The Financial Conduct Authority has published the final findings of its asset management market study, seeking to lay out a set of remedies that address concerns about the industry as a whole.
The report raised concerns over closet tracker funds, competition in the market and the difficulty of switching from more expensive share classes. The FCA has looked closely at fees proposing remedies to increase the transparency of costs, to investigate how those performance fees are charged and make it easier for managers to move investors into cheaper funds.
The regulator has taken a hard line on investment consultants, with a separate investigation into investment platforms and a recommendation that the FCA be granted greater regulatory power by the Treasury over the market.
Launched in November 2015, the study was designed to ensure that investment products used by consumers offer value for money, and encourages the industry to focus more on the benefit of the investor, and not just for the profit margins of the asset managers.
“There is evidence of sustained high profits in the industry over a number of years”
There has been a watering down of language around the ‘all-in’ fee charge, which would encompass every charge incurred by an investment product. Today’s report does not go quite as far as some suggested, with the nuance being that the FCA will now ‘support’ the disclosure of an all-in fee, as opposed to ‘imposing’ the fee on UK managers.
This demonstrates a rowing back from the position in November, and provides evidence of the regulator’s engagement with the industry since then. Further consultation on this is expected.
That being said, November’s criticisms do remain, particularly on the notion of weak price competition across the industry. Today’s report reinforces the FCA’s contention that ‘firms do not typically compete on price, particularly for retail active asset management services’. The FCA has found that active charges have stayed at a similar level over the past decade, yet high levels of profitability – with average profit margins of 36% – has failed to produce a reduction in prices, pointing to weak price competition within the industry.
On the active versus passive management debate, the FCA has remained decidedly neutral, despite criticisms to the contrary, with some arguing that the report was too pro-passive. The FCA has focused on arguing that investors must be able to understand – through greater transparency – the total cost of investing in a certain fund, and the objectives of the fund that they are investing in. This will ensure that, whatever the nature of the fund, investors will be able to make informed decisions on the investment products most suited to their requirements.
Christopher Woolard, executive director of strategy and competition, was quick to point out that the FCA was not favouring one strategy over another. “We never said active is bad or passive is good, we are not favouring one or the other. We want to ensure investors know what they are buying and pay the right amount for it.” That said Andrew Bailey’s expectation is that active fees will come down having said: “I see the study as creating the framework that allows this competition to flourish. We would expect to see fees come down.”
Engagement between the regulator and the broader asset management industry since the publication of November’s interim report has resulted in a report that does not point to a complete overhaul of the current regulatory framework. Instead, any reforms will be put in place gradually, and many recommendations within the report will be subject to further consultation. In light of the Brexit pressure being placed on firms in the City, the question that remains is how many of these proposals will the FCA be willing to properly implement.
The final report confirmed the findings set out in the interim report published last year – noting
- There was evidence of sustained, high profits over a number of years.
- The objectives of funds are not always clear to investors and fund performance is not always reported against an appropriate benchmark
- The FCA found concerns about the way the investment consultant market operates.
The FCA has proposed a number of remedies for what it deems to be weaknesses within the industry. These proposals can be split into four specific areas: investor protection, price competition and addressing concerns around investment consultants and intermediary platforms.
On investor protection, the FCA is seeking to:
- Stop fund managers from receiving box profits, which eat into investor profits
- To ensure that all managers have two independent directors on the boards of their funds
On price competition:
- To ‘support’ the disclosure of an ‘all-in’ fee to investors
- To ‘support’ a standardised disclosure process for costs/charges to all institutional investors
On intermediary platforms:
- Predominantly, to launch a market study (next month) into investment platforms
On investment consultants:
- To ask HM Treasury to give it greater regulatory control over the investment consultants market.
They do not believe that the industry has gone far enough in improving competition, raising the possibility of a referral to the Competition and Markets Authority.
FCA announces market study into asset management industry
FCA sets out study’s terms of reference, focusing on price competition within the industry; interim report expected in summer of 2016
FCA announces that interim report has been delayed and will not be published into Q3 of 2016
Interim report published, arguing that retail investors are generally receiving poor value for money, that price competition is weak within the industry and that managers must provide greater clarity on fees. A controversial ‘all-in’ fee charge is mooted
Deadline for responding to the interim report expires
Final report published, watering down the notion of an ‘all-in’ fee charge from an imposition, to FCA ‘support for the idea’. The report requests that HM Treasury extends the FCA’s remit to include the regulation of the investment consulting industry
The final report announces that further consultations are expected later this year on the report’s overall package of remedies. The FCA’s decision on whether to refer the market for investment consultancy services to the CMA is also expected by September this year.