FCA overhauls asset management rules with 'all-in fee' proposal

"We want to see greater transparency so that investors can be clear about what they are paying and the impact charges have on their returns."

The FCA found that there is limited price competition for actively managed funds, meaning that investors often pay high charges. It found stronger competition on price for passively managed funds, but also examples of poor value for money in this segment.

The study also shows that fund objectives are not always clear, and performance is not always reported against an appropriate benchmark.

Additionally, the FCA says investment consultants undertake valuable due diligence for pension funds but are not effective at identifying outperforming fund managers.

The UK’s asset management industry is the second largest in the world, managing almost £7 trillion of assets. Over three quarters of UK households with occupation or personal pensions use the services asset managers offer.

In response, the FCA has proposed a "significant package of remedies" including a strengthened duty on asset managers to act in the best interests of investors and reforms to hold asset managers to account for how they deliver value for money.

It is also introducing an 'all-in fee' so that investors can easily see what is being taken from the fund, as well as a number of measures aimed at helping retail investors identify which fund is right for them. The measures will require asset managers to be clear about the objectives of the fund, clarify and strengthen the use of benchmarks and provide tools for investors to identify persistent underperformance.

The measures aim to ensure clearer communication of fund charges and their impact at the point of sale and in ongoing communication to retail investors and increased transparency and standardisation of costs and charges information for institutional investors.

The regulator will also explore the potential benefits of greater pooling of pension scheme assets.

The FCA is now consulting on whether to make a market investigation reference to the Competition and Markets Authority on the investment consultancy market and has recommended that HM Treasury considers bringing the provision of institutional investment advice within the FCA’s regulatory perimeter.

In addition, the FCA will undertake further competition work on the retail distribution of funds, particularly in relation to the impact financial advisers and platforms have on value for money.

Andrew Bailey, Chief Executive at the FCA, said: “Asset managers are responsible for the savings of millions of people in the UK, making decisions which affect their financial well-being both now and in the future.

“In today's world of persistently low interest rates, it is vital that we do everything possible to enable people to accumulate and earn a return on their savings which can meet their lifetime needs. To achieve this, we need to ensure that competition in asset management works effectively to minimise the cost of investment.

“We want to see greater transparency so that investors can be clear about what they are paying and the impact charges have on their returns. We want asset managers to ensure investors receive value for money through pursuing energetically their duty to act in their customers’ best interests. The remedies that we are proposing today aim to achieve these outcomes.

“Low interest rates are necessary for the economy, but we have to do everything else we can to ease the burden on savers. This is one thing we can do."

David Ferguson, CEO at Nucleus, commented: “The FCA published its interim findings on competition in the asset management sector this morning. The first response I saw was ‘at last’. Whether or not it could have arrived sooner, the report includes some pretty incisive and stark observations. Upon first impression, it certainly doesn’t look like too little, too late.
 
“Transparency has forced the platform sector to get competitive, with the result that some players who once captured (largely undisclosed) revenues of 75bps or more now take fees of 30-40bps, amid a fiercely competitive landscape. Despite the grumbles of various observers, the sector has delivered real, positive benefits for clients amid this drive to transparency, and today’s news will lead that to become even more pronounced over time.
 
“Hopefully today’s announcement will have a similar impact on the asset management sector, with the FCA introducing an all-in fee and enhanced reporting requirements. Shining a spotlight on the true fee active managers charge retail clients means the days of 90bps funds – which are probably nearer 120bps when other fees and turnover costs are included – might finally be over now that there is a requirement to present an all-in fee. This will substantially reduce revenue margins and should give rise to better client outcomes. Sure, there’s no reason why pricing should be expected to fall to institutional levels as cashflows are less predictable and liquidity is harder to manage, but new technologies and better data analysis will be deployed to help bridge the gap, without necessarily resulting in a complete collapse in fund management profitability.
 
“The businesses that will really feel the pain are not only the pure asset managers, but those so-called vertically-integrated (the dictionary definition of integrated is quite important here) businesses that are using platforms (or even adviser salesforces) as loss-leaders to drive client portfolios toward fat-margin, in-house fund managers. They, and their shareholders, could be in for more than a bit of disappointment. Here’s hoping.”