MS15/ 2.2 - Asset management market study interim report

Posted: 1st December 2016

Background

On 18th November, the FCA published the interim findings of its asset management market study.

The UK has the world’s second largest asset management industry, managing just under £7 trillion of assets. £1 trillion is managed for UK retail investors, and £3 trillion on behalf of UK pension funds and other institutional investors. The interim findings have indicated weak price competition in a number of areas across the industry.

The study launched in November 2015 to assess whether competition is working effectively in the asset management industry. It took into consideration whether investors receive good value for money when making investment decisions.

Andrew Bailey, Chief Executive of the FCA, said:

“In today's world of persistently low interest rates, it is vital that we do everything possible to enable people to accumulate and earn a return on their savings which can meet their lifetime needs.  To achieve this, we need to ensure that competition in asset management works effectively to minimise the cost of investment.”

In the report, the FCA compares the net return on a £20,000 investment over 20 years to highlight the impact of charges. The example found that a typical passively-managed fund could yield a return of up to 44% over and above that of an actively managed fund.

Over time, passive funds have seen a decrease in charges through active competition in the market. However, managed funds have not seen a decline in charges in over a decade.

Key Points from MS15 / 2.2

The findings from the interim report include:

• There is limited price competition for actively managed funds, meaning that investors often pay high charges
• There is stronger competition on price for passively managed funds, though the FCA did find some examples of poor value for money in this segment
• Despite a large number of firms operating in the market, the sector has enjoyed sustained, high profits over a number of years with significant price clustering

The FCA has proposed a number of significant remedies which include:

• Increased responsibility on asset managers to act in the best interest of investors
• The introduction of an ‘all-in-fee’ approach to increase price transparency so that investors can easily identify what is being taken from the fund
• Exploring with the government the potential benefits of increased pooling of pension scheme assets
• Simplifying the process for retail investors to move into better value share classes
• Introducing measures to assist retail investors to identify which fund is right for them, such as requiring asset managers to be clear about the objectives of the fund, clarifying and strengthening the use of benchmarks and providing tools for investors to identify persistent underperformance
• The recommendation that HM Treasury brings the provision of institutional investment advice within the FCA’s regulatory jurisdiction
• The FCA is also consulting on whether to recommend the Competition and Markets Authority undertakes an investigation of the institutional investment advice market

Although the study is focused on competition, many of the proposed remedies also take into account investor protection. This may mean implications for firms in both areas in the future.

The regulator concludes that there should be a more competitive market for investors so that they can clearly identify the most suitable investment product at a reasonable price.

Regulatory next steps

The deadline for firms’ responses to the interim report is 20th February 2017.

The final report, along with the proposed amendments to the rules, is expected to be published in Q2 of 2017.

Considerations for firms

Firms will be seeking to establish whether the findings and proposed remedies will have an impact on their business models.

Ahead of embedding any requirements from the regulator, firms should consider reviewing whether they are delivering consistently good outcomes for clients in terms of:

• Value for money
• Transparency of charges
• The standard and clarity of customer communications

The FCA also suggested that they may launch another market study on the retail distribution of funds and the impact that financial advisers and platforms have on value for money.

Read the interim report in full.