Fund managers look set for another torrid regulatory ride in the UK following a landmark report published last week.
The final Financial Conduct Authority (FCA) ‘Asset Management Market Study’ includes a swingeing “package of remedies” designed to increase competition, lower fees and improve disclosure in the UK funds industry.
Under the proposals UK fund managers will face a sterner investor ‘best interests’ duty, tougher disclosure mechanisms – including the requirement to report a single ‘all-in’ fee, and “standardised disclosure of costs and charges to institutional investors”.
In a statement, FCA chief, Andrew Bailey, said: “We have listened carefully to the feedback we received in response to our report last November. We have put together a comprehensive package of reforms that will make competition work better and help both retail and institutional investors to make their money work well for them.”
The FCA report also calls for a ban on “box profits”, a practice where managers pocket the spread on fund daily entry and exit prices despite not incurring any underlying transaction costs. Instead, managers will be required to return any ‘box profits’ back to the fund.
Furthermore, the UK regulator has confirmed an intention to bring investment consultants under its ambit in a move first flagged in the FCA’s November 2016 interim report on the funds industry.
According to a separate FCA study released in conjunction with the interim report, Aon Hewitt, Mercer and Willis Towers Watson represent about 60 per cent of the UK asset consultancy business.
“One survey found that 58% of schemes currently select the fiduciary arm of their existing investment consultant or actuary as their fiduciary management provider,” the FCA investment consultant report says. “Moreover 75% of new mandates were awarded without a fully competitive tender in 2014, with investment consultants continuing to provide the majority of mandates.”
The FCA also knocked back subsequent offers from the three main consultancy firms to adopt new practices in a bid to ward off a formal investigation by the Competition Markets Authority (CMA) slated for this September.
“We are proposing to reject the undertakings in lieu and are seeking views from other interested parties on this proposal,” the final FCA report says. “We are recommending that the Treasury considers bringing investment consultants into the regulatory perimeter, subject to the outcome of the provisional market investigation reference to the CMA.”
While the final FCA findings closely follows its interim publication, the regulator rejects “a perception” that the 2016 study “suggested that passive funds were preferable to active funds”.
“This is not the case,” the June 2017 FCA report says. “Rather than focusing on one strategy over another, we think it is important that investors understand both the total cost of investing and the objectives of the fund or mandate they are investing in, so that they can choose the product that best meets their needs.”
However, after a more than two-year long investigation into the UK funds industry the regulator found “that, on average, both actively managed and passively managed funds did not outperform their own benchmarks after fees”.
“This finding applies for both retail and institutional investors,” the FCA says.
After completing its review of the funds management industry, the FCA has scheduled an investigation of the UK investment platform market.
“The study will consider how ‘direct to consumer’ and intermediated investment platforms compete to win new and retain existing customers,” the report says.
Still reeling from the previous retail distribution review (RDR), UK financial advisers also remain under FCA scrutiny with the Financial Advice Market Review (FAMR) currently in full swing.
“The FAMR recommendations update was published in April 2017 and the review of the outcomes from FAMR is expected in 2019,” the FCA report says.