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UK Competition Law Threat to Active Fund Managers

SCM Direct ("SCM"), an investment manager based in the UK, has recently called for the Competition and Markets Authority ("CMA") and Financial Conduct Authority ("FCA") to investigate actively managed funds sector for alleged fixing of annual charges. This is the latest in a series of public comments and studies relating to an alleged lack of competition in the active funds sector. As this pressure continues to grow, there is an increasing risk of a competition law investigation by the CMA or FCA which could have a significant and negative effect on the industry.

Scrutiny of Active Funds Sector 

The asset management industry, and in particular the active funds sector, is being subjected to increasing scrutiny from regulators with respect to the issue of price competition and whether they are delivering value for money for investors. 

  • The FCA published the interim report for its Asset Management Study in November 2016. This stated the FCA’s preliminary view that there is "weak price competition in a number of areas of the asset management industry", pointing to price clustering, stagnant pricing trends and a failure to pass on economies of scale to investors.

  • The FCA has provisionally decided to make a market investigation reference (“MIR”) to the CMA in respect of the market for the provision of investment advisory services to institutional investors and employers.  This relates to the FCA’s concerns, expressed in the Asset Management Study interim report, that investment consultants are not assisting institutional investors to identify better performing managers nor assisting smaller institutional investors to effectively negotiate better prices.

  • The European Securities and Markets Authority (“ESMA”) has issued a statement outlining its concerns regarding ‘closet indexing’.  ESMA’s concerns include that investors are paying higher management fees on an expectation that they are receiving an active fund management service.

Following the FCA’s interim report there have been calls for the CMA to investigate the active funds sector for price fixing. SCM, co-founded by Gina Miller (who was the lead claimant in the Brexit challenge), called for an investigation into the active fund sector for allegedly fixing annual charges. SCM cite their own research in claiming that 70% of companies in the industry imposed an identical 0.75% yearly management charge on their clients and that fees have not changed in five years.

On 10 March 2017 Mary Starks, Director of Competition at the FCA, said in a speech at the Association of Investment Companies conference that the ongoing Asset Management Study confirmed the FCA’s view that the market is in need of reform. It is clear this issue is one of the FCA's priorities and likely to garner additional attention from the regulator.

Possible CMA Response 

If the active funds sector is subject to a CMA investigation on the grounds that asset managers are alleged to be engaging in anti-competitive activities, the sanctions available to the CMA for such infringements are significant, as seen in the recent LIBOR and FOREX investigations.

Firms found to be engaging in such activities can be subject to fines of up to 10% of group global turnover. In addition, the provisions of any agreements that are in breach of competition law will be void and unenforceable and firms could expose themselves to actions for damages from customers who can show they have been harmed by paying excessive fees.

Individuals within asset managers could also be subject to personal liability under the Enterprise Act 2002 (amended by the Enterprise and Regulatory Reform Act 2013). Individuals prosecuted for cartel activities may be liable to imprisonment for up to five years and/or the imposition of unlimited fines. Individuals charged with the cartel offence may also be guilty of money laundering under the Proceeds of Crime Act 2002, which carries a possible sentence of fourteen years imprisonment and/or the imposition of unlimited fines. In addition, a competition director disqualification order may be placed on an individual director of an offending company which has a maximum period of disqualification of fifteen years.

If a MIR is finalised and submitted to the CMA then the CMA will have 18 months to conclude an investigation on the level of competition within the markets referred. One of the motivations for using a MIR is the availability of more extensive remedies which, among other things, can include structural remedies (for example divestment of business and assets); monitoring remedies (such as a requirement to provide regular information); behavioural remedies which either restrict firms' behaviour, or require them to act a certain way; and recommendations for other Governmental departments or industrial bodies to take action.

Next Steps 

Active fund managers should undertake an internal review of their prior practices with respect to pricing and charges passed on to investors and their communications with their competitors in light of these recent developments, and evaluate areas of their business where they are at risk of exposure to a competition law investigation or MIR. Asset managers should also consider their ongoing relationships and interactions with investment consultants in the light of the MIR and the possibility of CMA action affecting the provision of investment advisory services to institutional investors.

Copyright 2020 K & L GatesNational Law Review, Volume VII, Number 92


About this Author

Scott S. Megregian, Global Antitrust, Competition and Trade Regulation Attorney, KL Gates Law firm

Scott Megregian is Co-Practice Group Coordinator of the firm’s global Antitrust, Competition and Trade Regulation practice group and a partner in the firm’s London and Brussels offices. He is a Competition and Regulatory partner and has more than 25 years of antitrust and competition experience, drawn from both sides of the Atlantic and spans transactional, dispute resolution, government investigation, regulatory and counselling engagements. Scott has extensive experience advising clients in the mining and metals, energy, chemicals, defence, sports and intellectual...

Neil A. Baylis, KL Gates, Telecom Industry Lawyer, Trade Regulation Attorney

Neil is a partner in the Competition and Trade Regulation, Travel and Leisure, and Telecom, Media and Technology practice groups. He has experience in advising clients on all aspects of EU and UK commercial and competition law. His work covers drafting and advising on commercial agreements; merger control; bringing and defending competition law based complaints before the regulators; drafting and implementing compliance programs; advising on regulatory issues under EU laws, advising on consumer law issues; and advising on litigating competition law issues before the English courts. He has advised on major cases in the following industries: automotive; construction materials; fertilisers; subsea cables; travel; media; sport; betting and gaming; beverage; transport; and oil and gas services.

Legal 500 2016 (Travel) - ‘Well versed in the travel sector’, K&L Gates LLP advises on a range of commercial and regulatory matters for clients such as ABTA, Amadeus, Contiki, Red Savannah, CHR Travel and Home House. Leading individual Neil Baylis is ‘a key player in the market’

Andrew J. Massey, Investment Management and Funds Attorney, KL Gates, Law firm

Mr. Massey is a partner in the firm’s London office where he is a member of the Investment Management and Funds practice group. 

He provides advice on financial services law and regulation to a diverse range of financial services institutions. His practice encompasses advising on regulated and unregulated investment funds, the scope of regulation, and regulatory issues relevant to all aspects of a financial services business and its products and services. 

Jacob N. Ghanty, Investment Management Attorney, KL Gates Law Firm

Jacob Ghanty is a partner at the firm’s London office, where he is a member of the Investment Management, Hedge Funds and Alternative Investments practice group. He concentrates his practice on financial services regulation, investment management, payment systems and services, FinTech, insurance/reinsurance and structured debt and capital markets. Mr. Ghanty advises clients on their regulatory strategy, on their dealings with regulators and on transactional matters.

Philip J. Morgan, Investment Management Attorney, KL Gates Law Firm

Philip is a partner in the firm's Investment Management practice group and has wide experience in all aspects of law and regulation in the UK financial services industry.  He works closely with U.S. and other colleagues to provide international financial services regulatory advice and his practice also focuses on investment funds, particularly hedge funds, real estate funds, private equity funds and listed investment funds.  His transactional work also encompasses corporate projects such as joint ventures and establishment of limited liability partnerships, with a...