In this chapter of our Annual Insurance Review 2018, we look at the main developments in 2017 and expected issues in 2018 for financial institutions.
Key developments in 2017
There was marked shift in the Financial Conduct Authority (FCA)’s focus away from the banking sector to fund/asset managers with the publication in June 2017 of its final report, following a year-long market study of the asset management industry.
The FCA has made three core findings, which will be the pathfinders for the package of industry measures previewed in the report. These start with the FCA’s conclusion that the asset management industry does not provide good value for money to investors. It cites management price clustering, the industry’s high profitability, lack of competition and, most significantly, that both the active and passive fund sectors do not on average outperform their benchmarks, after management costs.
The second conclusion is that the reporting of investment strategies and fund objectives is inadequate. It cites the FCA’s view that there is “around £109bn in ‘active funds’ that closely mirror the market … but are charging ‘active’ prices.’’ It also points to concerns as to the accuracy of reporting on performance and the use of potentially misleading target benchmarks, in particular in the absolute return fund sector.
The third core theme is the FCA’s conclusion that the industry’s reporting of management costs provides insufficient visibility on the underlying costs and charges.
The package of measures is designed to maintain the industry’s competitiveness in the global market.However, a number of the conclusions in the report, in particular relating to the funds that are said to track their indices (a suggestion based apparently on a single uninformative metric), are in our view simplistic and open to challenge.
The conclusion on value for money also does not reflect the strategic advantages the asset management industry provides, including diversification of exposures, asset class spread, and access to thematic and geographical funds.
What to look out for in 2018
The direction of travel for asset managers is clear from the measures previewed in the report. These include: imposing a general duty on fund managers to demonstrate that they are acting in the best interests of investors; to report on the value for money they provide, to identify the remedial measures where sub-standard value for money exists; with personal manager responsibility under the Senior Managers and Certification Regime to comply with these duties .
For performance reporting, the FCA will consult in 2018 on reporting of investment strategies and fund objectives, how funds’ performance is measured, and rationalising the target benchmarks used. For management costs, there is likely to be a standard template presentation of an all-in-one fee, broken down to provide granular transparency on costs and charges.
In the future, the greater transparency and clarity on each of these operational factors should, in our view,be constructive for the industry and its risk profile.
The challenge for the asset management industry in 2018 will be to find the best way of complying with these measures and demonstrating that it is delivering value for money (and rectifying value-for-money issues) but without signposting potential issues for investors in relation to past activity.
It will need to work with the FCA to formulate its investment reports to provide the required level of clarity on investment strategies, fund objectives and performance targets – and in this process to neutralise the sweeping criticisms of the industry that can be read into the FCA’s conclusions in the report. For example,the commentary directed to the invested funds that track their indices, a matter that has been publicly identified as a potential mis-selling issue for a number of fund managers.