European Union: FCA Publishes Its Final Report On The Asset Management Market Study And Its Accompanying Consultation Paper CP17/18 On Implementing The Remedies In Its Handbook (Investment Management Brief: 29 June 2017)

Last Updated: 29 June 2017
Article by David Heffron, Elizabeth Budd, Michael Lewis and Ian Warner


FCA publishes its Final Report on the Asset Management Market Study and its accompanying consultation paper CP17/18 on implementing the remedies in its Handbook

The FCA's final report on the Asset Management Market Study [28.06.17] contains the FCA's findings, proposed remedies package and next steps. The proposed remedies are to be read in conjunction with The FCA's Consultation on implementing asset management market study remedies and changes to Handbook (CP17/18). Given the scale of the UK's asset management industry and its vital role for millions of savers, investors and pensioners, the FCA launched a market study (November 2015) to ensure this market works well and its products offer value for money. The FCA's final findings (which are broadly in line with those in the interim report in November 2016) include the following:

  • Price competition: weak in some areas including retail active asset management services. Segregated mandates usually sold to larger institutional investors show prices reduce as the mandate size increases but such lower prices do not appear to be available for equivalent retail fund sizes.

    There is "considerable price clustering" in the asset management charge for retail funds, active charges have remained broadly stable over the last decade and there are high profit margins (averaging 36% in the firms sampled). Firms do not usually lower prices to win new mandates;
  • Performance: varies across asset classes and within them. On average neither actively managed or passively managed funds outperformed their own benchmark after fees. There is no clear relationship between retail active funds' charges and gross performance in the UK. Some evidence to show investors pay higher prices for worse performing active funds and investors find it difficult to identify outperforming funds and interpret and compare past performance information. Although past performance is widely held not to be a good guide to the future, even if investors identify funds that had performed well there is little evidence of persistent outperformance - although there is evidence for persistent underperformance. Underperforming funds often close or merge with better performing funds but this takes time and while improving performance for investors in the underperforming funds on average slightly reduces performance of the fund with which it merged;
  • Clarity concerns: these are around asset managers' communication of their objectives to clients and their usefulness to retail investors. Many active funds offer similar exposure to passive funds but some charged "significantly more". The FCA considers value for money for asset management products is "some form of risk adjusted net return" based on performance, risk and price paid: but investor awareness and consideration of charges is "mixed and often poor";
  • Investment consulting and other intermediaries: generally it is larger institutions that negotiate effectively obtaining value for money but there is a "long tail of smaller institutional investors" (typically pension funds) for whom negotiating is harder and who rely on investment consultants. Retail investors seem not to benefit from economies of scale when their investments are pooled through direct-to-consumer platforms and the FCA has concerns about the value provided by retail intermediaries.

To address the above, improve competition and protect those least able to engage with their asset manager the FCA proposes remedies across three areas:

  1. Remedies to protect investors who are not well placed to find better value for money by:

    • strengthening the fund manager's duty to act in the best interests of investors (includes clarification of the FCA's expectations regarding value for money and governance reforms which, alongside the Senior Managers and Certification Regime, will hold asset managers to greater account, including by introducing at least two independent directors to the board of fund managers);
    • fund managers returning box profits derived without taking market risk to the fund and disclosing box-management practices;
    • easier switching for retail investors to cheaper share classes.
  2. Remedies to drive competitive pressure on asset managers by:

    • disclosing a single all-in fee to investors;
    • standardising costs and charges disclosure to institutional investors (the FCA recommends industry and investor representatives agree a standardised costs and charges template with an independent person convening a relevant stakeholder group to do so); *
    • chairing a working group on making fund managers' objectives clearer and more useful to investors and consulting on the use of benchmarks and past performance reporting being shown against the most ambitious target held out to investors
    • recommending the Department for Work and Pensions (DWP) removes barriers to pension scheme consolidation and pooling. *
  3. Proposals to improve intermediaries' effectiveness by:

    • proposing to reject the undertakings in lieu (UIL) of the competition reference to the Competition and Markets Authority (CMA) and seeking views from interested parties on the proposal;
    • recommending the Treasury considers bringing investment consultants inside the regulatory perimeter (subject to the outcome of the provisional market investigation reference to the CMA); * and
    • a market study on competition in the investment platforms market for which the FCA's Terms of Reference will be released shortly. This market study will explore, among other things how 'direct to consumer' and intermediated investment platforms compete to win new and retain existing customers and whether platforms enable retail investors to access investment products that offer value for money. *

Of these proposed remedies those with an asterisk require no further consultation. There is a second group - namely the FCA's investor protection proposals at 1 above on which the FCA is now consulting (see CP17/18) and its proposed rejection of the UIL. The third group (namely: costs and charges disclosure to retail investors, benchmarks and performance reporting and the convening of a working group for improving the clarity of fund objectives and consulting on any resulting rule changes) are those matters on which, although the final report contains the FCA's initial view, it will consult later.

The FCA also expects to publish its decision on whether to refer the investment consultancy services market to the CMA by September 2017. It is seeking views by 26 July 2017 on its proposal to reject the UIL that were offered. The investigation period for a CMA market investigation is 18 months (in some cases, this can be extended by 6 months), which at times would be intensive. The CMA often requires vast amounts of information to be provided under very tight deadlines, which can also involve third party companies that are not at the heart of the market investigation. Final remedies in a market investigation can be both behavioural and/or structural.

The closing date for FCA to receive responses to the matters under consultation in CP17/18 is 28 September 2017. Read more here.

FCA reminds firms to submit MiFID II applications for VOP and authorisations

If a firm needs to change its regulatory permissions because of MiFID II the FCA reminded firms [19.06.17] to submit their complete applications now. The FCA cannot guarantee applications that are only complete after 3 July 2017 will be determined by 3 January 2018 when MiFID II takes effect. The FCA points out most applications are incomplete when submitted to them. So the FCA can identify as soon as possible if any further information is needed to complete the application firms should now make sure that their applications are submitted, as a matter of urgency. The FCA page also links to their MiFID II Application and Notification User Guide which may assist firms affected by MiFID II to understand the steps that they need to take. The FCA reminds firms of the implications of acting outside the scope of their permissions and of carrying on regulated activities by way of business in the UK without being authorised or exempt.

FCA's Live & Local regional programme of retail investment events including on assessing suitability

The FCA announced [15.06.17] its events across the UK for regulated investment firms running from July to December 2017. These include, for retail investment firms, interactive workshop on assessing suitability in light of the FCA's Assessing Suitability Review published in May, previously reported on in the 1 June 2017 Investment Management Brief here, Q&A roundtables with the FCA and industry panellists and 45 minute one-on-one surgeries with a supervisor. Further dates and locations will be announced. Online booking is required for all sessions. To hear about forthcoming events the FCA has provided a sign up link here and includes more information in their June 2017 Regulation Round-up.

FCA issues Consultation Paper on the EU Benchmarks Regulation

The FCA's consultation paper CP17/17 [22.06.17] Handbook changes to reflect the application of the EU benchmarks regulation contains the FCA's proposals to align its Handbook with the directly-applicable EU Benchmarks Regulation (BMR) applicable from 1 January 2018. Although the consultation paper is most relevant to benchmark administrators and those firms that are already supervised contributing data to them, the consultation paper's summary will be relevant also to those already supervised using benchmarks in financial instruments or in certain financial contracts or in relation to investment funds. It proposes removing Handbook rules superseded by the BMR although these continue to apply to administrators of and submitters to those benchmarks that the FCA already regulates until their administrators are authorised or registered under the BRM. The consultation paper contains a flow chart to assist firms work out whether they should be authorised or registered (the two methods in the BMR for seeking permission to issue benchmarks). The FCA confirmed some domestic rules outside the BMR will be retained. Among the FCA's proposals are governance and financial resources requirements for administrators of the most significant benchmarks (that the Commission designates as 'critical') and that administrators forward to the FCA all reports they receive from contributors about suspected benchmark manipulation and FCA supervised contributors report suspicions of manipulation directly to the FCA. The FCA asks for comments by 22 August 2017, the drafts of the application forms for authorisation and registration will be available on 6 July 2017 and the FCA asks for comments on those by 6 August 2017.


Commission's initiative for reducing barriers in cross-border fund distribution

As part of its Capital Markets Union (CMU) Action Plan the Commission launched an inception impact assessment roadmap [21.06.17] on reducing barriers to cross-border distribution of investment funds. This follows a range of initiatives including the CMU Green Paper and the Commission's consultation on barriers to cross-border fund distribution (June to October 2016). Using marketing passports in the UCITS and AIFM Directives funds are being distributed across border in the EU, but much of the market remains on national lines. Funds marketed cross-border represent approximately 40% of total AuM and 57% of all EU UCITS and AIFM directive funds. Of these - based on AuM - a quarter are "round-trip" funds – marketed cross-border to just one country (usually where the asset manager is located). The consultation responses identified a number of regulatory barriers as well as distribution models, local tax regimes and investor home-country bias causing a fragmented market. Regulatory barriers generally arose from the different ways Member States implemented the marketing passport. A combination of barriers including different marketing requirements, need for local agents, different/non-transparent regulatory fees, lack of support for online and direct distributions and, generally, lack of transparency of national requirements - rather than any particular one of these barriers - were found to impede asset managers from exploiting the marketing passports fully. The initiative will therefore seek to address problems for funds using the marketing passport as provided for in existing EU rules. EU level action will be likely, as to address some of the regulatory barriers may involve amending EU legislation as consultation responses clearly show national implementation of UCITS and AIFMD passports resulted in different interpretation of the passport requirements under these directives.

Securities and Markets Stakeholder Group report on product intervention under MiFIR

The SMSG issued its own initiative report on product intervention under MiFIR [16.06.17] considering the scope of MiFIR's product intervention powers. ESMA in its opinion on the Impact of the Exclusion of Fund Management companies from the scope of the MiFIR Intervention Powers [12.01.17] states the powers of product intervention it and the National Competent Authorities (NCAs) have under MiFIR apply to products marketed and distributed by credit institutions and investment firms (so are not applicable to fund management companies directly distributing units in funds). Accordingly, there is a risk of arbitrage between MiFID firms and fund management companies. The SMSG report proposes that MiFIR could allow for a wider interpretation permitting the application of product intervention rules to all financial institutions marketing or distributing products that the product intervention measure targets. To resolve the situation the SMSG seeks ESMA's explicit confirmation of its own and the NCAs' product intervention powers regarding all possible distributors.

Securities and Markets Stakeholder Group securities lending advice to ESMA for UCITS Guidelines compliance

The Securities and Markets Stakeholder Group (SMSG) issued advice to ESMA [12.06.17] on securities lending as an efficient portfolio management technique. It comments on Section X (Efficient Portfolio Management Techniques) of ESMA's "Guidelines for competent authorities and UCITS management companies" in respect of which, in the latter half of 2017, ESMA proposes to review compliance. The SMSG flags areas for ESMA to consider relating to supervisory convergence and to highlight those aspects within the Guidelines it considers may contribute to a competitive disadvantage for UCITS that carry on securities lending. The SMSG aims to facilitate consultation between ESMA, its board and stakeholders on areas for which ESMA is responsible.

ESMA's annual report for 2016 is published

ESMA has published its Annual Report 2016 [14.06.17] including sections on its Mission and Objectives and achievements vis a vis its 2016 objectives. It makes some points in relation to asset management including:

  • ESMA is to do stress test work in the asset management sector in 2017;
  • ESMA cites its supervisory convergence work in the asset management sector as being a significant part of its Capital Markets Union (CMU) project;
  • to increase investor protection in the asset management sector ESMA is working on increasing costs transparency both for fees and performance, examples are the PRIIPs KID (enabling investors to compare investments) and rules in MIFID II (unbundling research from management fees);
  • ESMA refers to its article in TRV2/16 on using, measuring, regulatory treatments for and financial stability risks of synthetic leverage in relation to investment funds;
  • ESMA in the report's Key Deliveries and Successes section, includes its investigation into closet indexing (asset managers claiming to manage funds actively that in fact stay close to a benchmark) – and charging management fees equivalent to those that are actively managing – so-called "!closet indexing" or "index hugging". ESMA published the results of its work and its views (ESMA/2016/165) included the importance of fund managers adhering to commitments in disclosure documentation and to anticipate regulatory action for inaccurate disclosures. ESMA notes this is particularly relevant to UCITS as they can be sold to retail investors in the EU using the passport and have the reputation for being strongly regulated.

EBA public hearing on progress developing prudential regime for MiFID investment firms

The European Banking Authority (EBA) is holding a public hearing on 3 July 2017 at 2pm in Canary Wharf on progress to date on a prudential regime for MiFID investment firms. It will present preliminary results from the data it gathered and follow up on the 4th November 2016 Discussion Paper to gain further feedback for its response to the Commission's call for advice. The EBA plans to submit its final advice in September 2017.


The FCA has updated its cyber resilience page [15.06.17] with a one-page guide on the foundations of good cyber-security for firms – particularly smaller businesses - including contact details for reporting a cyber incident. Read more on the FCA's approach to cyber resilience in the 1 June 2017 edition of the Investment Management Brief here.

The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 come into force

The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (Regulations) came into force on 26 June 2017 replacing the Money Laundering Regulations 2007 and the Transfer of Funds (Information on the Payer) Regulations 2007 and implementing, in part, the Fourth Money Laundering Directive and the Funds Transfer Regulation 2015/847/EU on information to accompany the transfer of funds. The Regulations include provisions for: relevant persons to whom the regulations apply to carry out risk assessments to identify and assess risks of money laundering and terrorist financing and to have policies, controls and procedures to mitigate money laundering and terrorist financing risks the risk assessments identify; customer due diligence requirements; reliance and record keeping requirements; beneficial ownership information applicable to UK bodies corporate and trustees; provisions for supervisory authorities and for their registration, suspension and cancellation of registration of relevant persons in certain circumstances; information and investigation powers for supervisory authorities; enforcement; and appeal provisions. The Joint Money Laundering Steering Group has amended and published final, revised Guidance [23.06.17] aligned with the Regulations but flags that other wider issues will be addressed later in 2017. The FCA has consulted on the use of its powers under the Regulations see the Investment Management Brief for 15 June 2017 here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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