Some £2.7trn (€3.18trn) of non-UK assets managed out of London could be ‘in jeopardy’ depending on how other local EU jurisdictions react to the provisions of Mifid II, according to part of the further response from the Association of Professional Fund Investors (Apfi) to the UK Financial Conduct Authority’s interim report into the UK asset management industry.
The danger arises because of the risk that the UK may end up as a so-called ‘gold plated’ market in its implementation of the Directive, rather than acknowledge the variations that may occur across the region, such as Swiss and Italian tied markets.
That 200 page report – MS15/2.2 – published 1 November 2016, assessed that the UK’s £7trn (€8.18trn) AM industry suffered a lack of competition leading to excessive active management fees, Apfi notes.
In Apfi’s first response to the report, which it published 23 November, it stated that the FCA’s conclusions may have been skewed by analysis “focussed specifically on investment consultants rather than the wider professional fund investor universe”.
UK representative for the Apfi, JB Beckett (pictured) said at the time: “If we expect competition and skill as a necessary pre-determinant for ‘alpha’ then we would expect more active funds to underperform that outperform over a prolonged period. Analysing markets and investing is not easy but index products do convey that illusion and this deteriorates the perceived economic value of active management.”
“Likewise selecting good managers that are consistent and competent is not easy. Here the value in professional fund selection, diversification and switching should add value net of fees to the end investor. However supportive evidence for active fund selection remains scarce, anecdotal or privately guarded. We encourage APFI members and other professional fund buyers to demonstrate the value added by sharing their experiences, to respond to the FCA consultation, share best practice, median costs and value added over benchmarks. We believe that forum should extend to all quarters of Professional Fund Investors (PFIs), not solely investment consultants.”
The Association has subsequently canvassed its membership for their views on MS15/2.2, and concluded that it is broadly supportive of the report and findings, albeit with key provisos, such as the warning on the consequences of Mifid II.
Apfi’s latest response also points out that the snapshot of management charges in the industry, contained in the report, must also reflect the context of changes that have brought the industry to its current point in the UK market.
“We observe that the asset management industry has been based on free market competition and 20 years of self regulation, with a number of iterations over the years. Today’s market reflects the consequence of previous regulatory actions including Big Bang and polarisation in the 1980s and RDR in the 2000s.”
Another key point raised by Apfi is that it feels the FCA has not sufficiently addressed concentration of assets in the market.
“In your sector overview and introduction you state that; “The industry is not particularly concentrated, with the largest ten asset management firms operating in the UK accounting for around 55% of total assets under management.” (p. 29). The total number of firms quoted appear to be 1,840, so an alternate interpretation would be the opposite: 0.5% of the firms control more than half the assets. You do mention these very challenges, asset concentration and the cost disadvantages that smaller firms are facing, but it is a striking feature of the report that the oligopolistic nature of the market is not fully addressed, how it relates to asset management business models, marketing and thus potentially skew the wider active-passive debate being considered.”
For a full list of the queries raised by Apfi in its response to the FCA consultation on its interim statement findings, click here: APFI RESPONSE TO FCA MARKET STUDY INTERIM REPORT