The FCA has delivered on its promise in its interim report on the asset management sector study to provide remedies that actively work to the benefit of the investor. The message from this final study is: always act in the best interests of your investors, you have been warned.
The FCA recognises the value of the sector, though, and this final report illustrates well that the industry and regulator have had a prolonged and relatively productive dialogue to agree on remedies that both can live with. The industry may disagree on some points, the all-in fee for example, but they will be aware that tougher measures could have been brought forward – and perhaps still could be.
The language in this final report should be considered most carefully by commentators, and industry. The FCA ‘supports the disclosure’ of a single all-in fee but this is not the same as a mandatory approach – the FCA is being coy about the prospective disclosure of transaction fees and will consult further. The implications of MiFID II introduces a requirement to ‘provide aggregated and on-going information on all costs’ at least annually (and implicitly looking backwards) which in effect means that the FCA’s objective on an all-in fee may be met in this way. On box profits the FCA has narrowed its aim to risk free profits, i.e. those where the AFM’s capital is not at risk. On fund performance, and governance too, the regulator is expecting more and has remedies to improve both.
The language speaks for the investor, and clearly indicates that the regulator has reached its limit with some parts of the sector and seeks more action to provide remedies that materially change behaviour. Investment consultants, for example, will be referred for a fuller market investigation in September if some further analysis in the next few months confirms that need. The way in which intermediaries and investment platforms operate is also under closer scrutiny, with a market study announced into investment platforms as part of the remedies in the final AMMS. Our analysis indicates once again that the retail investor outcomes are at the forefront of the regulator’s thinking as it would indicate that smaller investment platforms in particular are in the regulator’s scope.
However, the regulator has listened to the industry on the active/passive debate with a tone now to this which is more nuanced than previously, demonstrating that those active fund managers have been heard.
While a lot of the detail shows that more needs to be done to convince the FCA that the sector is acting in the best interests of the investor, the balance of this final report indicates a recognition that the sector is important. The regulator has remained firm throughout this study period to seek change in behaviour and performance; the industry has responded to this, and now has the opportunity to work constructively to show how it can respond to the challenges posed. The final study could have produced a more damaging outcome for the industry, a full competition investigation for example, but this final report indicates that pragmatism on both sides has prevailed.
On the face of it, the FCA’s charge sheet against the industry looks much the same as it did in November 2016.
In November, the FCA’s language was inflammatory – all-but accusing the sector of anti-competitive behaviour, to the detriment of the retail investor. Now, the tone is more reserved but the essential narrative approach remains. The FCA has found high profits, with average margins at 36%. This sits alongside weak price competition in a number of areas of the asset management industry – and particularly on retail active asset management services. The FCA found no clear relationship between fees charged and results delivered – although it did detect some evidence that those charged higher prices simply end up worse off.
Reading the suggested remedies, however, it is clear that the FCA has in fact listened to the sector and moderated its approach – the larger asset managers, in particular, will be relieved. However, the language deployed should give the sector pause for thought and demands a finely calibrated response. Critics will see today’s report as evidence of a sector which is still extracting high profits at the expense of the retail investor. The danger is that if the FCA report is not seen as a sufficient response to this or the industry is not seen to treat the issues raised, further reputational and political damage could be inflicted on the industry down the line.
The asset management sector therefore needs to demonstrate it is taking the essential charge seriously – and is acting to deliver greater transparency and value for retail investors.
With industry and political reaction beginning to filter through to the media there has been a shift in tone from some of the most influential news organisations: The Times reports that campaigners have said the remedies proposed fell “far short of the wholesale overhaul they had been hoping to see”. There is disappointment with the fact that there is no specific measure to tackle the lack of price competition and that it stopped short of requiring all fund managers to adopt US-style mutual fund boards.
The BBC takes a fairly neutral view on the findings, outlining the reforms which will “make competition work better”, whilst including a mix of industry response – from both the Investment Association and Gina Miller, for example. This is Money takes a typically pro-consumer view stating that the FCA’s report comes after it uncovered “devastating evidence of rip-off charges and weak price competition in the industry.” It notes that the FCA plans to set up a working group to consider how to make investment fund objectives clearer and more useful for investors, launch a new probe into the online fund brokers used by DIY investors and also call for feedback on whether it should introduce a phased-in ‘sunset clause’ for trail commissions. Sky News notes that the FCA’s plans will “protect millions of savers from being ripped off.”
Introducing an active-passive dimension into the analysis, Ignites Europe makes an interesting observation in that the FCA felt it necessary to specifically address the “perception that our interim findings suggested that passive funds were preferable to active funds.” It clarifies that “Rather than focusing on one strategy over another, we think it is important that investors understand both the total cost of investing and the objectives of the fund or mandate they are investing in, so that they can choose the product that best meets their needs.” Money Marketing also leads with this angle.
Suzi Ring and Sarah Jones at Bloomberg writes that the FCA’s suggested “changes have been met with a lot of push back from the industry as it looks to shore-up its position in the face of Brexit and fends-off increasing competition from cheaper index-tracking funds that are stealing market share.”
Meanwhile Angela Monaghan at The Guardian argues that the asset management industry “must introduce sweeping reforms to cut costs and improve returns for savers after years of raking in sustained, high profits.” She also points out that the industry has been “subject of a number of reviews since the start of the millennium”, including the 2001 review by Paul Myners and 2012 one by John Kay.
Chris Cummings, CEO of the Investment Association
Our industry looks after pensions and investments for millions of UK households, helping them to lead more prosperous lives into retirement. With this role comes significant responsibility. We strongly support the FCA’s objective of ensuring our industry serves its customers in a competitive, accountable and transparent manner. Many of the key recommendations work with the grain of European legislation already in the pipeline to introduce more clarity and transparency for consumers. We will work closely with the FCA as it looks further into the detail of how to present costs and charges in the clearest way for savers and how it will develop more independent oversight of investment funds in a way that is effective and proportionate.
We welcome the regulator’s recognition of the industry’s work to date on developing a consistent and transparent disclosure code for charges and costs which can be built on further with consumer groups. The FCA has listened to our calls to make it easier for savers to switch between share classes, which we welcome. Asset managers compete every day to attract clients and investors and are focused on delivering the best outcomes for them. Our priority now is to have a meaningful dialogue with the regulator about the implementation of the recommendations, to ensure savers are getting the best possible deal. A pragmatic timetable is key to achieving this, given the major regulatory changes already in the pipeline and the preparations for Brexit.
Sean Hagerty, Managing Director, Europe, Vanguard
This is an important moment for UK investors. We support the FCA’s efforts to lower the cost and complexity of investing. Consumers should always benefit from lower prices, better quality products, and clearer information. Costs matter. Every pound that investors pay in charges is a pound out of their potential returns, reducing their chances of being able to afford a comfortable retirement or save for a mortgage deposit. Our own proprietary research demonstrates the impact of cost on performance. Our findings show that too many funds fail to meet their performance benchmarks, largely because of the charges they levy. As an industry, we have an opportunity to reassure people that investing can be a force for good, and for many people, a sensible way of providing for the future. This includes ensuring investors have access to all the information they need, including costs, in a format they can understand. The increased transparency proposed by the FCA will enable an informed investor to choose high-quality, low-cost products which will lead to better financial outcomes for UK investors.
Daniel Godfrey, founder of The People’s Trust
Investment Managers will be relieved today. The FCA has delivered a report which spares them the harshest potential remedies flagged in their interim report last November. Asset management’s biggest problem isn’t the FCA. It’s the dysfunctional nature of the investment chain that prevents them fulfilling their potential to optimise returns for investors and drive economic growth.
Martin Gilbert, chief executive of Aberdeen Asset Management
I have stated several times that I am in favour of all-in fees including all costs as the industry has an obligation to deliver what the customer wants. Incorporating dealing charges for equity funds should be straightforward particularly for those managers, like ourselves, who have low portfolio turnover. It is more challenging to calculate all-in-fees for bond funds, but I’m encouraged the industry is already looking at ways of doing this. We need to embrace the concept and commit to finding a solution for the best interests of clients.
I am a vocal advocate of the benefits of involving independent directors in fund governance, having seen how they help elsewhere in the world. While supporting FCA’s general moves in this direction, Aberdeen would advocate going further than the FCA currently suggests by introducing two independent directors on to the Boards of UK open-ended fund ranges.
Gina Miller and Alan Miller, SCM Direct
Whilst the FCA is finally pursuing a pro-consumer agenda it is disappointing that they still appear to be dragging their feet on some key aspects. The UK investment industry has been ripping off the consumer for decades and it is time for the UK regulator to act now rather than have further consultations with the industry and its shoddy trade bodies.
The fact that the FCA feels it has to state there will be an increased ‘duty on fund managers to act in the best interests of investors and use the Senior Managers Regime to bring individual focus and accountability to this’ shows how fundamental the dereliction of duty has been in the asset management industry.
Andy Agathangelou, founding chair, the Transparency Task Force
This looks like a great example of a regulator doing what is necessary despite what must have been mountains of pressure and resistance from an industry that would have lobbied very hard to maintain the status quo as much as possible. To my mind, some of that lobbying has looked like parts of the industry are still in denial about what has really been going on; an example might be the Investment Association’s response to the FCA’s Interim Report, 146 pages that in parts make a brave attempt to argue that the FCA’s analysis, research and findings are wrong.
Martin McElwee, Freshfields Bruckhaus Deringer
It’s clear from today’s report that there’s work to do for the industry. Crucially though, there is no support for allegations of collusion among asset managers nor for a further competition review of the whole industry. It is good to see that the FCA remains open to industry views on how key proposals can be implemented – including the “all-in” fee – and that it has taken on board concerns about adding cost onto UK asset managers in an international market – an important acknowledgement in the context of Brexit.