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Discussing the Financial Conduct Authority’s (FCA’s) interim report, Kirstene Baillie, partner and head of Fieldfisher’s financial services and funds group, says although it is still early days the regulator is clearly determined that it must be able to assess whether asset managers compete to deliver value for money.
FCA published interim findings of its asset management market study.
The FCA published the interim findings of its asset management market study, which was launched in November 2015 to assess the effectiveness of competition in the sector. The FCA has found that price competition is weak in a number of areas of the industry, and has proposed a significant package of remedies in order to improve competition and protect those least able to engage actively with their asset manager. The FCA is now seeking feedback on its interim findings, its proposed remedies, and its intention to refer the investment consultancy sector to the Competition and Markets Authority (CMA).
The scope of the study is wide ranging and this is only an interim report, so it is early days.
The regulator’s key objectives come through clearly though—and should be welcomed and supported:
The FCA is determined that it must be able to assess whether asset managers compete to deliver value for money.
At this stage the FCA is putting forward a number of possible alternative remedies for various of the identified issues.
The impact of the package will depend on which of the options mooted are followed through: the more radical the package of remedies the FCA decides to pursue, the greater the potential impact on fund managers.
Should some of the more radical proposals be followed through, there will be a risk of overregulating a product. In some instances, the FCA seem to be taking a paternalistic view or perhaps seeking to stand in the shoes of the investors and do part of the work for investors, particularly in the retail market where investors cannot argue their own case. This may have a negative impact because it will deter asset managers from independently developing what they think are the ideal products to offer in response to customer and market demands, which should be one of their core roles and their responsibility, albeit within a sensible regulatory framework.
Until we know the shape of the proposed regulatory framework changes, it is difficult to know whether or how consumers may benefit.
Consumers could benefit if the remedies which are proposed and enacted result in them having access to better information so that they can better understand the investment products concerned, and so be in a better position to make informed investment decisions.
To take one example—note the comment that only 25% of non-advised retail investors reported looking at a key investor information document when choosing a fund. Presenting information, whether on charges or any other topic, in a form that is easy to understand could partially solve the problems. There is also, however, a need to ensure that information is communicated effectively, such that they review it.
Whether consumers might benefit from some of the more radical proposals, such as a fully independent UK fund governance structure, or a single all-in-charge which would include all charges taken from a fund with no option to overspend, is less clear at this stage. These ideas could introduce some serious gold plating for UK funds. If some of these radical solutions are selected, it may be that such expected benefits would not in fact be delivered to UK consumers because there may be greater promotion of Luxembourg or Dublin funds into the UK which will not offer such similar protections.
Certainly competition is at the core of the asset management market study. Aside from the interim report, it is important to review and respond on the provisional decision document for a potential market investigation reference (MIR), which is published alongside the interim report.
The draft terms of reference are not quite so wide however as the question may imply. For this purpose, the FCA refers to investment advisory services comprising advice given to institutional investors on asset allocation and manager selection, and advice given to employers in relation to pension schemes for the benefit of their employees.
The focus is on the role of investment consultants, as explained in Chapter 8 and Annex 1 of the interim report. There is particular concentration in this sector, with three firms taking an estimated 60% of the market share. Also there are particular trends evident in this area which likely require attention, notably incentivisation to recommend their own products, and the risk that they over recommend complex investment strategies which clients find hard to assess—with, for example, an increase in the number of schemes adopting liability-driven investment (LDI) strategies or using hedge fund products.
We will have to wait and see how the industry responds to the MIR draft decision and whether they agree with the FCA that there is ‘a weak demand side and misaligned incentives’ which require an in-depth examination of the sector. If followed through, there could be serious ramifications for the investment consulting community.
Investment advice to institutions is within the scope of the FCA’s current regulatory perimeter. The black hole, which is currently unregulated, concerns strategic investment advice provided by investment consultants which helps determine a pension scheme’s asset allocation.
Having seen the issues both from the asset managers and pension scheme trustees’ different perspectives, I can sympathise with the FCA’s wish to take some action.
If strategic asset allocation advice comes within the scope of FCA regulated activities, and so within the scope of FCA supervision, this should certainly help alleviate current concerns. The FCA though seem clear that, while extending the scope of regulation may go some way to address concerns, this alone would not be sufficient, and so the MIR is also necessary.
In the short term, asset managers should comment to the FCA in response to the questions raised both in the interim report—MS15/2.2—and, should they wish, on the potential MIR. Such views should be provided to the FCA before 20 February 2017.
In the short to medium term, asset managers could, aside from waiting for conclusions in the final report, take various items of ‘self-help’.
Many asset managers have already taken this option—taking the initiative by looking at various ways of dealing with the issues about which the FCA is concerned. Many are working hard on making communications clearer to investors (with workstreams ranging from improving website terms, to reviewing terms and conditions, to working with industry groups such as the Investment Association on market-led solutions, particularly on the disclosure of costs and charges); managing internal issues, whether on outsourcings or costs; and looking hard at old regulatory problems, whether on commission terms or box profits.
Asset managers could take the opportunity presented by this interim report to consider how to make further progress in various areas covered in the interim report on their own initiative.
Overall, it is important that the 2017 final report will offer proposals for a proportionate, practical and cost-effective approach so that the UK asset managers and their UK fund products are not regulated. A carefully formulated and coherent package of some of the more moderate proposals may be the preferable way forward.
Kirstene is a financial services specialist and advises leading players in the financial services market on legal and regulatory developments—particularly asset managers with regard to new funds, products and services. With over 25 years’ experience in this sector, Kirstene is best known for her advice on regulated funds, but her practice extends over a wide range of retail, institutional and alternative investment funds, and insurance and pension products. Kirstene is the immediate past co-chair of the Investment Funds Committee of the International Bar Association and she is a member of the FCA’s Legal Experts Group regarding implementation of the Alternative Investment Fund Managers Directive.
Interviewed by Kate Beaumont.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.
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