UK: FCA Shakes-Up Investment Sector With Stricter Rules

Last Updated: 10 July 2017
Article by Jake McQuitty and Noline Matemera

On 28 June 2017, the FCA published the final findings of its market study into the £7trn UK asset management sector (the second largest in the world) and announced a package of remedies it will take forward to address the concerns identified in its interim report into the sector of November 2016.

The remedies are comprehensive, covering asset managers as well as tough proposals for intermediaries.  The FCA says they are designed to "make competition work better and help both retail and institutional investors to make their money work well for them".

For funds, these remedies will involve:

  • significant reviews of existing charging and pricing structures, which are often highly complex with diverse historic or legacy product chains, to bring them into line with the new requirements;
  • meaningful changes to the way funds share information and communicate with investors; and
  • wholesale changes to internal governance and controls to satisfy the FCA's standards. 

Intermediaries (investment consultants) are also singled out as representing particular risk and in need of reform, with opaque fee arrangements and potentially material conflicts of interest affecting the quality of advice given to funds.

Highlights from the FCA's report

The final report confirms the findings set out in the interim report published last year. This found that price competition is weak in a number of areas of the industry, particularly in the retails funds sector. Despite a large number of firms operating in the market, the FCA's analysis found evidence of sustained, high profits over a number of years. The FCA also found that investors are not always clear about the objectives of funds, and fund performance is not always reported against an appropriate benchmark. Finally, the FCA found concerns about the way the investment consultant market operates.

The FCA received responses to the interim report from industry, investor representatives and others which the FCA says has helped it develop a package of remedies.  These fall into three areas.

To help provide protection for investors who are not well placed to find better value for money, the FCA proposes to:

  • strengthen the duty on asset managers to act in the best interests of investors and use the Senior Managers Regime to bring individual focus and accountability to this;
  • require fund managers to appoint a minimum of two independent directors to their boards;
  • introduce technical changes to improve fairness around the management of share classes and the way in which fund managers profit from investors switching, buying and selling their funds.

To drive competitive pressure on asset managers, the FCA will:

  • support the disclosure of a single, all-in-fee to investors;
  • support the consistent and standardised template for disclosure of costs and charges to institutional investors developed by the industry and investor representatives;
  • recommend that the DWP remove barriers to pension scheme consolidation and pooling;
  • chair a working group to focus on how to make fund objectives more useful and consult on how benchmarks are used and performance reported.

To help improve the effectiveness of intermediaries, the FCA will:

  • launch a market study on competition in the investment platform market;
  • seek views on rejecting the undertakings in lieu of a market investigation reference regarding the institutional advice market to the Competition and Markets Authority;
  • recommend that HM Treasury considers bringing investment consultants into the FCA's regulatory perimeter.

The FCA proposes to implement these remedies in a number of stages, and has published with its report a timetable for implementation.  Some stages are already being taken forward including a consultation paper for the industry to respond to, focusing on the remedies related to governance and technical changes to promote fairness for investors.   Other remedies will require further work in light of ongoing work such as implementation of MiFID II and the output of certain working groups.  The industry should therefore expect further consultations throughout the rest of this year and into 2018.

Whilst it has been a long time coming, with some hiccups along the way (including the notorious leak in March 2015 of the FCA's thematic review of the sector), the FCA has fired the starting gun and we expect it will take action against those who remain on the starting blocks – funds now need to proactively and meaningfully respond to the FCA's proposals, particularly around pricing and governance.

Next Steps

The FCA's proposed remedies will undoubtedly have far-reaching consequences for the UK's asset management sector. Firms and investment consultants operating in this sector will need to give urgent thought to the implications of the Report and its proposed remedies to their business model and operations.

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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