The Financial Conduct Authority (FCA) published terms of reference on 18 November 2015 for its market study into asset management. The study will focus on: (i) how asset managers compete to deliver value for money; (ii) whether asset managers are willing and able to control costs and quality along the value chain; and (iii) the effect of investment consultants and other advisers on competition for institutional asset management. Across these topics, the FCA will also consider whether any barriers to innovation or technological improvements are preventing investors from getting better value for money.
While the study was initiated as part of the FCA’s wholesale sector competition review, the FCA has expanded the scope of the study to include asset management services to retail investors. The study will focus on asset management products and services but will also seek to understand where aspects of distribution, advice and ancillary services affect the way competition works for asset management. The scope includes pooled investment funds, segregated mandates and insurance-based investment products but will not focus on with-profits funds, private equity funds or venture capital funds.
The FCA will set out its analysis and preliminary conclusions in summer 2016, with the final report due in early 2017. There is already a strong regulatory focus on disclosure of costs and charges, with new rules in the Packaged Retail and Insurance-based Investment Products Regulation (PRIIPs) and the revision to the Markets in Financial Instruments Directive (MiFID II) expected to increase comparability across products and provide more transparency on transaction costs. The FCA’s Discussion Paper on Smarter Consumer Communications also focuses on how disclosures can be made more user-friendly. As part of this market study, the FCA is intending to look at how prices and costs vary in practice and this is likely to increase scrutiny of products which may offer poor value for money compared to close substitutes, and of poor value ancillary services purchased on behalf of clients. In other market studies, the FCA and/or the Competition and Markets Authority have considered consumer behaviour in light of behavioural biases and have recommended remedies to help consumers increase scrutiny of the services they receive, such as creating comparison tools, prompting consumers to review the services provided and reducing barriers to switching. Overall, firms are likely to see increased scrutiny of costs on higher margin products and services and we may see some rationalising of product ranges.
Contributing to the market study
The FCA plans to host a number of roundtables and bilateral meetings with stakeholders, as well as approaching market participants for information and data regarding the issues they will be investigating as part of the market study. These discussions are likely to play an important role in the shape and focus of the investigation. Firms should establish their position on competitive dynamics and potential remedies on the key areas of the study and engage in discussions with the FCA. Questions for firms to consider include the following:
- Costs and charges: Are costs and charges disclosures clear and user-friendly? How will MiFID II and PRIIPs affect this? Do products with similar objectives have significantly different costs? If prices differentiate between types of client, does this reflect genuine differences in cost?
- Quality of service: Are features of products and services clearly displayed? Are there aspects which receive less investor scrutiny and if so why? Where products are complex, is this complexity designed to serve the needs of end investors?
- Purchasing ancillary services: How much scrutiny is given to value for money when purchasing ancillary services on behalf of clients? What information is provided to investors on these services? Are there barriers to achieving good value for money for ancillary services, such as bundling or high concentration in the choice of service providers
- Vertical integration: While vertical integration of asset managers with institutional investors (such as pension providers or insurance companies) or platforms may increase efficiency, it may also create conflicts of interest. How are these conflicts managed and do in-house asset managers receive sufficient scrutiny?
- Investment consultants: Do the metrics investment consultants use for assessing asset managers help achieve good value for money? How are conflicts of interest managed? Conflicts could include incentives to recommend active strategies to justify fees or incentives to recommend in-house products where these exist.
- Barriers to innovation and entry: What market practices or regulations create barriers to innovation or entry? Are there barriers to switching between products or providers?
While the FCA is not formally consulting on the Terms of Reference, it welcomes any comments before 18 December 2015.