The UK Financial Conduct Authority (FCA) has earmarked the index, credit ratings and market trading data sectors for closer scrutiny amid claims of anti-competitive behaviour in the influential – and expensive – service industries.
In a statement last week, the FCA confirmed it would launch two investigations this year, starting with a probe “into concerns that complex contracts for benchmarks and indices prevent switching to cheaper, better quality or more innovative alternative providers”.
“Benchmarks and indices are used by market participants like asset managers, banks and clearing houses to track and evaluate asset prices and investment performance,” the release says.
High indexing and benchmark costs are a common source of angst among fund managers, including in NZ, with data providers such as S&P and MSCI generally wielding significant pricing power.
Global research house, Morningstar, has made some attempt to break the index nexus, launching a range of free or low-cost benchmarks in 2016 but with limited take-up in NZ to date. Last October Morningstar released a new suite of multi-sector indices targeting Australasian investors including KiwiSaver providers – signing up ethical investing specialist Pathfinder as a foundation user. Pathfinder earlier switched to Morningstar indices to benchmark some single asset class products.
Following its index investigation, expected to start about June, the FCA has flagged another intensive “market study” into the credit ratings sector by the end of 2022 in light of similar anti-competitive concerns.
Furthermore, the UK regulator has begun an intelligence-gathering exercise on wholesale trading data suppliers – notably, stock exchanges – that sell information such as “how many financial instruments are being traded, what people are prepared to pay for them and the price at which trades are executed”.
A highly concentrated wholesale trading data market could be lowering the quality of information available while also pushing up costs for investors, FCA consumers and competition head, Sheldon Mills, said.
“Access to wholesale data is really important for those who want to make investment decisions. Without it, they lack the information they need to make properly informed choices,” Mills said. “Our Call for Input and planned market studies are intended to ensure that competition is working well, that information is available to market participants that want it, and that innovation is keeping up with market developments.”