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Changes needed in asset management sector says regulator as major study raises serious issues

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There is weak price competition in some areas of the asset management sector and greater transparency is needed on charges says the FCA.

What’s more, says the regulator, investment consultants undertake valuable due diligence for pension funds, but are not effective at identifying outperforming fund managers. And, the FCA 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.

These were key findings of a just published asset management market study which was launched by the FCA back in November 2015. The study set out to examine whether institutional and retail investors get good value for money when purchasing asset management services.

Statement

In a statement issued today, the FCA said 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.

Remedies

The FCA is proposing a number of remedies that seek to make competition work better in this market, and protect those least able to engage actively with their asset manager.

The remedies were listed in the statement and 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.

The FCA is considering making a market investigation reference to the Competition and Markets Authority (CMA) on the investment consultancy market. It has also recommended that HM Treasury considers bringing the provision of institutional investment advice within the FCA’s regulatory perimeter.

The FCA is now seeking views on its initial findings.

FCA CEO Statement

Chief Executive at the FCA Andrew Bailey said:

“Asset managers are responsible for the savings of millions of people in the UK, making decisions which affect their financial well-being both now and in the future.

“In today’s world of persistently low interest rates, it is vital that we do everything possible to enable people to accumulate and earn a return on their savings which can meet their lifetime needs. To achieve this, we need to ensure that competition in asset management works effectively to minimise the cost of investment.

“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.

“Low interest rates are necessary for the economy, but we have to do everything else we can to ease the burden on savers. This is one thing we can do.”

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