The Financial Conduct Authority (FCA) has flagged up weak price competition in the British asset management industry, particularly among actively managed funds and pledges for increased transparency of costs and performance reporting.
In its 200-page interim report assessing the state of the £7trn (€8.18trn) strong asset management sector in the UK, the FCA highlighted that investors in active funds often pay higher charges than necessary due to a lack of price competition.
In addition, it highlighted that fund objectives were not always clear, and performance was not always reported against an appropriate benchmark.
While the passive fund industry was generally more competitive, the FCA also warned that examples of “poor value for money” could be found in this segment.
The UK regulator suggests to address these shortcomings by proposing among others an all-in fee in order to show more clearly what is being taken from the fund, as well as enhanced reporting requirements, particularly for funds aimed at retail investors.
Andrew Bailey, chief executive at the FCA said: “We want to see greater transparency so that investors can be clear about what they are paying and the impact charges have on their returns. We want asset managers to ensure investors receive value for money through pursuing energetically their duty to act in their customers’ best interests.
“The remedies that we are proposing today aim to achieve these outcomes,” he said.
Mike Walters, head of investment management regulation, KPMG UK predicted that the FCA’s finding could see a series of dramatic changes to the investment management world as we know it with companies and funds forced to merge together to meet future regulatory requirements.
“Today’s report is not just another review, it’s a fundamental challenge to the value for money that the active fund management industry provides to UK savers and investors. Firms need to think carefully about how to communicate to investors what value they add.
‘Consolidation of firms and funds’
“I expect to see some consolidation of firms and funds as governance committees, intermediaries and investors increasingly question the level of fees relative to fund performance.
“But we mustn’t lose sight of the fact that whilst the FCA found that on average the performance of actively managed funds does not represent value for money, many out-perform and some provide access to certain markets passive funds just can’t,” said Walters.
Martin Gilbert, chief executive of Aberdeen Asset Management welcomed the report stressing that it “brings focus, and a sense of urgency”, to confronting some key industry issues impacting customers.
“There is a need for increased transparency in relation to the services provided, the costs of such and also for ensuring value for money,” said Gilbert. “Asset managers play a vital role in helping investors achieve their financial goals and the FCA’s proposals will help deliver this. We look forward to working with the regulator and the industry to ensure all investors, large or small, receive the best possible service.”
‘Feel the pain’
David Ferguson, chief executive at wrap platform Nucleus, added: “The businesses that will really feel the pain are not only the pure asset managers, but those so-called vertically-integrated (the dictionary definition of integrated is quite important here) businesses that are using platforms (or even adviser salesforces) as loss-leaders to drive client portfolios toward fat-margin, in-house fund managers. They, and their shareholders, could be in for more than a bit of disappointment.”
The FCA launched the market study in November 2015 to assess whether competition is working effectively in the UK’s asset management industry – the second largest in the world, managing almost £7 trillion of assets. Over three quarters of UK households with occupation or personal pensions use the services asset managers offer.
The FCA found that:
– there is limited price competition for actively managed funds, meaning that investors often pay high charges. On average, these costs are not justified by higher returns;
– there is stronger competition on price for passively managed funds, though the FCA did find some examples of poor value for money in this segment;
– fund objectives are not always clear, and performance is not always reported against an appropriate benchmark;
– despite a large number of firms operating in the market the asset management sector as a whole has enjoyed sustained, high profits over a number of years with significant price clustering;
– investment consultants undertake valuable due diligence for pension funds but are not effective at identifying outperforming fund managers. There are also conflicts of interest in the investment consulting business model which require further scrutiny.
Call to bring institutional under FCA remit
The FCA is also consulting on whether to make a market investigation reference to the Competition and Markets Authority (CMA) on the investment consultancy market and has recommended that HM Treasury considers bringing the provision of institutional investment advice within the FCA’s regulatory perimeter.
In addition, the FCA said that it will undertake further competition work on the retail distribution of funds, particularly in relation to the impact financial advisers and platforms have on value for money.
The FCA is now seeking views about its interim findings and welcomes views from all stakeholders on the emerging thinking on potential remedies.
The full interim findings of the asset management market study and accompanying documents can be found here.