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an intervention: FCA regulation of the asset management market

14 February 2017

Background

The Financial Conduct Authority's (FCA) Asset Management Market Study: Interim Report was released in November 2016. The report, which is the first of its kind, is a detailed investigation into the asset management industry following FCA concerns about a lack of effective competition in the market, despite the number of asset management firms in the UK rising steadily over the last eight years. In summary, the long anticipated report revealed weak price competition, high profit margins for fund managers and a lack of consumer information affecting the ability of institutional and retail investors to access value for money. We anticipate the FCA will follow up on its Interim Report with Thematic Reviews and would not be surprised to see some enforcement action being taken towards the end of 2017.

Four key concerns

  1. Price - Most retail investors were unaware of the fund charges attached – particularly when they are stated as a percentage. There was no correlation between price and performance – generally, higher charges on funds didn’t generate greater returns.
  2. Active vs passive funds - Actively managed funds, which have a 77% majority in the market over passively managed funds, came under considerable scrutiny for price clustering, high fund charges and a failure to outperform their benchmark. The FCA noted the lack of information about passive products and that investors were not aware of the advantages of opting for a passive fund.
  3. Consumer choice - Investors rarely switch between asset managers and are disincentivised from doing so because of unknown charges and delays in switching. Past performance is not always the best indicator for selecting the right fund and asset manager as it is difficult to accurately interpret the data and compare between different funds.
  4. Intermediaries - There was a general concern about the role of retail intermediaries and investment consultants and a question mark over whether they assist investors with getting value for money.

Changes to look out for

The interim report is testing the water with a number of proposed remedies to strengthen competition and encourage transparency:

  • 'all in' fees - a single charge at the outset so investors will know how much is being taken out of the fund in service fees such as commission and transaction charges
  • disclosure and communication obligations - requirements for an ongoing dialogue between asset managers and investors on selecting the appropriate fund, fund performance, and the extent to which it meets investor objectives
  • pricing - transparent price information on fund charges and management fees and standardisation of costs for institutional investors
  • accountability - carved out duty for asset managers to act in the best interests of their investors
  • further consultations and referrals - the FCA is considering referrals to the Competition and Markets Authority (CMA) and HM Treasury for an in-depth investigation of institutional investment advice.

What next?

Asset managers now have an opportunity to consult the FCA on the accuracy of the report and the implications of the proposed remedies. The final report with concrete recommendations is due to be released by March 2017.

Impact

The reforms are still at first stage discussions and have not gone as far as price caps or restrictions on business models. Nonetheless the critical report has put asset management services under the spotlight. The preliminary finding reflect the FCA’s appetite for intervention and paves the way for increased regulation of asset management services, particularly if the CMA referral goes ahead. While this report focused on asset managers, the FCA said they may launch further studies looking at brokers and asset advisers in due course.

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The content on this page is provided for the purposes of general interest and information. It contains only brief summaries of aspects of the subject matter and does not provide comprehensive statements of the law. It does not constitute legal advice and does not provide a substitute for it.

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