On November 18, the UK Financial Conduct Authority (FCA) published an interim report on its findings from an asset management market study (Report). The FCA launched the market study in November 2015, focusing on competition in the asset management industry and the ability of retail and institutional investors to get value for money when purchasing asset management services.

The Report is divided into 11 chapters covering topics, including: 1) the manner in which investors choose between asset managers; 2) the impact of intermediaries and fund governance bodies on competition between asset managers; 3) analysis of prices, performance and profitability; 4) the ability of asset managers to control costs and quality along the value chain; 5) the effect of intermediaries (such as investment consultants) on competition for institutional asset management; and 6) barriers to innovation and technological advances. While some of these topics are focused on the retail sector, many of the themes will be of broad relevance to the UK asset management industry, including those in the wholesale sector such as UK-based hedge fund managers and other AIFMs.

Overall, the Report highlights a number of areas for improvement. The FCA found that price competition is limited for actively managed funds, and that investors often pay unjustifiably high charges which are not reflected in the relevant funds’ returns. The Report notes that strong competition exists on price for passively managed funds; however, the FCA nonetheless identified examples of poor value for money. The FCA stated in the Report that in its view fund objectives are not consistently clear and fund performance is not always reported against an appropriate benchmark. Further, the FCA found that intermediaries and other investment consultants provide valuable due diligence for pension funds, but were not apt at identifying outperforming fund managers, and that conflicts of interest in the investment consulting business model warranted further attention.

In order to address these findings, the FCA has proposed a series of remedies, including: 1) a strengthened duty for asset managers to act in the best interests of investors; 2) a possible new “all-in” fee for investors to improve price transparency; 3) measures to assist retail investors to select funds, including requirements for asset managers to disclose the objectives of the fund and clarify the use of benchmarks on performance; and 4) standardization of information on costs and charges for institutional investors to improve transparency, among others.

The FCA is currently consulting on whether to make a market investigation reference to the Competition and Markets Authority on the investment consultancy market. The FCA has also recommended to HM Treasury that institutional investment advice is brought within the FCA’s regulatory remit.

All UK-based asset managers should review the FCA findings in the Report and considering whether or not they need to make adjustments to meet the FCA’s objectives.

Comments and feedback on the Report and proposed remedies must be submitted by February 20, 2017.

The FCA’s accompanying press release is available here.

The FCA’s terms of reference for the market study are available here.