The FCA had a hunch that the asset management industry might be vulnerable to charges of fat cattery and that view is confirmed today in the interim report of the Asset Management Market Study. In the subtly understated words of Andrew Bailey this morning: “This is an industry with quite strong margins, and persistent margins”. Set against the context of greatly reduced passive charges over the last decade, active fund managers are now thoroughly on notice.
This isn’t just about the regulator imposing its will; Andrew Bailey points out that the whole point of the asset management industry is to get larger returns than on cash and we’d all agree with that, along with accepting that charges impact the eventual return of the long term saver. If we are to make investing more attractive to the 13.8m British adults who have savings accounts but no risk based investments, we need to show the returns are worth the risk… and that the industry isn’t pocketing the lion’s share through fees.
So it’s hard to argue against the FCA’s push towards increased competition and efficiency. Some £109bn of funds are deemed expensive in relation to the level of active work. But a price cap is not on the agenda because the FCA does not view this as the best way to get more effective price competition. The direction of travel is towards an all-in fee and the regulator plans to explore several routes.
The report finds that fund charges tend to be heavier than platform charges. But interesting it does identify a lack of correlation between cheap funds and cheap platforms – some cheap platforms have offered some very pricy funds – particularly for investment solutions.
The FCA don’t believe platforms are creating significant obstacles to asset managers winning routes to market. Vertical integrated platforms will be relieved to hear that although they are seen as being a significant and growing part of the market, they ‘do not appear to give significant prominence to their own funds in best buy lists’ or by preferential pricing of their own funds. Overall, platform are seen to be enablers of market access for fund managers.
Where advice is offered as part of the vertically integrated model, the regulator sees that there can be a temptation for firms to promote their own funds. The FCA has noted the growth of in-house funds, although it hasn’t found ‘any examples of adviser networks mandating the use of in-house funds’. There are some concerns about the processes for selecting in-house funds and solutions. Ratings agencies are said to be instrumental in helping advisers to construct the in-house CIP. We will cover the influence of ratings agencies in our next UK Fund Distribution guide and would welcome views on this.
On the subject of switching clients to cheaper share classes, the regulator accepts that the process is complicated. On the agenda are ways to ‘shine a light’ on old and new share classes and making bulk transfers easier.
The sternest criticism today was reserved for investment advisers to small pension schemes, but retail asset managers will know that they are also under scrutiny. We are getting reactions from fund groups that the FCA’s focus on fees rather than quality is misdirected and that fund managers will be forced to shoulder a hugely increased burden in the form of marketing comms and compliance. To some extent this requirement is likely to run against the increased efficiency objective.
The initial market reaction seems to be one of relief, as the FCA appears to be taking a less Draconian approach than many expected, particularly on pricing caps. However, we need a focus on broadening access to advice and the FCA admits that price – on which much of this report is centred – doesn’t generally affect people’s decision to invest.
We think the attention the report pays to past performance is interesting, particularly because the FCA itself repeatedly tell us that past performance is not a reliable guide to the future. Ratings agencies are under scrutiny for their role and the FCA will be looking for greater consistency in how past performance is communicated.
Vertically integrated firms might well be more worried today about the FCA’s focus on both process and price. We think there may be a lot more to come out on this one.