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 36%!
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 market.
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.
Disclaimer
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.
