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FCA Report on asset management

The FCA has released its final report in its asset management market study. As with other recent market studies, the final report isn’t the end of the process, but sees the process break up into a range of separate workstreams – with this final report leading to a new market study, a likely market investigation, a consultation on regulatory remedies, and a process of developing and testing other disclosure-related remedies over the coming months. 

The FCA has identified:

  • weak price competition, particularly in actively managed funds, with price ‘clustering’, stable prices over time and high profitability;
  • no clear relationship between the charges for and gross performance of UK retail active funds, and some evidence of a negative relationship between net returns and charges – although these results are highly sensitive to the methodology employed;
  • investors have poor awareness of charges and limited focus on them;
  • concerns about how funds communicate their objectives, and how some active funds do not offer materially different exposure to passive funds;
  • a difference in outcomes for institutional investors – some get good value for money. Others, typically smaller, find it harder to negotiate with asset managers and rely more on investment consultants;
  • continued concerns about investment consulting, with high and stable market shares, low switching and a weak demand side, and conflicts of interest.

Remedies and next steps

The FCA is proposing a range of remedies and next steps. In broad terms there is now:

  • a set of concrete proposals for the reforms to the regimes for investor protection and governance (see below);
  • a clear direction of travel for reporting of objectives, performance, fees and charges, although the FCA is not yet at the stage of specific proposals;
  • a new market study into investment platforms, with terms of reference to be published shortly;
  • likely a new market investigation into investment consulting, starting later this year.

The specific proposals are:

Investor protection and governance remedies
  • requiring fund managers to assess whether value for money has been provided to investors, in relation to each authorised fund it runs, in line with detailed prescribed requirements. Managers must publish an annual report on the value for money assessment undertaken, covering whether charges and other payments from scheme property are considered reasonable, economies of scale issues, differences in charges across different share classes, weighing of level of charges and service received, what cost savings have not been passed to the fund, and steps being taken to address deficiencies;
  • making the duty to act in the best interests of investors a ‘Prescribed Responsibility’ for which senior managers will be personally responsible;
  • requiring that independent directors comprise at least a quarter of the board of a fund manager (with a minimum of two independent directors);
  • clarifying that a fund manager may carry out mandatory conversion of share classes, without investor consent, in certain circumstances (eg where new cheaper share classes were created for RDR);
  • requiring that, in some cases, box management profits must be passed on to relevant funds and enhanced disclosure is to be included in fund prospectuses; and
  • consulting on whether these remedies should also extend beyond authorised funds and apply to ‘unit-linked’ or ‘with-profits’ insurance products and investment trusts. These were not the focus of the market study.

The proposed new rules on value for money and governance are included in the FCA’s Collective Investment Schemes Sourcebook (COLL) and so are capable of enforcement by private investors as well as the FCA.

The FCA is consulting on these remedies, and has proposed draft text for COLL. Responses to the consultation are due on 28 September 2017.

Remedies to increase transparency and competitive pressure
  • Investment objectives: The FCA will chair a ‘working group’ to explore options to increase language used in, and clarity of, objectives. (It has moved away from prescribing the use of specific benchmarks or targets, but wants to prevent an asset manager that doesn’t set a benchmark in advance from then using one in marketing, and to require those that do set a benchmark in advance to use it consistently across regulatory and marketing materials.)
  • Reporting performance: The FCA will carry out further work on the presentation of past performance by fund managers Authorised Fund Managers – also with a view to requiring that these correspond to the objectives set for the fund in advance.
  • Communicating fees and charges: The FCA will launch a consultation later in 2017 on how fees and charges should be communicated to investors. They are testing which format of communication appears to be most effective. For institutional disclosure, the FCA wants industry and investor representatives to agree a standardised template for disclosure of costs and charges.
  • Recommending that the Department for Work and Pensions continue to review and remove barriers to pension scheme consolidation and pooling.

Retail intermediaries

The FCA will launch a new market study into platforms, likely to look at issues of transparency of charges and value for money, whether platforms make use of their buying power to benefit investors, dependency on third party rating firms, and whether there are concerns about increasing vertical integration. Model portfolios are also flagged as an issue of interest. The Terms of Reference will be released ‘shortly’.

Investment consultants

The FCA previously consulted on referring the investment consulting market to the Competition and Markets Authority for a full market investigation. The three major investment consultants then proposed undertakings in lieu of reference, offering commitments to disclose charges and performance in a standardised format, address conflicts of interest and strengthen their internal processes.

The FCA proposes to reject these undertakings, and continue with making the market investigation reference. It is consulting on this, with responses due on 26 July 2017. It expects to make a final decision in September 2017, which appears likely to be followed by a CMA market investigation (likely to take around 18 months) possibly followed by a remedies process.

The FCA also recommends that Treasury bring investment consultancy services within the regulatory perimeter.

Compliance and enforcement

The FCA appears to have identified lack of awareness of competition law in some areas of the sector, concerning commercial relationships and interactions between market participants. The final report just gives a ‘reminder’, rather than proposing any specific enforcement steps or issuing warnings. This may nonetheless suggest a somewhat increased exposure of the sector to antitrust enforcement risk, and the need to have sound antitrust compliance arrangements in place.

The final report has a relatively light focus on the FCA’s other enforcement powers. It refers to the FCA’s ability to take enforcement action against firms that have not complied with Principle 6 of the FCA’s Principles for Businesses (a firm must pay due regard to the interests of its customers and treat them fairly) in light of its findings relating to governance and investor protection (see 1. above). However, there are no indications that this market study has prompted the FCA to launch enforcement investigations against any firms. 

Overall assessment

It is clear that the FCA expects, and wishes to see, a meaningful reduction in fees and charges for authorised funds going forward. It clearly wishes to see a step change in the industry’s approach to “value for money” more generally. 

Once all the proposed changes are implemented, it seems reasonable to assume that the FCA will look to review the market in some form, to assess the results – perhaps in the form of thematic reviews. If the desired results do not materialise, the FCA may also focus on enforcement action, either under existing regulatory powers, or by looking at allegedly collusive interactions between competitors. The record from other retail-focused market studies and investigations (such as into retail banking and energy) is that remedies directed at spurring competition have not always had as great an impact as hoped, and it may be doubted whether the remedies here also amount to ‘silver bullet’ to deliver improved value for money. As a result, it seems entirely plausible that asset management will remain in the FCA’s focus in the coming years.

Further information

This case summary is part of the Allen & Overy Legal & Regulatory Risk Note, a quarterly publication.  For more information please contact Karen Birch –, or tel +44 20 3088 3710.

Legal and Regulatory Risk Note
United Kingdom