The FCA has published its final report on competition in the asset management sector
The FCA has published its final report on competition in the asset management sector. The regulator has proposed a wide-ranging package of remedies, which if implemented will bring significant change to the sector. It has also stated it will launch a market study into investment platforms in July this year. This e-alert highlights the key issues raised by the FCA in its report and corresponding remedies.
Pricing and transparency
The FCA confirmed its interim findings that asset management firms do not typically compete on price, particularly for retail active asset management services, noting considerable price clustering and broadly stable pricing for the last 10 years. This, coupled with the average profit margins of 36%, led the regulator to conclude that competition is not working as effectively as it could be for investors. The FCA stated it had found that there is no clear relationship between the charges levied and the gross performance of retail active funds in the UK, and investors' awareness of charges is often poor. It also raised concerns over the use of appropriate benchmarking.
On pricing, the FCA supports the MiFID II and PRIIPS proposals for the disclosure of a single all-in fee due to come into force next year, but stopped short of more radical proposals such as requiring firms to assume balance sheet risk where, for instance, transaction costs exceeded the all-in fee. The MiFID II provisions will introduce new requirements for firms to provide aggregated and on-going information on all costs, including a single all-in-fee (see our previous article on the single-in-fee here).
The FCA is also consulting on requiring fund managers to return any risk-free box profits to the fund; facilitating transfers of investors to better share classes; and ending the payment of trail commission. In terms of transparency, the regulator will chair a working group to consider how to make fund objectives clearer for investors, and will consult on the use of consistent benchmarking.
Governance and accountability
The FCA stated it has concerns around the level of accountability to investors, given its overall findings on the market. Significantly, the FCA did not go as far as imposing a new fiduciary duty of care on asset managers. Instead, when it extends the Senior Managers and Certification Regime, which currently only applies to banks and insurers, to all authorised firms in 2018, it will introduce a new Prescribed Responsibility "to act in the best interests of investors including a consideration of value for money" to be allocated to the chair of the AFM board. The chair of the board would hence be liable if the FCA could prove that the individual did not take “reasonable steps” to prevent a breach.
A further proposal is the introduction of a minimum of two independent directors on all asset managers' governance boards, with 25% of boards to be independent, a proposal which forms a cultural shift towards a more US-style of governance in the industry.
The regulator stated it has concerns over investment consultants as it found the three largest providers had relatively high and stable market shares, with relatively low switching levels by investors. The FCA is now consulting on whether to refer the investment consultancy market to the competition regulator for a full market investigation (see here – responses due by 26 July 2017), and will make a decision on this in September. It is also recommending that the Treasury bring investment consultants into the FCA's regulatory scope.
The FCA announced it will launch a market study into investment platforms in July, as it has concerns over the market dominance of a few investment platforms and weak competition in the sector. The study will look at competition both in direct to consumer and intermediated platforms. The FCA may also decide to look at hedge funds and private equity funds after receiving various comments on those sectors during its work on the market study.
The FCA's package of wide-ranging proposals will necessitate significant changes across the asset management industry with various implementation challenges, not least, the recruitment of more independent non-executive directors. However, the FCA didn't make a CMA referral of the asset management industry (although may do for investment consultants); stepped back from more radical proposals in relation to the single all-in fee (conforming instead to the MiFID II / PRIIPS disclosure requirements); and resisted calls for a statutory fiduciary duty.
We note that the FCA has agreed with industry requests for staggered implementation, which does, at least, allow more time to engage with the consultation phase and further consider the effects of the proposals. To register comments on the proposals on governance, share class switching and box management click here (responses due by 28 September 2017). There will be a further consultation on the remaining proposals in December.
Partner, Head of Competition
Co-Head of Retail & Consumer Sector, Partner, Competition
Partner, Competition & Regulation