Is the FCA going to be able to get fund managers in better shape in the UK’s £7trn asset management sector?
That’s the question the Financial Conduct Authority has set out to answer in their asset management market study.
The project started last November with the publication of a terms of reference and has now published an interim report.
It’s an important project, due to the size and impact of the sector.
With over three quarters of UK households holding occupational or personal pension assets, most of us are users of the services offered by asset managers.
The FCA have found that price competition is weak in a number of areas of the industry.
They reported that, while the price of passive funds has fallen, active prices have remained stable.
Despite a large number of firms operating in the market, the asset management industry has seen sustained, high profits over a number of years.
In addition, investors are not always clear what the objectives of funds are, and fund performance is not always reported against an appropriate benchmark.
Finally, the FCA have identified concerns about the way the investment consultant market operates. With many small pension schemes relying heavily on the advice of consultants, this is a big deal too.
In order to remedy the current problems identified at this stage of the asset management study, the FCA is proposing a significant package of remedies to make competition work better in this market, and protect those least able to actively engage with their asset manager.
These proposals include a strengthened duty on asset managers to act in the best interests of investors, reforms to hold asset managers to greater account, introducing an all-in fee to make it easy for investors to see what is being taken from the fund, and measures to help retail investors identify the most appropriate fund.
The regulator will also launch an investigation into investment consultancy services.
Responding to the FCA’s interim report to its asset management market study, Ian Sayers, Chief Executive of the Association of Investment Companies said:
“This is a detailed and comprehensive report, which will take some time to consider fully.
“One focus of the report is fund governance and how improvements in transparency could help investors to make better decisions. However, evidence from the report also demonstrates that retail investors often do not use the information that is currently available. For example, around half of retail investors were not aware of the existence of fund charges.
“This is where the governance of an investment company can be of real benefit, as investment company boards are there to uphold the interests of all shareholders. A third of investment company boards have reduced their management fees in the last four years.
“They are also introducing more tiered fees where the percentage paid reduces as the investment company increases in size. This captures some of the economies of scale on behalf of investors in a way which the report notes is rarely seen elsewhere in the funds sector.
“The report also focusses on equity investment and the relative costs of active versus passive investment. One of the advantages of the closed-ended investment company structure is the ability to invest in a wider range of assets, making them particularly suitable for illiquid investments which are hard to replicate in a passive strategy.”
A consultation on the findings and proposals in the FCA’s interim report closes on 20th February 2017 and then we expect the publication of their final report in the second quarter next year.
It will be interesting to see the outcome from this asset management market study and any intervention from the regulator.
Healthier competition, more transparent charges and objective measurement of fund performance are all factors both advisers and investors should welcome.
