The UK Financial Conduct Authority (“FCA”) is undertaking a study of the asset management market, which manages GBP 6.9 trillion, and is the second largest market in the world after the US. The rationale for the study is to ensure, as part of the FCA’s overall purview, that the UK market works well.  As part of the FCA’s new competition remit, the study is also looking at whether the market is sufficiently competitive so as to offer value for money for consumers.  An interim report was published on November 18, 2016, which voiced concerns about charges, performance, and competition in the industry.

The interim report expresses misgivings about active fund management charges and, in particular, about indications of weak price competition in an industry where average profit margins are 36%. These indicators include: (i) charges have stayed broadly the same for the last 10 years; (ii) charges are considerably clustered in some sectors; and (iii) charges do not fall as fund size increases.  The report also noted concerns that investors attempting to switch active asset managers faced a range of issues — including those of cost, time, and effort — that could be detrimental to competition.  By contrast, competition appears healthier in passive management.

The FCA noted that overall evidence suggests that actively managed investments do not out-perform their benchmarks once costs are taken into account. In particular, retail funds tend to under-perform their benchmarks after costs, while funds available to institutional investors achieve returns that are not significantly above their benchmarks.  The FCA said that “studies based on US and UK data suggest that there are more funds that persistently under-perform their market benchmark than would be expected in a competitive market”.

Of much comment is the role of intermediary investment consultants, not currently regulated by the FCA, who advise institutional investors on the asset managers and funds in which to invest. This is a concentrated market with the top three insurer-tied firms accounting for around 60% of the market.  The FCA concluded that it was difficult for clients to monitor and assess the performance of the advice that they received as well as whether investment consultants were acting in their best interests.  The FCA is consulting on whether to refer the investment consultancy market to the competition authorities for investigation.

The FCA’s interim conclusions are principally as follows: (i) it will try to strengthen the duty on asset managers to act in the best interest of investors; (ii) it will introduce an “all in” fee approach and make it easier to switch accounts; (iii) it will require asset managers to be clear about the objectives of the fund, and clarify and strengthen the use of benchmarks; (iv) it will require clearer communication of fund charges and increase transparency; and (v) it will require clearer disclosure of fiduciary management fees and bring provision of institutional investment advice within the regulatory perimeter.

Comments are due on this interim report by February 20, 2017, and we will expect further consultation and developments thereafter.

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Photo of Greg Lascelles Greg Lascelles

Greg Lascelles advises clients in high-stakes matters with significant financial or reputational risk. His broad-based practice covers complex international commercial litigation, arbitration, regulatory investigations and Parliament Select Committee hearings.

He acts for major corporates, financial institutions, entrepreneurs and individuals, with a broad range…

Greg Lascelles advises clients in high-stakes matters with significant financial or reputational risk. His broad-based practice covers complex international commercial litigation, arbitration, regulatory investigations and Parliament Select Committee hearings.

He acts for major corporates, financial institutions, entrepreneurs and individuals, with a broad range of experience across financial services, life sciences, technology, manufacturing, construction, music, sport, real estate, and consumer goods. His cases involve disputes relating to interpretation, M&A disputes (warranties, indemnities and earn-outs), bonus and remuneration, Companies Act matters, shareholder disputes, data litigation, securities litigation (misselling, mismanagement and close-outs) and disputes involving serious issues of fraud. He has been involved in groundbreaking High Court and FCA disputes relating to, among other things, market abuse and collective selling, as well as in the Supreme Court on the interpretation of standard contractual clauses. Greg’s regulatory matters (including at the FCA, FRC, SFO and Insolvency Service) relate to market abuse and financial statement reporting. As well as regular advice to clients on contract drafting and risk avoidance, he has recently been advising on developments in FDI and national security legislation.

Greg’s recent High Court cases have been listed in The Lawyer’s Top 20 cases of the year in 2019 and 2020 and he is currently advising on one of the most significantly complex corporate investigations the FCA has conducted and one of the largest director disqualification cases to have been brought by the Secretary of State. Greg’s pro bono work includes representing a child imprisonment campaigning charity in references to the Supreme Court and ECHR, and Freedom of Information Act requests for other groups. He can and does advise clients in English, French and Spanish.