This book was suggested to me by Alison Howson at Agenda Publishing, who had the excellent idea of asking five people to consider how far William Beveridge's assertion that five giants needed to be overcome in postwar Britain had actually happened and whether these giants had now been banished. These were Want (poverty), Disease (health), Idleness (unemployment), Squalor (housing) and Ignorance (education). I have lived through the post-Beveridge changing and expanding school system, and then worked “in education” at various levels and together with many valued colleagues and friends have researched and written about the education system in Britain and other countries. Together with many others I am sad that the education system in England, which slowly and with errors was beginning to serve all children and young people and help develop some measure of social and racial justice in our society, has been turned into a competitive, semi-privatized, profit-seeking and unjust system. Ronald Reagan, the former US president, had much admiring right-wing press coverage for his claim that “the most terrifying nine words in the English language are ‘I’m from the government and I’m here to help’ ”. In my view the five most terrifying words over the past 40 years have been “Ronald Reagan and Margaret Thatcher”, as they were the principal architects of what became “neoliberalism”, a free-market ideology which has dominated much of the world since the 1980s and produced, in England especially, pointlessly competitive and corrupted schooling. Other postwar European countries managed to banish much ignorance in their populations through more equitable and just education, and without the often vicious denigration of a state-maintained system and its teachers, which is still in full flow in this country. It has become more difficult to find out what is actually happening in many of our schools, as they have been turned into businessoriented institutions with all the claims for confidentiality that characterize businesses. Research that might be critical of policy and practice is discouraged and much research funded by government avoids searching questions. Current claims that governments are interested in “what works” in schooling avoid the question “works for whom?”

Some intrepid writers, along with committed journalists, have managed to study and write from critical perspectives, and a number of books, articles and blogs now question what is going on.

With so many funds available, and new launches coming to market so regularly, one might expect intense price competition among funds in the UK and Europe. But the European fund management industry is different. Cutting fees to attract clients is barely, if ever, used by active fund managers. For most firms, to take this approach would be to tacitly admit that their performance, or expected future performance, is not as good as their rivals. Regardless of the reality, the possibility that this could be suggested is enough to stop most active firms from taking this step. Index-tracking funds, on the other hand, do compete on price, which in turn puts competitive pressure on active asset managers to demonstrate that it is worth paying more for potentially higher returns. Trying to unpick the reasons for the limits of price competition in the industry touches on both the way fee structures are determined for active funds and the way funds are distributed in Europe.

How funds ignore the law of demand

As we briefly discussed in Chapter 1, the law of demand suggests that the higher the price of a product, the less will be demanded, all other things being equal, while the lower the price of a product, the more people can afford it and so will purchase more of it. The ways in which the funds industry does not abide by this law are explored below.

Firstly, funds do not have a price tag that is distinct from a client's investment. Clients’ investments in a fund are collectively used to pay for the costs the fund incurs. A fund pays these costs, such as those for its management, from its assets on a daily basis. These costs are then presented as an annualized percentage charge to investors. For example, if a fund manager's investments generate an annual return of 7 per cent over one year and the fund incurs costs equivalent to 1 per cent of its assets over that year, then the fund’s investors receive a return of 6 per cent over the year (7 per cent less the 1 per cent costs). So a fund's charge reduces the return it generates by that amount every year.

The aim of this book is to provide an overview of terrorist finance in the twenty-first century and the measures employed to identify and obstruct money intended to support acts of terrorism. Terrorist financing has been a concern and topic of analysis for a large number of policy-makers and academics throughout the past two decades (and longer for a few specialists). In large part, the attention has been focused on the group or groups that represented a threat to a specific country. When the terrorist threat is local, and thus a national problem, this concern is understandable. Yet the dynamic changed at the end of the twen¬tieth century with the emergence of a more transnational form of terrorism. In turn, the states affected by transnational terrorist groups turned their efforts towards an international campaign against terrorist financing as one modality for suppressing and preventing acts of terrorism. The initial result was the con¬struction of mechanisms to combat the financing of terrorism (CFT) suitable for operation in the financial systems of developed economies. In time the international guidance evolved to offer some flexibility for implementation that recognized the different circumstances operating in the financial systems of a developing economy. A similar distinction can be found in the literature on terrorist finance, where a large part remains concerned with the financial systems of developed economies and a small portion analyses the impact of CFT measures on economic development, financial inclusion and the limited reach of formal finance in the developing economies.

The following chapters are the product of close to 20 years studying global finance and seeking to understand the efforts taken by national and international authorities to regulate and govern it. Much of the focus for this activity is located at the intersection of finance and security, and terrorist finance has been one of the central concerns. This text builds on research published in a number of edited books and academic journals, and it follows the general structure developed for a fourth-year undergraduate module at the University of St Andrews that I taught between 2009 and 2012. To access the publications and guidelines of the Financial Action Task Force and United Nations Security Council, mentioned throughout the text, please see the References section, which provides the general web addresses for these organizations through which the various publications can then be found.

Making the regime to counter terrorist financing global is more than simply expecting UN members to comply with the Resolutions of the Security Council. Yet that is the expectation of the Security Council, that all states are committed to take these actions because they are issued under Chapter VII of the UN Charter. The periodic reports of the Analytical Support and Sanctions Monitoring Team on compliance for the resolutions that impose targeted sanctions to prevent terrorist financing, however, reveal that is not the case. Beyond reporting data on accounts and assets frozen, states are expected to maintain travel bans, arms embargos and all other forms of targeted sanctions. For several states the cost of compliance, in the context of local conditions and with limited national resources, is simply too much. Financial and technical support is available but not as a per¬manent and ongoing subsidy to cover the continuing cost of compliance. The result is differing levels of implementation and enforcement among the member states of the UN, reflecting their level of concern for transnational terrorism and the local capacity to establish and enforce the CFT regime. As seen later in the chapter, if the FATF feels that a country's effort to act against money laundering and terrorist financing is insufficient, it will impose its measures intended to encourage the government to correct the deficiencies.

Even in countries with extensive formal financial systems and high levels of financial inclusion, the introduction of CFT measures at the beginning of the twenty-first century was not straightforward. An official from the UK's Financial Services Authority related one example of the problems created by them in a con¬ference speech in 2004: An “Oxford College [was] required to produce its 15th century charter, complete with seal to open a new account” (Robinson 2004: n.p.). The issue highlighted by this anecdote is the extent to which bank employees might require documentation to prove identity to satisfy the customer due diligence (CDD) requirement (also known as the “know your customer” obligation). The requirement is to prove one's legal identity so that the bank can avoid providing services to an individual or business that is the subject of targeted sanctions.

For a time after 2001 a frequent approach for introducing the topic of terrorist financing was to relate the announcement of Executive Order 13224 in the White House Rose Garden on 24 September 2001.1 The “Executive Order on Terrorist Financing: Blocking Property and Prohibiting Transactions With Persons Who Commit, Threaten to Commit, or Support Terrorism” marks the emergence of a more robust and aggressive CFT regime. Along with establishing terrorist finan¬cing as the initial battlefront in the US Administration's “Global War on Terror”, the “Rose Garden” speech of President George W. Bush provided several refrains that would be repeated regularly (Bush 2001: n.p.). These common quotations included:

But recall that the US was not one of the four states that had ratified the International Convention for the Suppression of the Financing of Terrorism in 2001. This situation was raised in the Rose Garden speech and President Bush said that he would be asking the Senate to ratify the Convention (which was recorded by the UN as 26 June 2002).

Many of the people living in Europe and North America on 11 September 2001 will have strong memories of that day and the live news reports they may have watched. It is, however, a very Western-centric view of the events. While suggesting the attacks had global significance, David Lyon reminds us of the Western-centric nature of the narrative surrounding the destruction of the World Trade Center. “True, their perceived significance differs from place to place. For instance, the national daily newspaper in Zambia granted only a couple of column inches of an inside page to the 9/11 attacks, on September 13” (Lyon 2003: 3).

“New payment technologies” was the term adopted by the FATF to identify emerging methods of payment in 1996. Today digital currencies and bitcoin immediately come to mind for the reader. Fifteen years ago, however, it was pre¬paid credit cards and e-gold that were of interest, with concerns surrounding their potential use in money laundering. The FATF study in 2006 was a follow up to the discussion of “Developments in New Technologies” included in the 1997 typologies report, reporting on presentations made to the group of experts by firms involved in electronic money (e-money) services. The typologies meeting theme of e-money resulted from the 1996 revision to the Forty Recommendations, which introduced a new Recommendation 13 directing states to “pay special attention to money laundering threats in new and developing technologies that might favour anonymity”. The latest version of the Forty Recommendations now addresses the topic in Recommendation 15, New Technologies, and broadens the scope of concern for AML/CFT to include new payment products, business practices and delivery systems.

In 1996, e-money was understood as either a stored value card, an internet-based system or a “hybrid system” combining features of these two technologies. The stored value or prepaid cards may carry the brand of a bank, Mastercard/Visa, a store or a money transfer firm. The customer places money on the card and then uses it just like they would a credit or debit card. As contactless technology has evolved, urban transportation systems have introduced the prepaid card in place of a ticket. In some cities the urban transportation system's card is also accepted for other payments, such as at a shop in the station. The early internet-based systems facilitated online payments and may have been linked to the customer's bank account. Although the passage of time means these early systems appear rudi¬mentary today, in 1997 the FATF report described them as “sophisticated tech¬nologies”, which is understandable when compared to the other payment methods available at the time. The discussion during the 1996 typologies meeting began with presentations from four industry organizations involved in providing these new financial technologies.

The aim of this chapter is to give an overview of the main fund structures used by UK and European asset managers, as well as the evolution of product regulations that have supported the growth of mutual funds across Europe. It is not intended as a detailed primer on fund regulation. There is an ongoing tension between asset managers’ desire for less regulation (and its associated costs) and regulators’ instinct to regulate (to safeguard investors’ interests). Despite this, the European asset management industry can thank supportive fund regulation as part of the reason for its impressive growth over the past 30 years.

Fund structures

The first fund in the UK was set up in 1868, the Foreign & Colonial Government Trust, which is now the £5.6 billion F&C Investment Trust. Originally established with a trust structure, the fund is now a closed-ended investment company, also known as an investment trust. The UK had to wait until 1931 for its first open-ended fund, the Municipal & General First British Fixed Trust, which had a fixed term of 20 years and so was then replaced by the M&G General Trust, which in turn has had several reincarnations, latterly as the M&G Blue Chip fund, which merged into the M&G UK Growth fund in 2006. In turn, this fund was renamed M&G UK Select in 2015 and had assets of £500 million in May 2022. M&G had originally been inspired by the first US open-ended fund, the Massachusetts Investors’ Trust that launched in 1924. This US-based fund has fared better than M&G's UK product and now manages assets of $7.1 billion (£5.3 billion).

While tracking an index is an investment strategy, rather than a distinct fund structure, it is worth noting that after some false starts by other firms, the first index fund open to retail investors was launched by John Bogle in 1975, the First Index Investment Trust. Today it is the Vanguard 500 Index Fund, with assets of $770 billion in May 2022. Developing index-based products further, the first exchange traded fund was established in Canada in 1990, Toronto 35 Index Participation units. Today this is the iShares S&P/TSX 60 Index ETF, which had assets totalling CA$12.6 billion (£8.1 billion) in May 2022. The first US product was launched in 1993 by State Street Global Advisors, the S&P 500 Trust ETF, which manages $346 billion (in June 2022).

The internal functions of an asset management organization are similar across organizations, even if the way individual roles are defined are likely to vary between firms. However, differences between the types of business managing mutual funds are much more apparent. Some of these aspects overlap, but it is still helpful to be aware of a firm's size, parent company, ownership, and operational structure when comparing firms. After exploring these considerations, the chapter will then move on to explain the value chain in which fund management businesses sit, their associated costs, revenues and profitability.

Boutiques vs Behemoths

It is possible to set up a fund management business with relatively few resources. Improvements in outsourced services and technological advances have made it eminently feasible for those with knowledge and experience of the industry to get a business off the ground. (Making the business a financial success by attracting clients is a different matter, which will be discussed later). The lack of office infrastructure and reliance on those providing services externally was put under pressure through the pandemic and proved resilient. Traditionally the greatest barrier to entry for the UK and European funds industry was deemed to be regulation, but many small firms say that even this is not the hurdle that it once was.

The large number of small asset managers – commonly referred to as investment boutiques – is a pronounced feature of the industry. There are more than 1,650 firms managing mutual funds with less than €20 billion in assets under management and so rank outside the largest 100 firms in Europe. Many of these firms remain profitable despite their relatively small size (see Figure 3.1).

Smaller firms tend to limit the range of products they manage and offer to clients, feeding into the perception that boutiques are more focused in their approach to investing. This is reflected in some academic research showing that there is a “boutique premium”, in other words that fund managers at smaller, standalone investment firms perform better than other businesses (Clare 2020). In some countries, the development of boutique asset managers is more pronounced, for example, France often promotes its credentials and the number of investment boutiques active in the market.

It is largely as a result of the belief that investment managers work better in small teams and should determine their own implementation of investment strategies that some large asset managers adopt a so-called multi-boutique model.