FCA slams asset management sector for lack of price competition

Publishing the interim findings of its asset management market study begun in November last year, the City watchdog found “there is limited price competition for actively managed funds, meaning that investors often pay high charges” which are often “not justified by higher returns”.

Fund objectives were also criticised for not always being clear, and performance not always reported against an appropriate benchmark.

The FCA said that despite a large number of firms operating in the market, the industry as a whole has enjoyed sustained, high profits over a number of years with “significant price clustering”.

Meanwhile, although investment consultants undertake valuable due diligence for pension funds, they were found to be not effective at identifying outperforming fund managers.

The FCA also identified “conflicts of interest in the investment consulting business model which require further scrutiny”.

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.

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.”

Publishing its findings, the FCA proposed a package of remedies, which include:

The FCA is also consulting on whether to make a market investigation reference to the Competition and Markets Authority (CMA) on theinvestment 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.

The FCA is now seeking views about its interim findings and welcomes views from all stakeholders on the emerging thinking on potential remedies.

Commenting on the FCA findings, Martin Gilbert, chief executive of Aberdeen Asset Management said: “I welcome the FCA’s interim report as it brings focus, and a sense of urgency, to confronting some key industry issues impacting customers. There is a need for increased transparency in relation to the services provided, the costs of such and also for ensuring value for money. Asset managers play a vital role in helping investors achieve their financial goals and the FCA’s proposals will help deliver this. We look forward to working with the regulator and the industry to ensure all investors, large or small, receive the best possible service.”

“The FCA’s suggested remedies will also help to strengthen confidence and competitiveness in the UK Asset Management industry, making it more attractive on the global stage by leading the way in best practice.”