RegTech Intelligence 
The FCA has released its final report on the Asset Management Market Study, which was launched in order to understand how asset managers compete to deliver value to clients, highlighting the weak price competition in several areas, issues with lack of clarity over charges and objectives.
The study was launched in November 2015, with an interim report released in November 2016. The findings in the final report are broadly consistent with those of the interim report and covered four main areas:
► Price competition – One of the key findings from the study was that price competition is weak in a number of areas across the asset management industry, and is particularly noticeable in retail active asset management services.
► Performance – The study looked at the relationship between price and performance in the asset management market. The study suggests that, for both actively and passively managed funds, on average they did not outperform their own benchmarks after fees in the case of both institutional and retail investors. The analysis also suggests that there is no clear relationship between charges and the gross performance of retail active funds in the UK, and that there is evidence of a negative correlation between net returns and charges. This means that, when choosing between active funds, investors paying higher prices for funds, on average, achieve worse performance. It is also difficult for investors to identify outperforming funds due to past performance not being a reliable indicator of future performance. Evidence also suggests that the worst performing funds are more likely to be closed or merged into better performing funds.
► Clarity of objectives and charges – The FCA raises concerns about how asset managers communicate their objectives to clients, especially retail clients. Investors’ awareness of, and focus on, charges and objectives is mixed and often poor, with many clients unsure about what charges they are paying for services and what the objectives communicated to them are.
► Investment consulting – Larger institutional investors, in general, are able to negotiate effectively and get good value for money, whereas smaller investors generally find it harder to negotiate with asset managers, and these are the clients that rely more on investment consultants when making decisions. The FCA have identified concerns in the investment consulting market, including the relatively high and stable market shares for the three largest providers, a weak demand side, relatively low switching levels and conflicts of interest, which results in lower value for the investor.
The remedies suggested in the report are split into two types. Firstly, those that will provide protections for investors who are not well placed to find better value for money. Suggested remedies of this sort include strengthening the duty of fund managers to act in the best interests of investors, which would be achieved through increasing accountability as part of the Senior Managers and Certification Regime (SM&CR), as well as introducing a minimum level of independence within governance structures. Another suggested solution to protect those
unsuited to finding better value for money is to require fund managers to return any risk-free box profits to the fund, and to make it easier for the managers to switch their investors to cheaper share classes. The FCRA has launched a consultation paper in tandem with the report in order to get feedback on these recommendations.
The second type of remedies the paper recommends are those which will drive competitive pressure on asset managers, in order to address the weak competition that the study noted. Part of this will be to further support the disclosure of a single all-in fee to investors, which MiFID II will also introduce for investors using intermediaries. Driving a consistent and standardised disclosure of costs and charges to institutional investors is expected to improve competition. This will be consulted on at a later date. The report also suggests that the FCA will chair a working group to consider how to make investment objectives clearer and more useful to investors, following the conclusions that these were often unclear. They will also recommend to the Department for Work and Pensions (DWP) that they continue to review and, where possible remove, barriers to pension scheme consolidation to help those schemes that wish to benefit from economies of scale that might be achieved with such consolidation.
These fixes could bring about interesting changes in the asset management space, working alongside regulation already in place to protect investors and drive competition and they should harmonise with the new rules coming in with MiFID II in a few months’ time. In addition to publishing further consultations later in the year, and those released alongside this report, the FCA will announce their decision on whether to refer the market for investment consultancy services to the Competition Market Authority (CMA) so, over the next year, it will be interesting to see what comes from this scrutiny of the asset management industry.