In its 208 page report, the FCA highlights a number of key issues. These include:
- charges are higher for actively managed funds but do not necessarily reflect better performance compared to charges for passive funds;
- while charges for passive funds have fallen over the last five years, charges for actively managed funds have stayed broadly the same;
- very few asset management firms lower charges to attract investment, particularly for retail investors;
- there is considerable price clustering for active equity funds, particularly where AUM are greater than around £100 million;
- as fund size increases, pricing does not appear to fall, suggesting that economies of scale are captured by the fund manager rather than being passed onto investors
- while progress has been made in improving market transparency, there are concerns around how asset managers communicate objectives and outcomes to investors;
- customers are generally not active in managing their investments and engaging with asset managers and there is a lack of customer switching;
- there are concerns as to the value provided by platforms, advisers and other retail intermediaries; and
- the investment consultancy market is heavily concentrated (meriting making a market investigation reference to the CMA - see below).
To address these concerns, the FCA is proposing a package of remedies. These include:
- a strengthened duty on asset managers to act in the best interests of investors, including reforms to hold asset managers to account for how they deliver value for money;
- introducing an all-in fee so that investors in funds can easily see what is being taken from the fund;
- a number of measures aimed at helping retail investors identify which fund is right for them, such as requiring asset managers to be clear about the objectives of the fund, clarifying and strengthening the use of benchmarks and providing tools for investors to identify persistent underperformance;
- making it easier for retail investors to move into better value share classes;
- requiring clearer communication of fund charges and their impact at the point of sale and in ongoing communication to retail investors;
- requiring increased transparency and standardisation of costs and charges information for institutional investors;
- exploring the potential benefits of greater pooling of pension scheme assets; and
- requiring greater and clearer disclosure of fiduciary management fees and performance.
Market Investigation Reference (MIR)
The FCA is also consulting on whether to refer the investment consultancy market to the Competition and Markets Authority (CMA). Market investigations, conducted under Part 4 of the Enterprise Act 2002, are detailed examinations as to whether there are features of a market that result in an Adverse Effect on Competition (AEC). A market investigation must be completed and the report published within 18 months of the date of reference.
If the CMA does find one or more AECs, it has wide-ranging powers to take actions itself (by accepting undertakings or imposing an Order) or to recommend action be taken by others. The CMA’s powers also enable it to put remedies in place which address the structure of the market directly (e.g. through divestiture, or vertical separation) or which address the behaviour of market participants (e.g. through regulating outcomes or improving transparency).
The FCA is now seeking views about its interim findings and welcomes views from all stakeholders on the emerging thinking on potential remedies. Reponses are requested by 20 February 2017.
While only interim findings, the FCA has identified some fairly significant concerns with the asset management industry. The Interim Report puts the spotlight on companies involved in this market and challenges them to demonstrate how they offer value to their customers.
With strong echoes of the recent investigations into the retail banking and energy markets, the CMA proposed remedies addressed to asset managers focus heavily on regulatory improvements around market accountability and transparency.
For investment consultants, the prospect of a Market Investigation Reference will require careful consideration and active engagement with the FCA between now and the end of February when the consultation on a reference closes.
Retail and institutional investors will also need to be ready to engage in the development of the proposed remedies package and to consider how they engage more generally with the market.
A further area of interest will be vertically integrated business models, with an increasing move towards business models that combine consultancy and advice services, distribution platforms as well as product provision.