The Financial Conduct Authority (FCA) has now published its long
awaited Interim Report on its Asset Management Study.
Its headline conclusion at this stage is that there is weak
competition in a number of areas of the industry and this is having
a material impact on investor returns. The regulator has
provisionally proposed a number of remedies, with significant (but
perhaps unsurprising) emphasis on increased transparency, cost
certainty, asset manager accountability and switching. The FCA has
highlighted various factors which, in its view, evidence weak
competition and poor investor outcomes.
One such factor is the limited price competition in fund
charges. While there is some evidence of price competition in the
charges applicable to passive funds, this is not the case in
actively managed fund charges. Indeed it would appear that actively
managed fund charges have been broadly static for the last ten
years, with 'most' asset management firms believing that
lower charges would not win them new business.
The FCA also found evidence of considerable price clustering for
active equity funds and considers this consistent with firms'
'reluctance to undercut each other'. Such a reluctance (if
it exists) is not an encouraging sign, particularly when the FCA
then points out that asset management firms 'have consistently
earned substantial profits', with an average profit margin of
Another important issue is investor outcomes. The FCA's view
is that actively managed investments do not outperform their
benchmark after costs, with retail funds underperforming their
benchmarks after costs. It found that there is no clear
relationship between price and performance – just because a
fund is more expensive does not mean that it will perform better
than other funds.
This in turn links to investor expectations and the extent to
which an asset manager's objectives, outcomes and charges are
transparent and communicated to investors. This is another area on
which the FCA has expressed concern.
Two further points are worth noting at this stage. Firstly, the
FCA is proposing further work in relation to platforms and advisers
in retail distribution and the value which they provide. Secondly,
the FCA has also noted its concerns about the role of investment
consultants and potential conflicts of interest. It is therefore
considering making a market investigation reference to the
Competition and Market Authority on the investment consultancy
In terms of the proposed remedies, the main themes are
transparency, cost certainty and improving investor outcomes. The
FCA has, for instance, proposed introducing an 'all-in fee'
when quoting charges with clearer communication of charges. It is
also proposed that the asset manager's duty to investors would
be strengthened with a greater emphasis on holding asset managers
accountable for how they deliver value for money, whilst
implementing measures to help retail investors identify the best
fund for them.
Stakeholders will now have until 20th February 2017
to comment on the proposed remedies.
The material contained in this article is of the nature of
general comment only and does not give advice on any particular
matter. Recipients should not act on the basis of the information
in this e-update without taking appropriate professional advice
upon their own particular circumstances.
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