FCA Asset Management Market Study: Interim Report

Of relevance to:
The asset management sector

In November 2015 the FCA published its terms of reference in relation to the intention to undertake a market study into asset management – see Regulatory Roundup 70 “Asset Management: Under the Microscope”.

The intention to conduct such a market study was set out in the FCA’s Business Plan for 2015/16 with the terms of reference having identified three main topics to be explored:

  • how asset managers compete to deliver value;
  • whether asset managers are willing and able to control costs and quality along the value chain; and
  • the effect of investment consultants and other advisers on competition for institutional management.

The FCA has published an interim report on the market study taking in various areas including the impact of intermediaries and fund governance bodies on competition between asset managers and the control of costs and performance. The latter is often an emotional subject and there are probably no surprises in learning that:

  • active funds, on average, underperformed benchmarks after charges;
  • institutional active products, on average, provided no significant return over the benchmark after charges;
  • there is little evidence of persistence in outperformance, but there is some evidence of persistence of relatively poor performance;
  • annual management charge ‘price clustering’ for active equity funds around the 1% and 0.75% region.

The study also looked at the role of investment consultants.
Amongst the findings is that, on average, investment consultants are not able to identify managers that offer better returns to investors, nor do they appear to drive significant price competition between asset managers.

The report also comments that there is a strong culture of gifts and hospitality in the investment consultancy sector, with a review by the FCA showing “a statistically significant positive relationship between the number of high ratings given to an asset manager and the number of gifts and hospitality items recorded by the consultants in a year” (the FCA reviewed the logs for 2015). Whilst the FCA acknowledges that there may be other factors to consider, at this stage the regulator is not ruling out the possibility that consultants may well have been influenced by the acceptance of gifts and hospitality and it is the intention to examine this area more fully.

The interim report concludes with a variety of proposed remedies including:

  • recommending that HM Treasury considers bringing the provision of ‘institutional investment advice’ (as in strategic asset allocation and manager selection) within the regulatory perimeter;
  • introducing an all-in fee so that investors in funds can easily see what is being taken from the fund;
  • helping retail investors identify the best fund for them by providing tools to identify persistent underperformance;
  • requiring increased transparency and standardisation of costs and charges information for institutional investors;
  • consulting on whether to make a market investigation reference to the Competition and Markets Authority on the institutional investment advice market.

The FCA invites comments (to be sent to: assetmanagementmarketstudy@fca.org.uk) on the report by 20 February 2017. The final report will be published later that year setting out the FCA’s findings and conclusions – which may include a consultation on any proposed actions (“we will continue to develop our thinking on whether we should intervene in this market, and what interventions would be most effective …”).