The asset management industry, which oversees nearly £7 trillion of our money in pensions and investments, has been put on notice by regulator the Financial Conduct Authority that it will not tolerate excessive profit margins, murky charges or weak price competition.

Active managers have long justified high investment charges of over one per cent a year by promising to beat the market. They cost substantially more than so-called ‘passive’ funds, which simply track an index like the FTSE 100 and charge as little as 0.1 per cent for doing so.

The FCA found that many active managers are not performing well enough to soften the blow of steep fees, ultimately shrinking the long-term returns that investors could be getting.

According to an interim report by the regulator, active funds have remained stubbornly expensive over the last decade while the cost of passive investing has fallen. The FCA also described a practice of price clustering, where managers stick to fees of 0.75 per cent or one per cent even when the size of their funds grows, suggesting that they fail to pass on economies of scale to investors.

Active managers are also too vague about their investment objectives and do not allow investors to measure their performance against a suitable benchmark. The report stated: “Investors may continue to invest in expensive actively managed funds which mirror the performance of the market because fund managers do not adequately explain the fund’s investment strategy and charges.”

The FCA is considering whether the failings warrant an official investigation by the Competition and Markets Authority, which has previously probed the much-maligned energy sector and payday lenders. Reforms likely to be introduced by the watchdog include all-in fees and the introduction of tools to help investors identify underperformance, though no detail was provided on what these could be.

David Ferguson, chief executive at Edinburgh-based investment platform Nucleus, said: “Shining a spotlight on the true fee active managers charge retail clients means the days of 0.9 per cent funds - which are probably nearer 1.2 per cent when other fees and turnover costs are included - might finally be over now that there is a requirement to present an all-in fee. This will substantially reduce revenue margins and should give rise to better client outcomes.”

Mr Ferguson dismissed the possibility that investment costs could ever fall to levels now enjoyed by institutional investors, around 0.2 to 0.4 per cent, as “cashflows are less predictable and liquidity is harder to manage”.

However, he added: “New technologies and better data analysis will be deployed to help bridge the gap, without necessarily resulting in a complete collapse in fund management profitability.”

The industry insists that it is already cleaning up its act. The Investment Association (IA) said it had agreed with the FCA to adopt an ongoing charges figure rather than an annual management charge, but that this has been scrapped in upcoming reforms introduced by the European Union in what the IA described as a “wholly retrograde” move.

Meanwhile, the former chief executive of the IA is laying down the gauntlet by setting up his own ethical investment trust after leaving the organisation last year in a row over transparency. Daniel Godfrey resigned in October 2015 after failing to convince leading fund managers to sign up to a statement of principles aimed at making fund charges clearer.

He has now put his money where his mouth is by founding the People’s Trust, an investment trust that will back social enterprises and charities and seek to deliver sustainable, consistent returns for investors. The People’s Trust has been seeking founder members to contribute £10 or £20 for start-up costs over the last month and reached its £100,000 funding target this week. Founders will receive a discount on shares issued in the trust, which will launch early next year.

Mr Godfrey said: “After the global financial crisis, the focus was naturally on banks, so it’s taken a while for the spotlight to shine on investment management. At the IA, I was basically saying ‘let’s lift the stones that haven’t been lifted for a while and take a look underneath them. And if we find any ugly creatures under there staring back at us, let’s clean them out for ourselves before the regulator does’.

“Unfortunately, while that may sound obvious, that’s easier said than done. When things are going as well as they have done for investment managers, it’s understandable that some people just won’t want to take the risk of proactive change.”

Mr Godfrey welcomed the FCA interim report, saying it could be a “game changer”. He wants to see more active managers thinking about long-term rather than quarterly results or short-term share price movements and to engage with companies that behave responsibly towards “customers, employees, the environment, communities and society as a whole”.

The People’s Trust is likely to start out with charges of one to 1.5 per cent, although the plan is to bring this down by economies of scale over time to one lower, flat charge. Mr Godfrey said the trust will aim to deliver total annual returns of over five per cent over inflation over a seven-year period and will not be “obsessed with beating the market”.

The People’s Trust will also not pay its executives any bonuses and will insist that they earn part of their salary in shares, bought at market price, which will have to be held for at least seven years.