Scope of FCA market study under question

The regulator said its review would examine areas including how asset managers competed to deliver value, and whether they were motivated and able to control costs.

But concerns have been expressed over a number of additional areas of interest, not least by the FCA itself.

Notably, the watchdog said it intended to investigate whether high levels of profitability suggested a lack of competition among asset managers.

“Where firms in a sector or industry generate profits above a normal rate for that activity over a sustained period, it may indicate that competition is not working effectively for those services,” it said.

“Profitability of the asset management sector appears to be quite high, both globally and in the UK.”

The FCA and others have acknowledged that investigating this further may prove a struggle. The regulator warned that understanding the business models and profitability levels of asset management firms was “not without difficulty”.

It added: “The accuracy of any assessment of profitability will depend on the quality of the data gathered and the assumptions used in undertaking the analysis.”

Jenny Block, competition partner at law firm Pinsent Masons, noted the Competition and Markets Authority (CMA) had previously struggled in a similar task.

“Any profitability analysis is likely to be complicated, and it is notable that in the retail banking market investigation, the CMA ultimately felt that a meaningful appraisal and comparison could not be undertaken,” she said.

“No doubt there are slightly different considerations here, but the exercise and its results will have to be considered with some care.”

Another of the FCA’s areas of focus in the study, which will commence at the start of 2016, will be what it described as a “clustering of annual management charges for active equity funds around 1.5 per cent”.

Also under investigation are the entry and exit charges imposed on investors buying or switching portfolios.

The regulator said it wished to “understand prices and costs along the value chain – from advice and distribution to asset managers and ancillary/third-party products”.

But the watchdog also admitted: “Some stakeholders have tried to do this previously and have expressed the difficulty in isolating data that shows the costs along the whole value chain.”

Hermes Investment Management chief executive Saker Nusseibeh warned a fixation on prices could distract from broader issues.

He said: “We worry that an unintended consequence might be a focus on price as opposed to holistic outcomes, which may obscure true underlying costs.”

In contrast, Vanguard head of European business John James said the FCA should see through its attempt to analyse costs more closely.

“Fees for asset management services still vary considerably in the UK financial services industry,” Mr James said.

“We believe the FCA’s focus on ensuring end investors get value for money will help level the playing field, increase competition, enable greater innovation and improve choice.”

Watchdog to examine vertical integration in ‘value chain’

While the FCA will not focus on competition between platform providers, it will investigate the impact of platforms on competition between asset managers and how funds are purchased.

It will also look at the broader issue of vertical integration in the asset management “value chain”.

The FCA acknowledged vertical integration could benefit end investors due to “increased efficiency within a firm, which may be passed on to consumers in the form of lower prices or better service”.

But it added: “In particular circumstances, vertical integration can make it more difficult for competitors to enter the market and it can create conflicts of interest in certain business models.”

In addressing this concern, the regulator will look partly at whether conflicts of interest could arise for platforms owned by asset managers.

“We will also consider where the platform provider is part of a vertically integrated business and sells its own products alongside competitors’ funds,” the watchdog said.

“In this case, the platform may benefit from recommending certain funds or placing them in more prominent positions on the platform.

“In order to assess the potential conflicts, we will need to understand how platforms negotiate with asset managers, and assess the relationship between asset managers and platform providers.”