokesman, who declined to identify the firms. The compensation was for various misdeeds that the FCA uncovered during its 84 enquiries - something that Butler also does not state outright in her article. She adds that her organisation is conducting an 'enforcement investigation' against 'one firm;' the spokesman later helpfully revealed that the investigation was on the same subject as the 84 enquiries and that this one firm - which he as well as Butler declined to name - was the worst offender among the 64. The spokesman also declined to name the 20 satisfactory funds, even though one might expect such a revelation to be beneficial to their reputations and to the investing public at large.

The spokesman summed the situation up by saying: "We ran tests on the 84 funds' products. We needed to have a chat with X of them to be clearer, then a subset of X had to pay. There was no disciplinary action; we just said to the firms 'don't you think you should pay?' We referred one of the firms to the enforcement department. It's at the earliest stages of the process now. They might do something with it; they might not."