UK Regulator Expresses Concerns Regarding Active Asset Manager Charges and Performance
The UK Financial Conduct Authority (“FCA”) is undertaking a study of the asset management market, which manages GBP 6.9 trillion, and is the second largest market in the world after the US. The rationale for the study is to ensure, as part of the FCA’s overall purview, that the UK market works well. As part of the FCA’s new competition remit, the study is also looking at whether the market is sufficiently competitive so as to offer value for money for consumers. An interim report was published on November 18, 2016, which voiced concerns about charges, performance, and competition in the industry.
The interim report expresses misgivings about active fund management charges and, in particular, about indications of weak price competition in an industry where average profit margins are 36%. These indicators include: (i) charges have stayed broadly the same for the last 10 years; (ii) charges are considerably clustered in some sectors; and (iii) charges do not fall as fund size increases. The report also noted concerns that investors attempting to switch active asset managers faced a range of issues — including those of cost, time, and effort — that could be detrimental to competition. By contrast, competition appears healthier in passive management.
The FCA noted that overall evidence suggests that actively managed investments do not out-perform their benchmarks once costs are taken into account. In particular, retail funds tend to under-perform their benchmarks after costs, while funds available to institutional investors achieve returns that are not significantly above their benchmarks. The FCA said that “studies based on US and UK data suggest that there are more funds that persistently under-perform their market benchmark than would be expected in a competitive market”.
Of much comment is the role of intermediary investment consultants, not currently regulated by the FCA, who advise institutional investors on the asset managers and funds in which to invest. This is a concentrated market with the top three insurer-tied firms accounting for around 60% of the market. The FCA concluded that it was difficult for clients to monitor and assess the performance of the advice that they received as well as whether investment consultants were acting in their best interests. The FCA is consulting on whether to refer the investment consultancy market to the competition authorities for investigation.
The FCA’s interim conclusions are principally as follows: (i) it will try to strengthen the duty on asset managers to act in the best interest of investors; (ii) it will introduce an “all in” fee approach and make it easier to switch accounts; (iii) it will require asset managers to be clear about the objectives of the fund, and clarify and strengthen the use of benchmarks; (iv) it will require clearer communication of fund charges and increase transparency; and (v) it will require clearer disclosure of fiduciary management fees and bring provision of institutional investment advice within the regulatory perimeter.
Comments are due on this interim report by February 20, 2017, and we will expect further consultation and developments thereafter.