On 28 June 2017, the FCA published its highly anticipated final findings of its Asset Management Market Study ("Final Report"), which can be accessed here. This follows the release of its interim report in November 2016 and the subsequent intensive consultation process with industry which involved 153 submissions.

Key Findings of the Final Report

The Final Report broadly confirms the key findings set out in the interim report, outlining:

  • Lack of Price Competition: The FCA considers that price competition remains weak in a number of areas of the asset management industry. In its additional work following the interim report, the FCA found that the pricing of segregated mandates typically offered to larger institutional investors tended to fall as the size of the mandate increases, but that such lower prices were not available for equivalently sized retail funds.

  • Variable Performance: The FCA found substantial variation in performance and that, on average, both actively managed and passively managed funds did not outperform their own benchmarks after fees. While the FCA recognised that some investors may choose to invest in funds with higher charges in the expectation of achieving higher future returns, in its further analysis, the FCA found that there is no clear relationship between such charges and the gross performance of retail active funds in the UK.

  • Clarity of objectives and charges: The FCA remains concerned about how asset managers communicate their objectives to clients and that investors' awareness and focus on charges is mixed and often poor.

  • Investment Consulting and other intermediaries: The FCA remains concerned about the investment consulting market with there being relatively high and stable market shares for the three largest providers, a weak demand side, relatively low switching levels and conflicts of interest. The FCA found that retail investors do not benefit from economies of scale when pooling their money together through direct-to-consumer platforms and noted that it has concerns about the value retail intermediaries provide.

FCA's Proposed Remedies

The FCA has put forward a series of proposed remedies that it intends to dovetail with other forthcoming legislative change (such as MiFID II, PRIIPs and the Senior Managers and Certification Regime). In summary, the FCA's proposed remedies can be categorised as follows:

1. Increase investor protection

  • Strengthen the duty on fund managers to act in the best interests of investors and use the Senior Managers and Certification Regime to bring individual focus and accountability, in particular by introducing a new Prescribed Responsibility to act in the best interests of investors including a consideration of value for money

  • Consult on proposals to introduce a minimum level of independence in governance structures

  • Consult on requiring fund managers to return any risk-free box profits to the fund and disclose box management practices to investors

  • Introduce technical changes to improve fairness around the management of share classes and the way in which fund managers profit from investors buying and selling their funds

2. Drive competitive pressure on asset managers

  • Support the disclosure of a single, all-in-fee to investors

  • Support consistent and standardised disclosure of costs and charges to institutional investors

  • Recommend that the Department for Work and Pensions remove barriers to pension scheme consolidation and pooling

  • Chair a working group to focus on improving the usefulness of fund objectives and consult on how benchmarks are used and performance is presented

3. Improve the effectiveness of intermediaries

  • Commence a market study into investment platforms

  • Seek views from interested parties on the FCA's proposal to reject the undertakings provided by the three largest investment consultants (which were provided in lieu of a market investigation reference to the Competition and Markets Authority regarding the institutional advice market)

  • Recommend that HM Treasury considers bringing investment consultants into the FCA’s regulatory perimeter

Next Steps

The FCA has indicated that implementation of the remedies will take place in a number of stages, with some proposed remedies requiring more consultation than others. These matters are central to the UK asset management industry and will be of keen interest to all in the industry. We would encourage readers to actively participate in the consultation process; responses to the first consultation relating to governance, box management and share class switching are due by 28 September 2017. The FCA also expects to make a final decision on whether to make a market investigation reference regarding investment consultancy services in September 2017.