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UK fund management industry under the regulatory spotlight

The Financial Conduct Authority releases final findings of asset management market study

The Financial Conduct Authority (FCA) has made a series of recommendations aimed at improving investor protection and transparency in the United Kingdom following its asset management market study. Its objectives are to ensure investors achieve better value for their money, improve asset manager competitiveness, and enhance the effectiveness of intermediaries such as investment consultants.  

The FCA’s recommendations, which are relatively in line with the initial findings published in November 2016, may result in higher costs related to compliance, regulatory and operational activities, but lower management fees in the long term; however these trends are an ongoing feature in the industry.

The FCA’s key recommendations in its final report1 are:

Investor protection

  • strengthen the duty on fund managers to act in the best interests of investors and use the Senior Managers Regime to bring individual focus and accountability to this
  • require fund managers to appoint a minimum of two independent directors to their boards
  • introduce technical changes to improve fairness around the management of share classes and the way in which fund managers profit from investors buying and selling their funds

Competitiveness

  • support the disclosure of a single, all-in-fee to investors
  • support the consistent and standardized disclosure of costs and charges to institutional investors
  • recommend that the Department for Work and Pensions (DWP) remove barriers to pension scheme consolidation and pooling
  • chair a working group to focus on how to make fund objectives more useful and consult on how benchmarks are used and performance reported

Intermediaries

  • launch a market study into investment platforms
  • seek views on rejecting the undertakings in lieu of a market investigation reference regarding the institutional advice market to the Competition and Markets Authority (CMA)
  • recommend that HM Treasury considers bringing investment consultants into the FCA’s regulatory perimeter

Investor protection

As summarized above, the FCA report introduces a number of remedies to increase investor protection. Andrew Bailey, Chief Executive at the FCA, said in a statement: “The asset management sector is important to the economy, managing the savings of millions of people and in the current low interest environment it’s vital we help people earn a return on their savings. We need a competitive sector, attracting investment into the United Kingdom which also works well for the people who rely on it for their financial wellbeing.”

Along with the final report, the FCA has initiated a consultation on changes to the way authorized fund managers are regulated. The consultation remains open until September 28, 2017, and encourages comment and feedback on the following three proposals:

  • measures to improve fund governance, including strengthened obligations to act in the best interests of investors
  • changes to existing guidance to enable investors to be moved into better value share classes
  • changes to box management practices

In addition, the consultation is soliciting views on whether the FCA should consider introducing an end to the payment of trail commissions, and whether remedies outlined in the consultation should be applied to other retail investment products.

Intermediary impact

The measures affecting intermediaries will bring additional scrutiny to consultants who advise pension schemes and other institutional investors. The FCA’s interim report, published in November 2016, had called for "stronger regulation" of the investment consultant sector, based on results of an earlier probe that found the investment consultant industry was hampered by potential conflicts of interest and "opaque" fees. As result, regulators believed the industry to be less competitive and efficient than it could be for institutional investors.2

The FCA recommended that its scope of oversight be extended to include investment consultants

Investment consultants in the UK act as gatekeepers to more than £1 trillion in assets, and UK rules require institutional clients such as pension funds, insurance firms and charities to seek advice about how to best manage the funds they hold.

Many of these consultants offer "fiduciary management" and are often retained by clients they already advise. When investment consultants serve the dual functions of advising their clients about which funds to choose, and managing funds for those same clients, the concern is that they may be simultaneously competing for client business with the money managers they are engaged by their clients to review.

The FCA’s final report identifies conflicts of interest within the investment consultancy sector and will make a determination in September 2017 as to whether these should be investigated by the Competition and Markets Authority (CMA). This echoes the FCA’s interim report, which noted that the CMA "would be best placed to explore what impact the difficulties in assessing the quality of investment consultancy advice has on competition between investment consultants, the advice they offer and ultimately the returns investors receive”.

The FCA also recommended that its scope of oversight be extended to include investment consultants.

Focus on competitiveness

The FCA’s 2016 interim report described the performance and fees of fiduciary managers as "among the most opaque parts" of the industry, adding that investors "cannot assess whether the advice they receive is in their best interests”. The interim report also noted that the investment advice provided by these consultants did not necessarily lead to benefits for clients.

The FCA supports disclosure of an all-in fee for investors

In response to these issues, the FCA's final report recommends that charges for institutional investors become more transparent. It also supports disclosure of an all-in fee for investors. Of note, under the Markets in Financial Instruments Directive (MiFID II), the all-in-fee approach applies to investors using intermediaries for fund purchases. 

The final report also calls for asset managers to provide greater clarity on the fund’s objectives as well as the applicable charges, as many active funds offer similar exposure to passive funds but charge significantly more. The report notes that investors’ awareness and focus on charges is often poor with a significant number of retail investors who are not aware that they are paying charges for their asset management services.

RBC Investor & Treasury Services continues to assess the FCA’s final report, and will monitor market developments and provide further insights.

Key insights

  • The final report published by the FCA introduces a range of measures to improve transparency in the UK asset management sector
  • The key objectives are to provide further protection for investors, improve asset manager competitiveness and enhance the effectiveness of intermediaries
  • The measures also bring additional scrutiny to consultants who advise pension schemes and other institutional investors

Sources

  1. Financial Conduct Authority (June 2017): Asset Management Market Study Final Report
  2. Financial Conduct Authority (November 2016): Asset Management Market Study Interim Report