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FCA Asset Management Market Study: Interim Report

23rd November 2016

Interim Report on FCA Asset Management Market Study

The City Watchdog - the Financial Conduct Authority (FCA) - has this week published an Interim Report on an Asset Management Market Study they have been conducting.

The FCA launched their Market Study into the Asset Management sector last November (2015) after a number of concerns were raised within the industry. In particular, the regulator wishes to assess how asset managers compete to deliver value for money – i.e. how well is competition working within the asset management sector and what are the resulting outcomes for investors?

Focus of the Report

The Interim Asset Management Market Study (MS15/2.2) now lays out the regulator’s areas of focus for the FCA’s final report, (expected to be published sometime next year in 2017) – and also provides information upon their findings so far.

Areas that the regulator will be focusing on and that they have provided feedback so far include:

• How do investors choose between asset managers?
• How do intermediaries and fund governance bodies affect competition between asset managers?
• What do prices, performance and profitability tell us about how competition is working?
• Are asset manages willing and able to control costs along the value chains?
• The role of investment consultants
• Are there barriers to entry, innovation and technological advances?

In addition, the regulator has asked various questions during the interim report for in the hope of input from industry participants as well as requesting thoughts upon some proposed remedies.

Comments should be sent to the FCA by 20th February 2017 to ensure they are considered before the final report is issued.

The UK’s Asset Management Industry:

The Asset Management Industry within the UK is very substantial, as the FCA details within the interim report advising that it is the second largest in the world, managing £6.9 trillion of assets.

Of this figure, more than £1 trillion is managed for UK retail investors and £3 trillion on behalf of UK pension funds and other institutional investors. In addition, the industry also manages around £2.7 trillion on behalf of overseas clients.

Asset Management Interim Report Findings so far:

At present the FCA’s Interim Report has found price competition to be weak in a number of areas of the industry sector, thus impacting delivery of ‘value for money.’

In particular, the FCA’s findings so far indicate that:

• not many asset management firms lower charges to attract investment, (particularly that from retail investors);
• The value provided by platforms, advisers and other retail intermediaries is something to cause concern;
• customers are on the whole not active in managing their investments or with engaging with asset managers;
• a lack of customer switching has also been found;
• for actively managed funds, charges are often higher yet do not subsequently reflect any better performance compared to passive funds. In addition charges for passive funds have fallen over the last five years, whilst those for actively managed funds have on the whole remained the same;
• there has been some progress made in improving market transparency, however there are still concerns about how investors have objectives and outcomes communicated to them by asset managers;
• For active equity funds, there seems to be considerable price clustering most notably where the assets under management are greater than approximately £100 million;
• Economies of scale are captured by the fund manager rather than being passed onto investors as it seems that as fund size increases, pricing does not appear to fall; and
• It seems that there is heavy concentration within the investment consultancy market leading to the FCA to propose whether the Competition and Markets Authority should review this sector.

Next Action Steps:

The Regulator has set out some proposed remedies and has requested comments on its Interim Report to be submitted by 20th February 2017. After which the FCA will finalise its Market Study report and set out their findings and conclusions and if appropriate, enter into consultation upon any proposed courses of action.

Those within the investment consultancy market will no doubt wish to consider the implications of a Market Investigation by the CMA and actively engage with the FCA’s request for input to the Interim Report before the February deadline.

Read our latest articles, news and views affecting compliance and regulation in the UK Financial Services Industry.