The City watchdog has this morning put forward plans for a shake-up of the £7 trillion asset management industry to ensure investors get a better deal.
The Financial Conduct Authority (FCA), publishing the interim findings of its market study, found weak price competition in some areas, a lack of transparency, potential conflicts of interest and sustained profitability among asset managers, despite a large number of companies in the space.
Despite the large number of companies operating in asset management, the sector as a whole has “enjoyed sustained, high profits over a number of years with significant price clustering”, the FCA said in its interim findings.
Here are four ways the FCA wants the asset management industry to improve for investors:
1: Price competition
Problems: The FCA has found evidence of weak price competition, especially among actively managed funds. In this area, investors are paying high charges that are, on average, "not justified by higher returns".
Stronger competition was found in passive funds, but the FCA did find some examples of poor value for money here also.
Solutions: The FCA suggested the introduction of an "all-in fee" approach, whereby charges are quoted so that investors can see where their money is going and can easily see what is being taken from the fund.
Problems: The FCA found funds are not always clear about their objectives and performances are not reported against an "appropriate benchmark".
Solutions: Asset managers should be "clear about the objectives of the fund" and clarify and strengthen the use of benchmarks.
This, the FCA said, will help retail investors identify which funds are right for them and identify underperformance.
Problems: The FCA found some investors find it difficult to know what effect charges are having on their returns and so judge value for money.
Solutions: Fund managers should be required to provide “clearer communication” on fund charges and general ongoing matters.
The FCA also wants “greater and clearer disclosure of fiduciary management fees and performance”.
4: Working for investors
The FCA wants to strengthen the duty on asset managers to act in the best interests of their investors.
This would include reforms to “hold asset managers to account for how they deliver value for money”.
Reaction: FCA hits asset managers at "full force"
Mark Pugh, PwC's UK asset management leader, said today’s FCA report suggests the industry is going to feel the “full force” of the FCA.
Measures to enhance the UK's reputation as a leading asset management centre should be welcomed. The diversity of the asset management sector is critical to the success and growth of the UK, and the FCA must balance this in its approach. Consumers rely on asset managers to deliver value, particularly in a persistently low interest rate environment.
Owen Lysak, senior associate at law firm Clifford Chance:
A big take home from the FCA's findings is a drive toward increased transparency. This is a theme that we have seen arise time and time again from the FCA, and something that is gaining traction across other jurisdictions and sectors.
Chris Cummings, chief executive of asset management industry body the Investment Association:
We are pleased that the FCA has recognised the industry is already leading on improving cost transparency for our clients by developing a new disclosure code, and the investment industry notes and welcomes the regulator's strong backing for the project. We look forward to working more closely with the regulator to deliver this important goal.