A Muffled Thunder
If Andrew Bailey ever supposed that the FCA’s final findings on asset management would go off like a firework display when they were published at the end of June, he must have been a bit disappointed by the lack of crackle and pop that resulted.
Okay, we’ll agree that the consumer media were keeping themselves alternatively amused at that time with the rival antics of Theresa May and Donald Trump – but it was still disappointing that such an ambitious and consumer-friendly programme had produced such a muffled thud in the consumer financial press. Or that even the serious broadsheets largely overlooked the sexily-named MS15/2.3 with its 114 dense pages and turned their Sunday attentions back to mortgages and pensions instead. Yawn.
Nor should we deny that there were a handful of brave op-eds such as Merryn Somerset-Webb, Moneyweek’s editor, who had a brief stab at explaining in the FT why consumers could benefit from a more transparent fee-charging system. But otherwise the place seemed to be full of people wandering around in the smoke, wondering what the heck was going on?
Why all the confusion?
Let’s be fair about one thing. The media’s confusion wasn’t entirely the FCA’s fault. Rather, it was that MS15/2.3 and its counterpart CP/17/18 represent a truly ground-breaking attempt to sort out an entire whole battery of issues that are likely to impact on retail clients in every kind of way. Just, not quite yet….
Firstly, it doesn’t exactly help matters that the regulator’s enormous tome is still at a discussion phase – you have until 28th September to make your final comments on the important parts of it, by the way. Or secondly that some parts of the issue are effectively being kicked into touch for the EU regulators to decide – the FCA’s final report appears to be happy to leave the whole subject of consumer fairness to MiFID II, which comes into force next January but which is itself still a bit of a fog.
Or thirdly, for the moment at least, that the FCA doesn’t have much more to say about sorting out the confusing panoply of fees and charges than that “Something Must Be Done.” Harrumph, as they say in Tunbridge Wells. As we’ll see shortly, simplifying the fees side of things alone is going to stretch the industry’s minds in ways that boggle the mind. This year? Next year? Some time? Never?
Has anybody seen that perimeter fence?
Just to make things more interesting, the nattily-named “Consultation on Implementing Asset Management Market Study Remedies and Changes to Handbook” (where do they find these titles?) kicks the issue forward into the far future by announcing that the FCA is still thinking of extending the scope of its asset management proposals to cover a range of other retail investment products: unit-linked funds, with-profits funds, pension funds and investment companies – which, it agrees, account for a huge proportion of retail investment business.
Well yes. We couldn’t disagree that, from the investor’s perspective, all of these products do look rather alike. But the problem, as the FCA itself notes, is that it might not be straightforward to bring all of these products into the same regulatory orbit, because they’re all subject in their own ways to their own governance regimes – which are also constantly evolving in their own various ways.
So when the FCA says that it’s now looking for views from “stakeholders” as to whether some or all of the proposals in the Final Report could (or should) be applied to these other retail products, it’s not hard to imagine people shrugging their shoulders and muttering: “for heaven’s sake, come back with a proper strategy report when you’ve had a chance to think it all through.”
Harrumph again. I’ll leave it there, because wiser heads than mine are still furrowing their collective brows as to exactly what this entire programme might amount to, or what the knock-on consequences might be. Let’s turn our attention instead to the key proposals.
And about time too…
Key proposals
First things first. The FCA’s final report might not be very final, but it’s as far as we’ve got after two solid years of discussion. The initial market study into asset management was launched in November 2015, leading to the interim report of the Asset Management Market Study (got that?), and hence to this summer’s final document, which was formulated after getting 153 written responses and after holding discussions with almost 200 stakeholders from 135 organisations. Not to mention all the feedback.
The initial report, says the FCA, “considered how asset managers compete to deliver value for both retail and institutional investors,” and the 2016 interim report found that there was only weak price competition in various areas of the asset management industry, and, says Mr Bailey, the competition model is not working well. “Despite a large number of firms operating in the market, the FCA’s analysis found evidence of sustained, [unacceptably] high profits over a number of years.”
Other issues materialised along the way. The regulator complains that “investors are not always clear what the objectives of funds are, and [that] fund performance is not always reported against an appropriate benchmark.” It also says that it had to fight off “a perception that our interim findings suggested that passive funds were preferable to active funds”; rather than getting into that untidy debate, it says, the FCA has chosen to focus on the need for investors to “understand both the total cost of investing and the objectives of the fund or mandate they are investing in, so that they can choose the product that best meets their needs.”
So far, so clear? Good, let’s move forward. Puhleeze….
Managerial responsibility and governance
The FCA says that it intends to introduce a new responsibility for asset managers to consider the value for money that they deliver to investors (yes, honestly); more significantly, it plans to handle this under the Senior Managers and Certification Regime, which is due to be extended to investment managers in 2018.
But it has fallen short of expecting managers to carry a fiduciary duty toward their investors, a significant shortfall on what some advisers have been asking for. The FCA does go some way toward correcting the balance by insisting that fund boards should assess whether value for money has been provided to investors – and also by requiring that all management boards should include at least two independent members. But, in some observers’ eyes, it has wimped out of the demand that board chairmen should also be independent.
Performance
As we’ve just said, the regulator has side-swerved the issue of whether active funds are failing to meet investors’ aspirations vis-à-vis passive funds, but the press has been in no doubt that it thinks actives deliver a poor deal. The FCA does say, however, that “on average, both actively managed and passively managed funds did not outperform their own benchmarks after fees. “ And it added that “there is no clear relationship between charges and the gross performance of retail active funds in the UK.”
UK press sources estimate that around £109 billion is currently invested in funds that claim to be active but are actually passives in all but name. Although significantly more expensive than passive index trackers.
You do the maths. But the late-June announcement of the FCA’s report had a sharp downward impact on the share prices of fund houses that specialise in active strategies. Will they soon make up the lost ground? If the FCA’s currently woolly scheduling is anything to go by, I wouldn’t want to bet against it.
Fees
Surely the key issue as far as retail investors are concerned? And certainly the only issue that was ever likely to make the newspaper columns. The idea of “pounds and pence” fees looks like a no-brainer, if you don’t look closely enough. But what’s this? More fog, unfortunately.
The FCA commits itself to introducing an all-in fee for retail investors that will include an estimate of trading costs. But not yet, apparently – there is no time line for the change. The regulator plans to look further into ways of improving the reporting of fund costs, and it says it’ll set up a working party, and blah blah blah.
The FT quotes Keith Baird, director of financial services research at Cantor Fitzgerald Europe, as saying: “The fact the FCA says it ‘supports’ action on moving to an all-in fee, rather than using firmer language, is supportive for asset managers.” As distinct from clients. We couldn’t disagree with that.
Will we ever get to a fully all-in fee? First we’ll have to figure out how those fees are calculated. How will a fund-of-funds declare its pyramid of sub-fees, and will it be able to account for all the fee discounts it gets along the way? Bearing in mind, of course, that those sub-funds are sometimes dotted around the globe, including some in tax secrecy havens? Will the all-in fee requirement apply to private wealth managers’ funds, and if so at what level? Where do hedge funds fit into all this?
Answers on a postcard, please. In the meantime, I’ll personally say that the FCA’s cop-out looks like good news for fund managers and one less thing to worry about for IFAs.
Transferring share classes
At last, something uncontroversial. The FCA’s proposals would enable asset managers to move their retail investors’ funds into cheaper share classes without obtaining their explicit permission. The industry agrees that about a third of the assets held in retail investors’ funds bought are still stuck in expensive share classes that are still paying legacy commissions, and the regulator is anxious to break the inertia. There are other proposals to abolish the last remnants of legacy payments on funds sold before the end of 2012, but they needn’t concern us here.
Investment consultants
Another kite that’s being flown for future consideration. The FCA has requested new powers that would allow it to oversee consultants, whose advice is still largely unregulated even though it heavily influences the ways in which pension funds invest. Consultant activity in this area is dominated by only a small handful of firms, but the FCA has drawn attention to the opacity of this sector, which it says has left some larger investors unsure as to whether they are receiving value for money.
Meanwhile the FCA is also considering whether to refer investment consultants to the Competition and Markets Authority, alongside other financial advisers. The FT notes that “the increased likelihood of a referral is a blow to investment consultants, who hoped to see off a competition probe.” In either case, it says, the FCA is due to make a call by this September.
Pension consolidation
One of the FCA document’s less obvious proposals includes the complete removal of any remaining barriers to consolidating pension scheme funds. The FCA says it believes that there are many benefits to be had from letting pension funds pool their assets – not least, the likelihood of being able to negotiate lower fees with investment managers. Will it happen? We’ll see.
A platform market study?
There’s always a sting in the tail, isn’t there? And yes, the FCA confirmed its intention, as set out in April 2017, to launch a study of retail platforms which will look into the ways in which discounts from providers are recorded and whether they are passed on to consumers.
The gist of the FCA’s argument so far has been that the complexity of charging structures has given the platform providers ample room to hide their gains from retail clients; but the same argument is being used for intermediated investment platforms that are more likely to involve professional investors.
Anything else?
Loads and loads of it. But I’ve had to be selective here. This is a vast subject, and as you’ll have noticed, it won’t be coming to a screen near you any time in the very near future. But please do let us know what you think. Write to me at editor@ifamagazine.com, and we’ll keep you updated.
In the meantime, you have until 28th September to make your voice heard at the FCA on this particular consultation process. Go for it. Give them no peace.
