The UK’s Financial Conduct Authority (FCA) is conducting a market study into the asset management sector. The FCA’s objective is to understand whether competition is working effectively to enable institutional and retail investors to get value for their money when purchasing asset management services. The full version of the FCA’s terms of reference can be found here.
The FCA uses market studies, either under the Financial Services and Markets Act 2000 (FSMA) or Enterprise Act 2002 (EA 2002), as an important instrument to gather information and assess how competition is working in financial services markets and what, if any, intervention the FCA should make.
The potential outcomes of a market study are broadly similar under the FSMA and EA 2002 regimes, although the FCA also has wider rule-making and enforcement powers under FSMA. The asset management market study is being conducted under the FCA’s FSMA powers, so the FCA will not be subject to a tight statutory timetable (as it would under its EA 2002 powers).
The FCA has already undertaken a number of market studies into various retail financial services and products, including retirement income, cash savings, credit cards and general insurance add-ons. This is the second market study into wholesale financial services: the FCA is currently also investigating competition in the investment and corporate banking sector.
Scope of study into asset management
The FCA market study will focus on asset management products and services managed in the UK or sold to UK investors; distribution of such products and services; and the role of third party service providers.
The FCA has identified three key topics for its market study:
- How do asset mangers compete to deliver value?: How do investors choose between asset managers? How does the current market structure affect competition between asset managers? How do charges and costs differ along the value chain?
- Are asset managers willing and able to control costs and quality along the value chain?: Can investors monitor costs/quality of services paid out of the fund? If service providers focus on winning business from asset managers, do they deliver value for end investors? Are asset mangers able to control costs along the value chain?
- How do investment consultants affect competition for institutional asset management?: How does advice given by investment consultants affect competition for asset management? How are conflicts managed within the business model of investment consultants? Can clients monitor the services provided by investment consultants?
As a helpful starting point, the FCA describes the asset management sector as “not particularly concentrated” with the top 10 asset managers accounting for around 55 per cent of the assets under management. However, the FCA is considering whether parts of the sector may have higher concentration than others, and whether competition is working effectively. The FCA has raised a question over why the number of asset managers dropped between 2013 and 2014, after increasing steadily over recent years.
In addition to these questions, the FCA will consider whether there are any barriers to innovation and technological advances.
Certain areas will not be considered in the market study. These include: research and execution services; private equity funds; contracts for difference (both products and providers); retail advisers; stockbrokers; and sovereign wealth funds.
In terms of specific products and services, the market study will cover investment funds and segregated mandates. It will also look at pooled investment funds and insurance-based investment products.
As indicated the geographic scope is limited to funds and mandates managed in the UK.
The table below sets out the products and services that the FCA will/will not examine as part of its market study. Further details can be found at Section 5 of the terms of reference.
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Potential outcomes for the asset management sector
At the conclusion of the market study, the FCA will decide whether or not competition is working well in the asset management sector. If the FCA concludes that competition is not working well, it has a number of powers available to it, including:
- Market wide remedies: These include changing existing rules, publishing general guidance or proposing enhanced self-regulation.
- Firm-specific remedies: These include using own initiative variation powers or own initiative requirement powers, cancelling permissions, public censure, imposing financial penalties as well as filing for injunction or restitution orders. Where the FCA identifies potential infringements of other laws, such as competition law, it may open an investigation, or refer the matter to other enforcement agencies.
- Reference to the Competition and Markets Authority: Make a reference to the Competition and Markets Authority for an 18 month in-depth market investigation.
If the FCA finds that the market is working well for customers, the FCA may decide to take no further action.
The FCA acknowledges that there are a number of ongoing regulatory initiatives that will affect the asset management landscape including for example, the Financial Advice Market Review; MiFID II; and smarter consumer communications initiative.
These will be referenced and borne in mind during any assessment undertaken by the FCA.
The FCA aims to publish an interim report in summer 2016 and a final report with remedies (if required) in early 2017. Companies who may be affected by the FCA’s review and any proposals for reform may wish to engage pro-actively with the FCA and seek to influence their direction of travel. Assisting FCA to understand the operation of the market and the impact of regulation can be very important in this respect.
Equally, any organisation which believes that it is being prevented from competing effectively in the asset management sector may view this market study as an opportunity to present any concerns it has to the FCA.
The FCA has itself been contacting market participants for information and data and will host a series of roundtable and bilateral meetings. Responding to the FCA requires careful consideration.