What does the FCA asset manager review mean for the industry?

FCA interior 620x430The FCA’s examination of competition in the asset management industry is likely to result in more direct action against firms, say experts, who welcome the investigation.

The FCA today set out the key areas it will focus on in its market study into competition in the asset management industry.

The regulator will assess firms on how they compete to deliver value, whether they are motivated or able to control costs and how investment consultants affect competition for institutional asset management.

But law firm Pinsent Masons has warned the review looks like it will lead to further “rules or direct action against individual firms”.

“What is notable is that the study is wide-ranging and encompasses not only the managers themselves but those along the value chain whether distributors, fiduciaries or other advisers and is set against the backdrop of examining whether there are barriers to innovation and technological advance, a theme that is very much at the forefront of the FCA’s current thinking,” says Elizabeth Budd, a partner in the regulatory team at Pinsent Masons.

In particular the FCA will look at retail investors’ ability to access information on transaction costs on an ongoing basis and act upon it by switching products.

Graham Bentley, managing director of investment consultancy gbi2, says he would like to see a review on the whole value chain on the price of legacy investments, including how fund managers charge and how this process can be made more efficient.

He says: “If you are a fund manager who has sold a lot of units off the page 15 years ago that share class is still charging 150bps but if you bought the same fund today from a platform it would only cost you 75bps and even if you added the platform fee it is still cheap. So that process needs to be made more efficient.”

The way a fund manager operates has changed dramatically over recent years but pricing units and fund shares today “is not a great difference from what it was in 1984”, Bentley adds.

“So if you had this massive increase in technology and the efficiency anticipated that they will give you why hasn’t that been reflected in the price?” he says.

There are billions of pounds invested in “dinosaur investment products” and individuals should be encouraged to review their investments, agrees Hargreaves Lansdown senior analyst Laith Khalaf.

He says: “There is also a lot of money in many expensive funds but nobody is forcing investors into buying in those funds. A lot of people are still invested in these old funds so people should be encouraged to review their investments and so firms should give them the tools to do that.”

Khalaf also says the FCA should look specifically into the tracker market where there are some providers that charge a very low fee and similar funds that charge “10 times that”.

He says: “There is a very competitive end to the tracker fund market, which has seen fund costs slashed to the bone, with a UK tracker fund available from Legal & General for a fund charge as little as 0.06 per cent per annum.

“At the same time there are tracker fund providers who are not playing this game at all, and are charging more than 10 times as much for a near identical product.”

EY senior advisor Malcolm Kerr also says one of the issues the FCA may be interested in exploring is the way competition works when asset managers have to unbundle research costs under Mifid II, at which point everybody in the fund management industry may move to the same pricing.

He says: If all managers reprice their funds at the same price that suggests that competition isn’t working as normal in the market. The industry may say that the competition is about performance, not about price, but other people would say it is very unusual in the market that everyone charges the same price.”

The FCA will also outline in its study the difficulty investors have in making sure they are getting value for money and in monitoring the performance of asset managers.

Bentley says: “Half of funds launched years ago are now closed or merged so information presented to the world now is different.

“It is difficult to assess the value for money investment managers deliver to investors because you have only a small proportion of the fund performance story today. Maybe there is an issue there for the regulator, which is about how do you factor in to your reporting your past failures as well as your past successes?”

Experts also say some other areas in asset management need attention, such as the conflict of interest involving investment consultants because they are not regulated on the advice they give.

Bentley says: “You can look at Square Mile and Morningstar, they aren’t investment consultancies but they provide advice on investment. It is interesting to look at the degree to which flows increase as a result of their recommendations.”

He says firms such as Morningstar are “economically important” for the fund management industry but the question remains whether their recommendations deliver any additional performance benefits.