Interim Findings of the UK FCA's Asset Management Market Study - Member Call on Monday 9 January 2017 at 2pm GMT/9am ET
ICI Global Regulated Funds Committee
ICI Global Steering Committee
International Committee
International Operations Advisory Committee
International Operations Working Group RE: Interim Findings of the UK FCA's Asset Management Market Study - Member Call on Monday 9 January 2017 at 2pm GMT/9am ET
On 18 November 2016, the UK Financial Conduct Authority (FCA) published the interim findings of its Asset Management Market Study (“Market Study”).[1] The FCA is inviting comments on its interim findings by 20 February 2017.[2] ICI Global intends to file a comment letter and will hold a member call on Monday 9 January at 2pm GMT/9am ET to discuss the FCA’s interim findings.
Dial-in details for the member call are below:
UK: 0330 336 0036
US: + 1 917 793 0005
FR: 0821 230 749
PIN: 066875
Other international numbers: https://static.powwownow.co.uk/media/pdf/Powwownow-Dial-in-Numbers.pdf
If you wish to join the member call, please contact Lesley Dunn at Lesley.dunn@iciglobal.org or on +44 207 961 0830.
Background
On 18 November 2015, the FCA published the Terms of Reference (ToR)[3] for its Market Study to “assess how asset managers complete to offer value for money.” Several themes in the ToR reflect the FCA prior examination of competition in the wholesale sector.[4] The publication of the Interim Report (“the Report”)[5] to the Market Study follows the FCA’s year-long examination of the UK’s asset management sector.
Interim Report
The Report contains the following 11 sections, supported by 9 annexes.
- Section 1 – Executive summary;
- Section 2 – Our approach;
- Section 3 – Overview of the asset management sector;
- Section 4 – How do investor choose between asset managers?
- Section 5 – How do intermediaries and fund governance bodies affect competition between asset managers?
- Section 6 – What do prices, performance and profitability tell us about how competition is working?
- Section 7 – Are asset managers willing and able to control costs along the value chain?
- Section 8 – The role of investment consultants;
- Section 9 – Are there barriers to entry, innovation and technological advances?
- Section 10 – Proposed remedies.
Interim Report
Section 1 of the Report contains an executive summary of the FCA’s findings. In the preamble, the FCA provides an overview of the active and passive funds that are available to UK investors, noting the following key points:
- Typical low cost passive fund returns on a £20k investment are higher than typical active funds;
- Since 2005 passive funds have grown fivefold and are now 23% of AuM in the UK; and
- Average disclosed fees for active funds and passive funds are 0.9% and 0.15% respectively.
Section 2 of the Report outlines the FCA’s approach to undertaking the Market Study.
Section 3 of the report contains an overview of the UK’s asset management sector.
Sections 4-9 of the Report contain the FCA’s findings. The following key points from the Report are of relevance to regulated funds and their managers.
Investor outcomes and factors that drive investor choice (see the first part of Section 4 and 6 of the Report, respectively)
- Actively managed funds do not outperform their benchmark after costs;
- There is no clear relationship between price and performance;
- Many active funds offer similar exposure to passive funds, but some charge significantly more;
- Investors generally consider value for money as risk-adjusted net returns;
- Evidence on whether investors take charges into account when selecting funds is mixed;
- Past performance and reputation are important drivers of retail investor choices, but past performance is not a good indicator of future risk-adjusted net returns.
Switching (see the second part of Section 4 of the Report)
- Investors incur a range of costs if they switch between funds and asset managers;
- Analysis of US and UK data suggests that there are more funds that persistently underperform their market benchmark than would be expected in a competitive market;
- Funds face difficulties in obtaining consent to switch investors into cheaper share classes.
Retail intermediaries (see the first part of Section 5 of the Report)
- Tools, including buy-lists and fund ratings, aim to help retail investors identify the best funds;
- Funds identified by platforms’ best-buy lists have not outperformed their benchmarks net of cost;
- Manager ratings and best buy lists are not good predictors of performance and can act as a barrier to entry, expansion and innovation;
- Economies of scale from asset pooling via platforms do not appear to benefit retail investors.
Ability to negotiate and the role of fund governance bodies in considering value for money on behalf of investors (see the second part of Section 5 of the Report)
- Fund governance bodies lack independence from fund managers and do not appear to exert effective challenge on value for money;
- The depositary has oversight duties over a UK authorised fund manager and can require the manager to take remedial action;
- Reforming governance standards for UK authorised funds, including drawing on the US model for fund governance will better ensure asset managers are held to account for how they deliver value for money;
- Pension oversight committees face challenges in their role and dealings with asset managers;
- Challenges and incentives work against consolidation of pension schemes.
Price trends, charging practices and profitability (see the second part of Section 6 of the Report)
- Active fund charges in the UK have been clustered at 0.75% and 1% over the last ten years;
- Passive fund charges in the UK have fallen over the past five years;
- Fund charges in the UK may be higher than they would otherwise be when compared to other jurisdictions, such as the US, where governance standards appear to better ensure asset managers are held to account for how they deliver value for money;[6]
- Economies of scale, as UK fund sizes increase, do not appear to be passed onto investors.
Transparency and clarity of objectives and investment outcomes (see Section 7 of the Report)
- Ancillary service pricing (e.g. administration, depositary services) is usually clear to investors;
- Investors are not given information on transaction costs in advance;
- Transaction costs can average 50 bps for active equity funds;
- The investment strategy and charges of funds are not always adequately explained to investors;
- Many absolute return funds do not report their performance against relative return targets;
- Some absolute return funds charge performance fees for returns below performance objectives;
- The introduction of an all-in-fee may allow fund investors to more easily see what is being taken from the fund.
Investment consultants (Section 8 contains more detailed findings on the role of investment consultants)
- Asset manager ratings influence the choices made by institutional investors, but do not help investors identify better performing managers or funds;
- Investment consultants do not appear to help smaller institutional investors negotiate, or otherwise drive significant price competition, between asset managers;
- Investment consultants may be subject to conflicts of interest that could result in poor outcomes for end investors.
Interim Proposals on Remedies
The FCA is proposing the following remedies to address its concerns:
- a strengthened duty on asset managers to act in the best interests of investors, including reforms that will hold asset managers accountable for how they deliver value for money, and introduce independence on fund oversight committees;
- introducing an all-in fee approach to quoting charges 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:
- requiring asset managers to be clear about the objectives of the fund and report against these on an ongoing basis;
- clarifying and strengthening the appropriate use of benchmarks;
- providing tools for investors to identify persistent underperformance;
- making it easier for retail investors to move into better value share classes;
- requiring clearer communication of fund charges and their impact at the point of sale and in communication to retail investors;
- requiring increased transparency and standardisation of costs and charges information for institutional investors;
- exploring with government the potential benefits of greater pooling of pension scheme assets;
- requiring greater and clearer disclosure of fiduciary management fees and performance;
- consulting on whether to make a market investigation reference to the CMA on the institutional investment advice market;
- recommending that HM Treasury also considers bringing the provision of institutional investment advice within the FCA’s regulatory perimeter.
The FCA also proposes further work on the retail distribution of funds, particularly on the impact that financial advisers and platforms have on value for money. Section 10 of the Report contains a more complete overview of the proposed remedies and the key principles the FCA has considered.
Next Steps
In Section 11 of the Report the FCA outlines the next steps on the Market Study. Responses to the Report are due to the FCA by 20 February 2017. The FCA expects to publish a final report in 2017, setting out its findings and conclusions. If appropriate, the FCA plans to consult on any subsequent actions.
Giles Swan
Director of Global Funds Policy, ICI Global
endnotes
[1] https://www.fca.org.uk/publications/market-studies/asset-management-market-study
[2] Comments are to be sent to assetmanagementmarketstudy@fca.org.uk
[3] Asset Management Market Study Terms of Reference, November 2015, available from https://www.fca.org.uk/publication/market-studies/ms15-02-1.pdf
[4] FCA Wholesale sector competition review 2014-15, February 2015, available from https://www.fca.org.uk/publication/feedback/fs15-02.pdf
[5] https://www.fca.org.uk/publication/market-studies/ms15-2-2-interim-report.pdf
[6] Annex 9 to the Interim Report contains a comparison of various aspects of investment fund regulation in selected jurisdictions.