What has happened?
On 18 November 2015, the Financial Conduct Authority (“FCA”) launched a market study to examine the state of competition in the asset management sector. Asset management firms, which are responsible for managing investors’ investment decisions and operating investment schemes which pool investors’ assets, currently control assets of around £6.6 trillion. The scope of the study covers both retail and institutional investment, but essentially excludes private equity, hedge funds and private wealth.
What is the scope of the market study?
The FCA’s terms of reference for its market study set out its view that asset managers perform a vital economic function by bringing together investors, on one hand, and companies and governments in need of capital, on the other. This function has a significant impact on consumers by affecting their retail and pension investments and insurance premiums.
The focus of the market study will be on asset management products and services but, to understand how competition functions in this area, the FCA will also examine the related markets for distribution and advice, and ancillary products purchased by asset managers. For example, investment advisory services will be covered where the asset manager pays for those services.
Three key areas to review
The terms of reference set out three key areas which the FCA proposes to review. These reflect issues identified following the FCA’s wholesale market review launched in June 2014:
- Driving competition. How do asset managers compete to deliver value for money to retail and institutional investors? The FCA intends to examine how investors choose between asset managers, how the current market structure affects competition between asset managers and how costs and charges differ along the value chain.
- Controlling costs. Are asset managers willing and able to control costs and quality along the value chain? This aspect will focus on whether investors can monitor the cost and quality of services paid for out their fund. The FCA will assess whether service providers deliver value for end-consumers by focusing on winning business from asset managers and whether asset managers are in a position to control costs along the value chain.
- Impact of investment consultants. How does the role of investment consultants affect competition for institutional asset management services? Finally, the third workstream will comprise a review of how investment consultants’ advice affects competition for institutional asset management, how conflicts within the business model of investment consultants are managed and whether clients can monitor services provided by investment consultants.
Although the first two of these three topics cover both retail and institutional investors, the FCA recognises that these two groups access asset management services in significantly different ways and will be mindful of these differences when conducting its study. Across its three focus areas, the FCA will consider whether there are any barriers to innovation or technological improvements which prevent investors from extracting better value for money, as part of its general mission to encourage lower prices, improved products and more choice through innovation.
What powers is the FCA using?
Although the FCA will focus on competition issues in this study, it is using its more flexible financial regulatory powers under the Financial Services and Markets Act 2000. The FCA has elected not to use its concurrent competition law powers, but it has broad discretion to choose which powers to use and can switch between them in the course of a market study.
What are the next steps?
The FCA will shortly begin gathering views and information from stakeholders, including asset managers themselves, platforms, investment consultants, trade and consumer bodies and investors. Indeed, the FCA has already emailed a number of firms to notify them of the FCA’s intentions.
The FCA also proposes to hold a series of meetings with stakeholders to discuss their views on the topics covered by the market study before publishing an interim report, currently scheduled for summer 2016. Stakeholders will then have a further opportunity to comment before the FCA publishes its final report early in 2017.
What are the possible outcomes?
The FCA has a wide range of remedies at its disposal to bring about any improvements regarded as necessary following its market study, including:
- Market-wide remedies, such as introducing new rules or amending or withdrawing existing ones.
- Firm-specific remedies, including imposition of financial penalties, seeking injunction or restitution orders, commencing one or more further investigations into possible competition law infringements or referring possible infringements to the Competition and Markets Authority (“CMA”), or publicly censuring firms found to have engaged in misconduct.
- Making a market investigation reference to the Competition and Markets Authority, triggering a more in-depth review of the sector.
Will the market study benefit competition?
With approximately £6.6 trillion of assets currently under management in the UK, the UK asset management industry is the largest in Europe and second only to the US globally. The FCA notes that even a small improvement in the effectiveness of competition in this sector could lead to substantial benefits for investors.