Asset Managers Face Pressure From FCA to Justify High Feesby
Financial Conduct Authority study looked at competition, costs
FCA proposing ‘all-in’ fees for investors, more transparency
“Weak” price competition in the U.K. asset management industry is leading to investors paying higher fees and charges that aren’t justified by bigger returns, the Financial Conduct Authority said following a year-long review of the industry.
The study found actively managed funds face the least price competition, though there were examples of poor value for money in passively managed funds as well, the regulator said Friday in a summary of its interim findings. The FCA also found there are conflicts of interest with institutional investment consultants, who often weren’t effective in identifying fund managers with better performance records.
The FCA’s conclusions come as asset managers are already facing increasing pressure from rising regulatory costs and competition from cheaper index-tracking funds that are stealing market share. The regulator is proposing a number of changes to aid competition including reforms to better hold firms to account on value for money, an "all-in fee" so that investors can more easily see what money is being taken, and requiring clearer communication on charges at the point of sale.
The regulator is also considering whether the issue around investment consultant conflicts should be referred to the Competition and Markets Authority.
“Today’s findings present a significant challenge to the asset management sector, but one not wholly unexpected,” said Mark Pugh, U.K. asset management leader at PricewaterhouseCoopers. “Firms have already focused on transparency and cost, but they clearly need to do more.”
The agency also found performance wasn’t always being measured against an appropriate benchmark.
“Asset managers are responsible for the savings of millions of people in the U.K.," Andrew Bailey, the FCA’s chief executive officer, said in a statement. "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 watchdog said the U.K. Treasury should look at giving the FCA the role of supervising investment consultants, who currently fall outside the regulator’s scope.
“We’ve been expecting the regulator to make substantial use of its wide ranging competition powers, and today’s interim findings suggest that the asset management sector will feel their full force,” PWC’s Pugh said.
Standard Life Plc CEO Keith Skeoch said the firm “as a true active asset manager” welcomed any move that would help people understand the benefits from different approaches to investing. Martin Gilbert, CEO of Aberdeen Asset Management Plc, said there was a need for “increased transparency” in relation to costs and services. The Investment Association CEO Chris Cummings, said value for money was a key concern for the industry that had already taken steps to improve confidence.
The FCA said last year it would review how asset managers compete in the U.K.’s 6.9 trillion-pound ($8.5 trillion) industry and whether they are motivated to control costs as part of a wider study into in the sector in light of concerns competition wasn’t operating effectively in some areas. The regulator said it wanted to understand the "investor journey" better to ensure consumers are getting good value.