The FCA publishes its final report in relation to the asset management market studyPrint publication
On the 28 June 2017, the Financial Conduct Authority (FCA) published its final report on the asset management market study, together with an initial consultation paper on remedies. The final report can be accessed here and the consultation paper on remedies here.
The FCA launched its market study, in November 2015, to assess whether competition was working effectively in the asset management sector and whether investors are getting value for money. In November 2016, the FCA published an interim report setting out initial findings and proposed remedies. The final report largely confirms the findings identified in the interim report around governance, lack of price competition, fund performance, and clarity of costs and charges.
The FCA is proposing a significant package of remedies that seek to make competition work better in this sector. Some of these do not require further consultation and are being taken forward. Other remedies do require further consultation and so proposals have been set out in a separate consultation paper. The deadline for responses is 28 September 2017.
The key findings of the final report are:
- Price competition: price competition is not working as effectively as it could be. The FCA found that asset management firms do not typically compete on price, there is considerable price clustering on asset management charges for retail funds (with most funds being priced between75% and 1%), and firms have high levels of profitability, with average profit margins of 36% for the firms sampled.
- Performance: on average, both actively managed and passively managed funds do not outperform their own benchmarks after fees. The FCA’s study also suggests that there is no clear relationship between charges and the gross performance of retail active funds in the UK.
- Clarity of objectives and charges: the FCA has concerns about how asset managers communicate their objectives and how useful these are for retail managers. It is also concerned that investors’ awareness and focus on charges is mixed and often poor. The FCA states that there are a significant number of retail investors who are not aware they are paying charges for their asset management services, whereas many institutional investors and some retail investors are increasingly focused on charges.
- Investment consulting and other intermediaries: the FCA has concerns in relation to the investment consulting market. These include the relatively high and stable market shares of the three largest providers, a weak demand side, relatively low switching levels, and conflicts of interest. These concerns are most relevant to smaller institutional investors, such as pension funds, which rely more heavily on investment consultants in comparison with larger investors.
The FCA has laid out a package of remedies. These fall into three areas:
Remedies aimed at protecting investors who are not in a position to find better value for money.
- Strengthen the duty on fund managers to act in the best interests of investors and use the Senior Managers and Certification Regime to bring individual focus and accountability, in particular by introducing a new Prescribed Responsibility to act in the best interests of investors including a consideration of value for money.
- Consult on requiring fund managers to return any risk-free box profits to the asset fund and disclose box management practices to investors.
- Introduce technical changes to improve fairness around the management of share classes and the way in which fund managers profit from investors buying and selling their funds.
Remedies aimed at increasing competitive pressure on asset managers.
- Support the disclosure of a single “all-in” fee to investors that includes asset management charges, intermediary fees and an estimate of transaction charges so that investors have a better understanding of costs upfront.
- Support consistent and standardised disclosure of costs and charges to institutional investors. This must be developed by industry and investor representatives.
- Chair a working group on how asset managers can present their objectives in a clearer manner and in a way which is useful to investors. This will include why, or why not, a benchmark is being used and ensuring that the use of a benchmark is consistent across all marketing materials.
- Recommend that the Department for Work and Pensions continue to review and, where possible, remove barriers to pension scheme consolidation and pooling.
Remedies to improve the effectiveness of intermediaries.
- The FCA is consulting on making a reference to the Competition and Markets Authority (CMA) to investigate investment consultants. This comes on the back of the FCA rejecting undertakings-in-lieu offered by the three largest institutional investment consultants (Aon Hewitt, Mercer and Towers Watson), which sought to avoid the proposed reference to the CMA. The reference would allow the CMA to investigate in detail concerns identified by the FCA in respect of the investment advice market. The FCA will consult on the undertakings-in-lieu and the proposed reference of investment consultants to the CMA. The consultation closes on 26 July 2017, with a final decision expected to be announced in September 2017. If the FCA does refer the investment consulting market to the CMA for a market investigation, it will be the first time that the FCA has made such a reference. A market investigation is effectively a “Phase 2” market study process, and would require a significantly more intense level of engagement by market participants as the CMA will gather and assess large volumes of evidence.
- Recommend that HM Treasury brings the investment consultant sector under a regulatory regime and that this is dependent on the provisional market investigation reference to CMA.
- The FCA will be launching its own market study into investment platforms.
The final report states that implementation of the remedies will take place in a number of stages, although those not requiring consultation are being taken forward immediately.
The FCA has published a consultation paper focusing on the remedies related to governance and technical changes to promote fairness for investors. The deadline for responses to the consultation paper is 28 September 2017.
The asset management sector will now enter an important phase of engagement with the FCA in relation to the proposed remedies. The remedies consultation paper is a key opportunity for asset management firms to work with the FCA on how to implement the new requirements. It is expected that the consultation process, culminating in additional policy statements and possible FCA Handbook changes, will run at least into 2018.
Furthermore, the FCA has noted from its market study that there is a possible lack of awareness of competition law in some areas of the asset management sector. In particular, in relation to how competition law applies to commercial relationships and how firms interact with one another. The FCA has taken the opportunity to remind firms of the importance of ensuring their business activities are undertaken in compliance with competition law. Therefore, asset management firms would be well advised to consider their compliance policies and to offer training in this respect.
If would like to seek legal advice or training on competition law and its application to the asset management sector, please contact Trudy Feaster-Gee or Andrew Northage.