Devilish details of FCA’s asset management market shake-up

Devilish details of FCA’s asset management market shake-up

The Financial Conduct Authority has called for a radical shake-up of the asset management market and questioned whether conflicts of interest exist between advisers, fund managers and ratings agencies.

Following a near two-year investigation into competition issues in asset management the FCA told fund managers today to overhaul their charging structures, called for extra powers plus revealed future probes.

Here are the key things you need to know about what the regulator uncovered about the industry – and what steps the watchdog intends to take next.

1) Active managers aren’t worth lofty fees

The regulator reported firms do not typically compete on price, particularly for retail active asset management services. 

Both actively managed and passively managed funds were found not to outperform their own benchmarks after fees. 

However the regulator revealed many active funds offer similar exposure to passive funds, but charge significantly more for this. 

The City watchdog estimated that there is around £109bn in ‘active’ funds that closely mirror the market which are significantly more expensive than passive funds.

The regulator found investors do not choose to invest in funds with higher charges in the expectation of achieving higher future returns. 

However, the FCA’s additional analysis suggests that there is no clear relationship between charges and the gross performance of retail active funds in the UK. 

There is some evidence of a negative relationship between net returns and charges. 

According to the watchdog this suggests that when choosing between active funds investors paying higher prices for funds, on average, achieve worse performance. 

The City watchdog found some evidence of persistent poor performance of funds. 

However, the regulator also noted that worse performing funds were more likely to be closed or merged into better performing funds. 

The FCA also found that the performance of the merging poorer performing funds improves after they have been merged. 

However, the City watchdog also found that the performance of the recipient fund, on average, deteriorates slightly after the merger, although it is not clear that this is a direct result of the merger. 

While mergers and closures may improve outcomes for some investors, the regulator found not all persistently poorer performing funds are merged or closed and it can also take a long time for worse performing funds to be pulled. 

To address the issue regarding fees, the FCA is backing disclosure of a single all-in fee to investors and Mifid II will introduce this for investors using intermediaries. 

This all-in-fee will include the asset management charge and an estimate of transaction charges. 

Managers will also be required to be clear about why or why not a benchmark has been used. The FCA will require that fund managers use or otherwise of benchmarks is consistent across marketing materials.

2) Advisers to lose cash as relationships under spotlight

In a double blow to financial advisers, the paper questioned vertical integration and suggested pulling the plug on trail commission.