FCA finds weak price competition in asset management

The Financial Conduct Authority has reported interim findings on its investigation into whether or not investors get good value for money in asset management.

FCA  finds weak price competition in asset management

The FCA launched the asset management market study in November 2015 to assess whether competition is working effectively.  It looked at whether institutional and retail investors get good value for money when purchasing asset management services.

The UK’s asset management industry is the second largest in the world, managing almost £7trn of assets.  Over three quarters of UK households with occupation or personal pensions use the services asset managers offer.

Reporting on the interim findings, Andrew Bailey, chief executive at the FCA said: “Asset managers are responsible for the savings of millions of people in the UK, making decisions which affect their financial well-being both now and in the future.

“In today’s world of persistently low interest rates, it is vital that we do everything possible to enable people to accumulate and earn a return on their savings which can meet their lifetime needs.  To achieve this, we need to ensure that competition in asset management works effectively to minimise the cost of investment.”

The FCA found that there is limited price competition for actively managed funds, meaning that investors often pay high charges although, on average, these costs are not justified by higher returns. It also discovered there is stronger competition on price for passively managed funds, though the FCA did find some examples of poor value for money in this segment also. The study found fund objectives were not always made clear to investors and performance is not always reported against an appropriate benchmark.

Despite a large number of firms operating in the market, the FCA said the asset management sector as a whole has enjoyed sustained, high profits over a number of years with significant price clustering. It said investment consultants undertake valuable due diligence for pension funds but are not effective at identifying outperforming fund managers. There are also conflicts of interest in the investment consulting business model which require further scrutiny.

Bailey said: “We want to see greater transparency so that investors can be clear about what they are paying and the impact charges have on their returns.  We want asset managers to ensure investors receive value for money through pursuing energetically their duty to act in their customers’ best interests.  The remedies that we are proposing today aim to achieve these outcomes.

“Low interest rates are necessary for the economy, but we have to do everything else we can to ease the burden on savers.  This is one thing we can do.”

Remedies

The FCA has proposed a package of remedies that seek to make competition work better in the market and protect those least able to engage actively with their asset manager. These include a strengthened duty on asset managers to act in the best interests of investors, including reforms to hold asset managers to account for how they deliver value for money. It also wants to introduce an all-in fee so that investors in funds can easily see what is being taken from the fund.

It has also proposed a number of measures aimed at helping retail investors identify which fund is right for them, such as requiring asset managers to be clear about the objectives of the fund, clarifying and strengthening the use of benchmarks and providing tools for investors to identify persistent underperformance.

If you want to respond to the study, the FCA is now seeking views about its interim findings and would welcome views from all stakeholders.

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