FCA sets its sights on index-hugging managers
The UK Financial Conduct Authority (FCA) today set out
proposals to combat weak price competition in the active asset management industry,
having identified a large proportion of managers charging high fees without
adding value – or even attempting to do so.
The long-awaited interim results of its asset management
study looking at value for money in the £7trn AuM UK industry highlighted a section
of the market where funds take modest positions, defined as those with a
tracking error to the benchmark below 1.5, but charge high fees.
The report stated that there is around £109bn of expensive
funds that “closely mirror” the performance of the market but are “considerably
more expensive” that passive funds.
The FCA found that, on average, costs are not justified by
higher returns. It considers this to be evidence that competition was failing.
Christopher Woodward, the FCA’s director of strategy and competition,
said: “Active charges have remained broadly the same for the last decade
whereas there is some evidence that passive funds’ fees have fallen.
“For active funds there is also considerable price
clustering… If we put that together with the fact that in the industry there are consistent and substantial profits over time it would suggest that rather than
being an efficient price for the market it is actually more like a ‘going rate’.”
Despite there being a large number of market participants there were spikes
in the distribution of charges around 1% and 0.75%, which would not be expected
in a competitive market. There was no suggestion of
any organised price fixing or collusion in the industry.
“Managers must be accountable for consistently demonstrating the value they add relative to fees, and ensure that their interests continue to be closely aligned with the needs and requirements of schemes and, ultimately end-savers,” said Ed Francis, EMEA head of investment at Willis Towers Watson.
Francis added: “As the FCA considers potential remedies to address these concerns, it is important that any further regulation does not fall onto investors in the form of higher costs.”
There are two broad groupings where the FCA was comfortable with the fees being charged. It considered competition to be working effectively for passive managers tracking an index at a low price, with an ongoing charges figure (OCF) at or below roughly 0.5, and active funds taking significant positions with an OCF of up to 1.5%.
It concluded that investors are not getting adequate
information to make decisions, stating that objectives were not always clear
and the appropriate benchmark is not always applied.
Indeed, the report identified a shocking level of ignorance among retail
investors: 49% were not even aware that they had paid any charges on their most
recent investment.
Andrew Glessing, head of regulation at consultancy Alpha FMC, said: “For the first time the regulator has laid out its expectations of the sector and is challenging the fundamentals of the asset management model in a way not seen before, in its aim to see greater value delivered to the end investor.
“We can expect greater scrutiny on corporate governance and strategy. Further, there will be heavier burdens of responsibility on senior management, a need for enhanced product governance, and active fund managers in particular can expect more external pressure from stakeholders as the FCA intervenes to drive price competition."
The FCA has targeted the enhancement of transparency and competition as the remedy, rather than seeking a charges cap or
engaging in naming-and-shaming (market practices are generally within the law).
In line with the FCA’s competition powers, the interim report laid out evidence and provisional remedies. It will now consult on its findings, with the aim of
publishing a final report in the summer of 2017.
Its provisional remedies are:
- · Improving transparency through an all-in fee and greater standardisation
- · Strengthening the duty of asset managers to act in the interests of investors
- · Enhancing the clarity of funds’ objectives and the use of benchmarks
- · Ease transitions into better value share classes
- · For pension schemes – pooling assets and FCA regulation of consultants
The EU’s PRIIPS Regulation, expected to apply from
January 2018, tackles similar issues but Woodward said that the FCA will go
further in its recommendations.
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