FCA Asset Management Market Study
The FCA has announced, in its Market Study MS 15/2.3, “a package of remedies” it will implement following its investigation into the asset management industry. The final report is available here.
In this final report, the FCA confirmed the findings of last year’s interim report, which highlighted weak price competition in various areas of the investment industry, including “the evidence of sustained high profits” of firms over the years and a lack of clarity around funds’ objectives.
The remedies the FCA is taking forward fall into three areas, considered below.
To help provide protection for investors who are not well placed to find better value for money, the FCA proposes to:
- strengthen the duty on fund managers to act in the best interests of investors, and to use the Senior Managers Regime to bring individual focus and accountability to this
- require fund managers to appoint a minimum of two independent directors to their boards
- introduce technical changes to improve fairness around the management of share classes and the way in which fund managers profit from investors buying and selling their funds, and specifically
- prohibit asset managers from capitalising on box profits (and require disclosure in the prospectus of the box management policy), which could create a “material hole” in the P&L for some firms. The regulator says its proposed rule change will result in at least £20m in risk-free box profits, that several firms retain, being transferred to investors in the future. The changes are also likely to incur a one-off cost of £5,000 per firm
To drive competitive pressure on asset managers, the FCA will:
- support the disclosure of a single, all-in-fee to investors
- support the consistent and standardised disclosure of costs and charges to institutional investors
- recommend that the Department of Work and Pensions (DWP) removes barriers to pension scheme consolidation and pooling
- chair a working group to focus on how to make fund objectives more useful and consult on how benchmarks are used and performance reported
To help improve the effectiveness of intermediaries, the FCA will:
- launch a market study into investment platforms
- seek views on rejecting the undertakings in lieu of a market investigation reference regarding the institutional advice market to the Competition and Markets Authority
- recommend that HM Treasury considers bringing investment consultants into the FCA’s regulatory perimeter
Alongside this final report, the FCA has published a consultation paper on some of the remedies. The overall package of remedies can be split into three groups:
Remedies which the FCA is consulting on alongside this report. This report sets out overall proposals and the accompanying CP17/18 and the FCA’s letter to the undertakings in lieu parties set out the relevant detail and questions for stakeholders on proposals aimed at:
- strengthening the duty on fund managers to act in the best interests of investors,
- requiring fund managers to return any risk-free box profits to the fund,
- facilitating switching investors to cheaper share classes,
- proposing to reject the undertakings in lieu of a market investigation reference
Final remedies which do not require further consultation:
- the recommendation that the Treasury considers bringing investment consultants into the regulatory perimeter,
- the recommendation to the DWP to remove barriers to pension scheme consolidation and pooling,
- the recommendation to both industry and investor representatives to agree on a standardised disclosure of costs and charges to institutional investors, asking an independent chair to convene relevant stakeholders to develop this further and working with stakeholders to consider whether any other actions are necessary,
- launching a market study into investment platforms shortly
Remedies for which the FCA gives its initial views on these proposals in this document and plans to publish relevant detailed consultations at a later stage:
- costs and charges disclosure to retail investors to be consulted on later this year,
- benchmarks and performance reporting to be consulted on later this year,
- convening a working group on objectives and consulting on any rule changes at a later stage, subject to the outcome of the working group.
The FCA expects to publish further consultation papers on most of the remaining remedies in the package before the end of 2017.
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