The Financial Conduct Authority (FCA) published its terms of reference (TOR) for its competition market study into the asset management industry on 18 November 2015. This is the first time that the FCA has considered competition for the asset management market.
The TOR marks the start of a year-long process during which the FCA will hold various roundtables, bilateral meetings and send out requests for data and information about asset managers’ businesses – managers need to be prepared.
The TOR sets out three main questions for the market study:
- How do asset managers compete to deliver value?
- Are asset managers willing and able to control costs and quality along the value chain?
- How do investment consultants affect competition for institutional asset management?
In addressing all three questions, the FCA will ask: are there any barriers to innovation and technological advances?
The FCA has broadened the scope to cover retail and institutional investors. This is on the basis that the issues identified in the feedback to the Wholesale sector competition review 2014-15 applied both to retail and to institutional investors.
What should asset managers do?
- Managers need to get to grips with the issues highlighted in the TOR areas concerned quickly.
- Managers need to determine the potential impact of the TOR on their businesses.
- Managers must decide whether to make representations to the FCA on the TOR. This is not a formal consultation but the FCA has indicated that it requires comments by 18 December 2015 – in our experience of similar processes, making representations at this early stage of the process is vital and presents a real opportunity to influence the scope and areas of focus.
- Managers will need to consider how to respond to the FCA requests for information – the FCA has indicated that it will shortly begin gathering information from stakeholders. This will include data, information and/or views from asset managers, platforms and investment consultants, and their customers/clients. These requests are likely to be lengthy and detailed, looking into issues such as costs and profitability, and turnaround times for submitting responses are likely to be tight. The process of assimilating the relevant information can be time-consuming and it is likely to be helpful to start thinking about how to resource any such requests sooner rather than later. Understanding the data before it goes in will also be critical.
- Even if managers do not think that the FCA will request information, whether in the form of a questionnaire or otherwise, the managers will need to consider whether it is in their best interests to make representations or supply evidence voluntarily.
In July 2014, the FCA launched a review of competition in the wholesale sector to gather views on areas that might benefit from an in-depth market review. In the FCA’s feedback statement of February 2015 for the wholesale sector review, it concluded that some features of the purchase and provision of asset management and related services may mean that competition is not working effectively in those markets. In particular the FCA was concerned that:
- investors may not be able to assess whether they are getting value for money;
- asset managers may not have sufficient incentives or the ability to control investors’ costs; and
- the bundling of some ancillary services may impact the way competition works for these services.
The FCA therefore decided to conduct a market study into asset management and related services to find out if competition is working effectively. The FCA business plan for 2015/2016 stated that the study was due to start in Q1 2016, however the FCA has now brought this forward with the publication of the TOR.
Terms of Reference
The focus of the study will be on asset management services provided to retail and institutional investors. It will also include distribution (in particular platforms and investment consultants); asset management products and providers (where assets are managed and sold in the UK to UK investors); and ancillary and third party service providers (particularly where costs are paid out of the fund). It is important to note that as the study proceeds, the FCA may narrow the scope if it does not believe that certain areas require further investigation.
There are a number of areas and activities which are partially in-scope, for example custodial banking services. The market for such services will only be considered to the extent that asset managers purchase the service and that this is a cost for the investors. There will be no in-depth investigation into the effectiveness of competition within such markets.
Certain areas will not be considered in the market study. These include research and execution services, private equity funds, contracts for difference products and providers, retail advisers, stockbrokers, and sovereign wealth funds.
Table 11 below shows the products and services which are in and out of scope. Further details can be found at section 5 of the TOR.
Click here to view table.
We have set out the headline topics of the market study in the introductory paragraphs above (The TOR sets out three main questions…).
Table 22 below sets out a more comprehensive summary of the topics the FCA wishes to explore. Further detail can be located in Section 4 of the TOR.
Click here to view table.
The FCA is conducting the study under its regulatory powers (derived from the Financial Services and Markets Act 2000) rather than its competition powers (derived from the Enterprise Act 2002). This will make little difference to the remedies available to the FCA. By using the FSMA powers, the FCA is limited to being able to require information from authorised firms and persons connected with them.
The FCA will be hosting a series of round table and bilateral meetings with stakeholders to hear parties’ views. It will also shortly be contacting market participants for information and data. The table below sets out the next steps in the process:
Click here to view table.
The level of the fees charged to investors is a hot topic for the FCA. As the FCA stresses in the TOR, there are £6.6bn of assets under management in the UK. As fees are often charged as a proportion of the assets being managed and given the value of those assets, even a small reduction in the level of fees, could save investors large amounts of money. The FCA has made a series of attempts in recent years to instil greater transparency over fees in the industry (including through the Retail Distribution Review in 2012 and through the 2014 thematic review into the Clarity of Fund Charges). It appears that the FCA is trying to bring its competition powers to bear on this issue to make sure that there is effective competition between providers, delivering better value for investors, and that the incentives of asset managers are aligned to better outcomes for investors.
Responding to the study will require careful consideration and significant resources. The other market study to derive from the Wholesale sector competition review 2014-15 was the Investment and Corporate Banking market study. If this is anything to go by, firms will need to be ready to provide large quantities of data and other supporting information within short timescales.
Finally, active engagement in the process is very important for the firms affected. Experience has taught us that this provides the best opportunity to shape the terms and influence the outcomes of the study in a way that is most beneficial. It is notable that the FCA is welcoming comments on the TOR (by the 18 December). There are various points in the TOR where the FCA indicates specifically that it is open to hearing views on how firms can respond most effectively to data / information requests. For example at paragraph 4.43 of the TOR, the FCA states: “…we are looking to understand prices and costs along the value chain – from advice and distribution to asset managers and ancillary/third party products. Some stakeholders have tried to do this previously and have expressed the difficulty in isolating data which shows the costs along the whole value chain. We are therefore open to hearing views about ways in which we could get meaningful data to show this.” Some thoughtful ideas submitted to the FCA early on could help ease the burden of responding to the formal data requests. Critically firms also need to understand the data they are submitting.
The full version of the terms of reference can be found here.