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FCA takes aim at the asset management industry

In the final report on its study into the UK’s asset management industry, the Financial Conduct Authority (“FCA”) has announced plans to introduce a range of sweeping reforms, with the aim of increasing competition, boosting transparency and cutting costs for savers.

One of its central proposals is to bring the investment consultancy market under its regulatory remit, something which the sector has largely avoided until now, despite advising pensions funds, insurers and charities on how more than £1 trillion should be invested. The regulator is seeking the authority to monitor the asset allocation advice provided to clients, aiming to ensure it meets consistently high standards.

The FCA is also considering making a referral to the Competition and Markets Authority (“CMA”) to launch a probe into the industry after finding evidence of conflicts of interests and opaque fees. It also warned of a lack of transparency, particularly at firms that offer asset management services (so called “fiduciary management”).

It also highlighted concerns about “relatively high and stable market shares for Aon Hewitt, Mercer and Willis Towers Watson, the so called “big three” consultancies which constitute c.55% of the market, a weak demand side and relatively low switching”. With a view to rejecting an “undertakings in lieu” proposal jointly provided by these three firms earlier in the year, the regulator is seeking further industry views before a formal referral is made.

The FCA states in its report that, “a full investigation of the sector by the CMA would enable it to identify all the relevant issues and put appropriate remedies in place.” The CMA has a wide range of tools at its disposal to increase competition, including the power to force businesses to spin off divisions.

The regulator supports the introduction of consistent and standardised cost disclosure to institutional investors with the aim of improving price competition amongst managers. It specifically supports the disclosure of a single, all-encompassing fee, including the asset management charge and an estimate of transaction charges.

The FCA also announced that it would shortly begin an investigation into investment platforms, amid concerns that market competition is failing to deliver value to clients. This appears to be directed at retail platforms rather than the institutional variety used by many pension schemes, but there is clearly a possibility that the remit may widen.

Amongst measures to improve fund governance and provide additional protection to investors, the FCA is proposing the requirement for authorised fund managers to continually assess whether an investment has provided value for money, with the additional requirement that a formal report is compiled each year, highlighting the fees and charges incurred, economies of scale and quality of services provided, amongst other information.

The proposals also call for the duty of fund managers to act in the best interests of investors to be strengthened, and the introduction of technical changes to ensure fairness in the allocation of share classes and proprietary transactions.

These reforms are likely to be implemented over several stages, with some to be enacted soon, others subject to government approval, and a final set following a further consultation.

Our view

We are very supportive of the FCA’s intention to ensure high standards of advice to all pension schemes, and would have no concerns if this involves further regulation of our work.

We believe that there is healthy competition in our segment of the market (mainly small to medium sized pension schemes), although we accept that there may be issues in some other segments. Further investigation into those firms that provide both advice and fiduciary management is warranted, and we continue to believe that third party oversight is essential for any schemes using fiduciary management.

While there is plenty of room for improvement within asset management, improved transparency in areas such as charges and enhanced governance should go a long way to making things better value for investors.