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18 November 2015

FCA launch competition probe into asset management industry

Today the Financial Conduct Authority (FCA) announced further details on its market study into UK’s asset management industry, as part of wider efforts to promote fair, transparent and competitive financial markets.

First signposted in its March 2015 Business Plan, the FCA will review how asset managers compete with each other and whether they are motivated -- and able -- to control costs across their value chain. The primary focus will be on costs and fees paid by clients, continuing a long-running FCA review of asset managers that started with Martin Wheatley’s speech at the Financial Services Authority (FSA) asset management conference in 2012.

Since then the market has evolved but despite continued market forces pushing down fees (e.g. low barriers to entry), the FCA believes that a lack of competition may result in clients paying too much. As such, average profitability is high in the sector which earns 13 billion pounds in fees annually, a common warning sign for regulators. In particular, the FCA believes that fees and charges are not always transparent or linked to the costs incurred. Therefore, it can be difficult for clients to assess whether they are getting value for money.

Firms will need to get out in front of the review and start considering how investors could determine value for money for asset management products, how behavioural biases may impact both clients and their behaviour and the role of advisors in affecting the way that client can achieve value for money. Rebuilding trust with clients is key to this endeavour. According to a recent survey, only 12 per cent of consumers have trust in their asset managers, the lowest out of all financial services providers surveyed – including investment banks.

The terms of reference are broad: the FCA’s review will also touch on the role of investment consultants and potential conflicts of interest arising from the provision of advice and asset management services; the incentives and ability of asset managers to control costs incurred on behalf of investors; and the bundling of ancillary services and the quality of some of the services provided.

It will also likely touch on niggling issues the regulator has mentioned in the past such as conflicts of interest in the sale of “closet tracking” funds and the lack of competition in third party services such as safekeeping of assets or custody.

As a result of the study, the FCA noted they “may intervene” in the asset management industry if it finds there is not enough competition in the sector. The regulator said it could take action “through rule-making, introducing firm specific remedies or enforcement action, publishing general guidance or proposing enhanced industry self-regulation” if it finds that a lack of competition means investors aren't getting value for money on the services they purchase from asset management firms in the UK.

For more information on the evolving regulatory landscape please see our latest Asset Management and Wealth Management Regulatory Guide - Q4 2015.