Today the Financial Conduct Authority (FCA) has published the final report of its asset management market study. There are few surprises with the report largely confirming the findings and proposed remedies set out in the FCA’s interim report which was published last November. Nonetheless, this report marks a significant milestone for Britain’s £6.9 trillion asset management industry. The report includes criticisms of certain industry practices, a wide range of remedies that the FCA plans to implement, and a promise of further investigation of certain sectors. In particular, the FCA states that:
- There is weak price competition across several segments of the asset management industry.
- The FCA has identified a number of general transparency concerns both relating to the communication of both objectives and charges.
- Investment consultants came in for what was probably the most significant criticism in the report with the FCA raising concerns over the relatively high level of concentration, conflicts of interests and a particular lack of transparency around performance and fees, describing investment consultancy fees as “the most opaque parts of the asset management value chain”.
- Many of the key points of detail for remedies will be put out for further consultation, meaning that there is still an important role for stakeholders in shaping the regulatory outcomes.
On a positive note for the industry, although the FCA has found evidence – in the form of “considerable price clustering” – of weak price competition in a number of areas of the industry, it does not give credence to some of the more extreme allegations (for example of collusion on price) that have recently been made. The FCA does not appear to have felt the need to give serious consideration to return the whole industry to the CMA for a further review.
2. Remedies implementation and consultation: important opportunity for the industry to put forward views
As expected, the FCA’s remedies are aimed at improving transparency in order to allow investors to better assess the ‘value of money’ achieved by different funds and investment strategies, increasing competitive pressure on asset managers, and increasing the effectiveness and scrutiny of the unregulated investment consultancy market. In particular:
- The FCA proposes to strengthen fund managers’ duty to act in the best interests of investors by clarifying expectations around value for money, increasing accountability and by making changes to governance structures to ensure a minimum level of independence. In particular, they propose a minimum number of independent directors on AFM boards and a responsibility on the chair of an AFM, as a senior manager, to assess value for money.
- The FCA remains supportive of a single ‘all-in’ fee that includes asset management charges, an estimate of transaction costs and intermediary fees so that investors have a better understanding of costs upfront. For institutional investors the FCA also supports standardised disclosure of costs and charges to improve transparency. The detail of this proposal though (which was central to industry responses) is subject to further consultation.
- The FCA also makes proposals to make it easier for firms to switch investors to cheaper share classes, and also ignites a new debate about trail commissions.
- Finally, the FCA has decided not to refer the asset management market as a whole for an in-depth review to the Competition and Markets Authority. The FCA is, however, proposing to make a reference of the investment consulting market, having provisionally rejected attempts by the larger consultants to head them off. It is expected to take a final decision on this by September 2017. If the FCA does refer to the investment consulting market to the CMA for a market investigation, that will mark the first time that the FCA has made such a reference. A market investigation is effectively a “phase II” market study process, and would require a significantly more intense level of engagement by market participants as the CMA will gather and assess large volumes of evidence.
The FCA has published a consultation paper on some of the proposed remedies alongside today’s report. The consultation process on strengthening the duty to act in clients’ best interests, improving share class switching and box management runs until 28 September 2017. Further consultation papers in relation to the other remedy proposals (including on the ‘all-in’ fee) are expected between September and the end of the year.
The industry will now enter a crucial phase of engagement with the FCA on the practicalities of its proposals. The remedies consultation process is a key opportunity for the industry to work with the regulator on how to implement the new requirements. It is expected that the consultation process, culminating in additional policy statements and possible FCA Handbook changes will run at least into 2018.
3. Further changes to the regulatory landscape
The remedies package comes at a time when the sector is grappling with other regulatory initiatives such as MiFID II, PRIPS and the impending extension of the Senior Managers and Certification Regime. For example, the single all-in fee interacts with the increased transparency and disclosure of fees and transaction charges required of asset managers under MiFID II and PRIPS. And the increased governance requirements with those under the extended SMCR to be consulted on later this year. But the FCA has stated that its proposed remedies have been designed with these in mind and support and complement these initiatives. The FCA expects to consult in due course on how the further detail on EU initiatives affects the FCA’s proposals (including crucially what the format of the all-in fee will be). The FCA also emphasised the supporting and complementary approach it has taken to the proposed remedies when considering the need for UK and EU regulation to be consistent at the point of Brexit.
4. Competitiveness of the UK’s asset management industry
The FCA noted that market participants had raised concerns during the consultation process that further regulation of the asset management industry in the UK could pose competitiveness and cost challenges in light of the uncertainty already generated by Brexit. UK competition agencies, including the FCA, have historically eschewed appeals to consider international competitiveness (from a regulatory cost burden point of view), and have focused much more strongly on the generation of good outcomes for consumers through better competition. Indeed, there was a deliberate policy choice not to give the FCA a competitiveness objective alongside its competition objective. The FCA’s nod to competitiveness concerns in this report is notable in light both of Brexit debates and also an increasing political discussion about protecting British industries. Nonetheless, the FCA, in line with its usual philosophical approach, concludes that, even if there are costs, the remedies package will make the industry more, not less competitive.
5. Looking beyond the FCA’s final report
The FCA is preparing to launch another market study focused on both direct to consumer and intermediated investment platforms (this was first mentioned in the FCA’s Business Plan 2017/18). That study will look at whether the platforms enable retail investors to access investment management products that offer value for money. A number of specific concerns about investment platforms were raised during the asset management market study, and we would expect these to be areas of focus on the investment platforms study: including the complexity of fees and charging information, and whether that information is provided in a way that is useful for consumers, the effect of potential conflicts of interest on the promotion of products, and barriers to switching. Given the importance of platforms in the value chain, we would expect this to be a major piece of work, and platforms will want to start considering their approach.
The FCA also notes in its report that charges can be less clear and transparent where investments are made through more complex fund structures such as hedge funds and private equity funds. While private equity funds were not part of the study, the FCA continues to consider whether any remedies should apply in this part of the sector (this was first raised in the interim report). The remedy consultations will therefore be relevant beyond the immediate asset manager sector. The FCA remains vague on whether additional steps could be taken with respect to hedge funds and private equity funds.