LONDON – Regulators are set to crack down on the UK’s asset management industry with a series of measures designed to improve investor trust in the sector and curb conflicts of interest.
On Wednesday, the Financial Conduct Authority published the final report of a near two-year consultation on the industry, taking aim at a lack of transparency and price competition within asset management by recommending a series of new rules and regulations.
The FCA used Wednesday’s report to ask asset managers to overhaul their charging structures and prices, with the regulator encouraging more competition between firms on prices so that investors can get a better deal on their investment products.
“We find weak price competition in a number of areas of the asset management industry. Firms do not typically compete on price, particularly for retail active asset management services,” the report’s executive summary says.
“We also found high levels of profitability, with average profit margins of 36% for the firms we sampled. Firms’ own evidence to us also suggested they do not typically lower prices to win new business. These factors combined indicate that price competition is not working as effectively as it could be,” the report continues.
The FCA used Wednesday’s report to press ahead with numerous reforms initially set out in an interim paper in November 2016, many of which were highly unpopular in the sector when first announced.
That includes plans for a single fee levied on investors that would encompass all costs, including trading costs, something that is expected to directly impact the profitability of some managers. The fee is referred to by the FCA as a “single all-in fee.”
Currently, investors are typically charged several fees, include entry and exit fees, as well as outperformance fees (if your fund does better than it said it would), and ongoing fees for the day-to-day running of the fund. The FCA wants to consolidate this.
Other proposals include mandating that asset managers have two independent directors on their boards to improve transparency and make sure investors get the best value for money.
A brief outline of the key proposals is outlined in the diagram below, which features in the FCA report:
- Financial Conduct Authority
As the report was released, Andrew Bailey, the FCA’s CEO said: “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.”
Industry reaction is so far mixed, with asset managers likely displeased that the FCA has maintained a large number of measures that were widely opposed by the industry when the interim report was published. However, those representing the interests of customers have welcomed the findings.
“Today, the FCA has hit the nuclear button and ended a decade of mild encouragement, sending a clear message to the asset management sector that it not only expects but now demands a transparent, customer-focused approach, particularly in relation to pricing and investor outcomes,” Jake McQuitty, a partner at aw firm TLT said, according to a report from the Financial Times.