‘Ripe for reform’: Industry reacts to FCA’s market study

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AJ Bell’s Ryan Hughes

The FCA Asset Management Market Study shows the regulator is firmly focused on tipping the balance of power back in favour of the consumer in an industry “ripe for reform”.

In its much-awaited final report, published today, the FCA confirmed the findings of last year’s interim report which highlighted weak price competition in various areas of the investment industry, including “the evidence of sustained high profits” of firms over the years and a lack of clarity around funds’ objectives.

AJ Bell head of fund selection Ryan Hughes argues there are too many examples of fund groups making huge profits, while delivering poor returns for investors. “The asset management industry is ripe for reform,” Hughes says.

“There are pockets of high quality active funds delivering great value to investors but there is a far higher proportion of active funds delivering poor value.’

He warns there are hundreds of billions of pounds stagnating in poor performing funds. 

“This needs to be unlocked and either moved into to high quality active funds or passive funds, a trend we have already started seeing.

But he says the key now is implementation, including additional consultations and how quickly reforms can be enforced. “It should also be remembered that the unbundling of fund charges since the Retail Distribution Review has had virtually no downward impact on active fund charges as it was expected to do.”

Investors and advisers have already been clearly casting judgement on “fake actively-managed funds”, says Tilney managing director Jason Hollands, who argues the number of managers worth backing is “relatively modest”.

“This can be seen both through the exponential growth in passives at one end of the market where competition for what is ultimately a commoditised type of product is rightly fee-based, but also the evidence from the actively-managed funds industry where performance-based competition is key.

“The actively-managed funds which have been hoovering up money from investors have not been dull, benchmark aware products, but those managed by proven investors like Terry Smith, Neil Woodford and Nick Train who typically take an unconstrained and high conviction approach and who can justify their fees through the excess returns they have generated over and above the indices over the longer term.”

A market review on the advice sector would complete the regulator’s “suite of reviews”, says Phil Deeks, technical director at TCC. 

“It’s clear that market studies are becoming the regulatory tool of choice, as they enable a drains-up review of a specific area of the market.

“Recent publications, including the retirement income market study, the asset management market study and the forthcoming platforms review, will only leave few aspect of the retail value chain untouched in the regulator’s pursuit of value for money. 

Deeks notes the regulator has already issued a warning shot about the value that the advisory sector provides, as well as a clear indication of its intent to look further into the retail intermediary sector.