The FCA’s eagerly awaited final report on the asset management industry has left many in doubt as to whether the regulator’s plan to tackle the myriad of problems it has identified is the right one.
The FCA did not shy away from calling out a lack of competition in the £7trn UK asset management sector, but while the direction of travel is clear the timing on future policies is not.
Following its hard-hitting interim report in November, the FCA has confirmed it will go ahead with some key measures which it calls “a comprehensive package of remedies” to tackle weak price competition, the lack of clarity in fund objectives, and the effectiveness of advisers and third parties.
Platforms faced tougher than expected rhetoric, as the FCA suggested platform costs in the value chain are potentially “more significant” than advice charges.
FCA chief executive Andrew Bailey has said the FCA will only ask for “sensible, transparent disclosure” when it eventually makes its rules.
But despite some softer noises made in the final report, fund groups and providers sense big changes in the investment industry are just around the corner.
The FCA’s final report has confirmed the regulator wants to go ahead with its all-in fee proposal, where fund managers will need to include an estimate of trading costs in one single figure.
The report says work will continue on the proposals as the FCA aligns with the EU’s upcoming Mifid II and Priips regulations which prescribe a similar approach to disclosure.
Some argue the report’s remedies, although potentially disruptive, are anything but definitive.
KPMG head of asset management regulatory change Julie Patterson says the FCA final report has rightly brought to attention what Mifid II and Priips are going to do, as implementation is only six months away.
She says: “There’s a lot of talk about the FCA going soft on asset managers in the final report but what the interim report didn’t fully recognise, as the final does, is the very significant full set of rules coming in from Mifid II and Priips. If the FCA had started to consult on different things now in its final report, these two regulations would come in first and they address a number of these issues in terms of disclosure.”
But co-founder of The People’s Trust and former head of the Investment Association Daniel Godfrey says deferring to Mifid II on the all-in fee proposal is “a disaster”.
He says: “The regulator and the Government are not going to make a disruption in the asset management industry. The disruption is to be found at the root.”
Patterson says investors need to know what costs are when they are grouped together as the net value of all costs of products is already provided by the net asset value of the fund itself.
She says: “No matter who is being paid what, you will end up with a total figure for what it has cost you depending on what product you had bought, which is not just funds.
“To the NAV, which investors already have, you need to add distribution costs that distributors need to set for them.”
As part of the suggested remedies, the FCA will require authorised fund managers to appoint at least two independent directors on boards to get better supervision of investors’ money.
But The Financial Inclusion Centre director Mick McAteer argues this is only “a partial improvement” to governance.
He says: “There’s still too much influence from the chair of the board in companies. If the fund governance was really independent they’d not be afraid of sacking fund managers.”
Experts say the clampdown on costs and disclosure is expected to increase costs for fund groups and squeeze profits, but only in the long term.
FCA package of remedies
- Require fund managers to appoint a minimum of two independent directors to their board
- Improve fairness around the management of share classes and potentially switching off pre-RDR trail
- Support the disclosure of a single all-in fee to investors
- Launch of investment platform study
- Ask Treasury to bring in investment consultant, into FCA’s remit
- Chair a working group to focus on how to make fund objectives more useful
- Consult on benchmarks use and performance reporting
- Consultancy market to possibly be referred to Competition and Markets Authority
- High profitability of vertically integrated firms and conflict of interest
- Inadequate advertising of passives and lower costs
- Economies of scale not being passed on to clients
Source: FCA, Money Marketing
Liberum analyst Justin Bates sees “little immediate impact” on firms outside what had been anticipated in the interim report, but he expects regulatory costs to increase and revenue potential to decline.
Bates argues the most immediate impact on certain firms’ profitability is likely to be the new requirement for them to return risk-free box profits to the fund rather than accruing to the asset manager.
Box profits result from the bid-offer spread between units, intended to cover transaction costs in dual-priced funds, when buy and sell orders can be matched with each other and the revenues then taken by the company.
If the fund governance was really independent they’d not be afraid of sacking fund managers
The FCA says its proposed rule change will result in at least £20m in risk-free box profits, that several firms retain, being transferred to investors in the future. The changes are also likely to incur a one-off cost of £5,000 per firm. Bates notes box profits have accounted for around 10 per cent of group profits in some cases in recent years.
Platforms under the spotlight
The attention to platforms and their value for money is one of three main areas the FCA is investigating.
The FCA says a first document on the recently announced platform study will be launched this month as the regulator examines whether providers offer the best options to investors.
The FCA notes the “significant difference” in total charges to the client, relative to what may look like low platform charges.
Direct platforms The Share Centre and Hargreaves Lansdown were among those that show comparatively low platform fees but are among the most expensive on the total costs of their services.
What direct investment platforms say about the FCA report
Shaun Port, chief investment officer
We want to keep our pricing as simple as possible. The outcome of the FCA market study will be a simplification of charges because some platforms can have more than 30 different charges across products, services, management.
Barclays Smart Investor
Clare Francis, savings and investments director
The pressure coming from the FCA will not be on just reducing the platform service fee but the pressure will be on being more transparent and clear on these charges.
Rob Fisher, head of growth
We think about ourselves as an asset manager rather than an asset gatherer. We think the total cost of investing is what is important, but also simple investment solutions. Over time it will all be around passing any economy of scale to clients in lower fees as we do.
Following the FCA report release last week, Hargreaves was the biggest faller in the FTSE100, down at 3.1 per cent.
Platforum senior analyst Rodolfo Crespo says Hargreaves uses its “negotiation power” to secure discounts for most fund groups, in the same way rival FundsNetwork does, including 40 fund houses on its Wealth 150+ list of preferred funds.
Hargreaves says people investing in the funds could save 23 per cent on the ongoing charge of these funds in the list. Total charges at the broker could add up to just over 1 per cent.
Where are the advisers?
A large number of respondents to the FCA interim report urged the regulator to look at the entire value chain when addressing the asset management industry, referring to advice costs in particular as “one of the largest portions” of this chain.
But FCA executive director of strategy and competition Christopher Woolard stressed how platform costs potentially make “a significant part” of the total costs investors are faced with.
Woolard said: “In the final report we made it clear we are interested in the whole value chain. The cost and charges you get from an adviser were addressed in part through the RDR and the Financial Advice Market Review. Then you have the platform piece… That is potentially a significant part of the total cost consumers bear.”
McAteer says the FCA analysis has left “big gaps” in the latest report such as how difficult it is to justify why advisers tend to pick some underperforming funds rather than others.
Patterson says platforms do not fully reflect the entire distribution chain.
She says: “In the interim report the FCA talked about further work on distributors but it didn’t aim at platforms but on distribution more widely. Now they specifically mention platforms but they are only a subset of distribution.
“A lot of distributors are definitely not platforms. Competition is everywhere in the value chain but maybe they are seeing platforms as a priority.”
Patterson suggests the FCA should start its analysis from fund manufacturers and then extend it to distributers, and put all the data together.
Vertical integration troubles
The FCA has reiterated its concerns on the spread of vertically integrated business models, in which firms both manufacture and distribute products.
Money Marketing asked the FCA about the nature of their concerns on vertical integration and to what extent this will make it into its upcoming platform study.
FCA director of competition Mary Starks said: “We’ll launch the work on platforms properly in due course, and at that point we will set out the scope of that work very clearly, but certainly vertical integration and the relationships between different parts of the value chain will be something we will be looking at.”
A number of respondents to the FCA study said vertical integration has been increasing since the RDR, suggesting providers are trying to seek “alternative routes” to get traction back in the retail market.
Money Marketing understands the FCA’s main concern is whether vertically integrated platforms are starting to push their own products to the detriment of other investment firms.
Fairer Finance managing director James Daley says brokers and platforms should remain intermediaries that are independent from asset managers.
He says: “The transparency in this market has been delivered by distributors. If customers are buying funds through platforms, they have the power to decide to display fees and help customers make choices on costs. I don’t think most platforms have gone very far in helping them.”
Respondents have also pointed out some vertically integrated models have margins “in excess” of fund managers’ profits. But analysts say it is unlikely vertically integrated firms such as Old Mutual Wealth or Standard Life can have higher margins than pure fund groups.
Shore Capital says people-intensive face-to-face advice firms or discretionary fund managerstend to have margins of around 20 per cent, and 30 per cent for the largest firms, while some pure asset managers’ profits are much higher such as Jupiter with around 50 per cent or Ashmore at 65 per cent.
However, equity analyst Paul McGinnis says: “In theory a fully-integrated model with all the four verticals, advice, platform, DFM and funds, sharing costs could produce a higher margin than the theoretical mix of individual parts but I don’t see any businesses that have developed it to that degree. Indeed, the FCA might have a few issues around conflicts of interest if it was that developed.”
Investment platform AJ Bell has recently launched its own range of passive funds, which are available to investors through both its advised and direct channels.
Chief executive Andy Bell tells Money Marketing the firm has “no intention” of offering advice itself on top of that. He says: “Where vertical integration runs through from advice to fund manufacture there is a clear conflict of interest that requires careful management and is an area that will benefit from a regulatory focus.
“Our focus in launching our own investment solutions has been on delivering value with an emphasis on the aggregate cost of platform and investment solution.
“It would be a shame if regulation got in the way of platforms offering innovative and lower charging structures for in-house investment solutions.”