There was only ever really going to be one story that stood out last week. As people awoke on Friday morning to read the FCA’s interim asset management report, there was probably a range of reactions from advisers, fund house senior management, and those embedded in the distribution chain.
The loudest noise must have been the sigh of relief from fund groups that the term ‘cap on fees’ was nowhere to be seen.
It certainly would have been one of the hardest outcomes for asset managers. But Andrew Bailey, the regulator’s chief executive, dismissed the idea as having no effect on increasing competition. Capping fees was certainly at one end of the spectrum, making it unlikely, but regulators do have form on using such methods. However, the fact that the FCA never really gave credence to the idea should not mean fund groups have dodged a bullet – this interim report does not make light reading.
If the FCA follows through on the sentiment portrayed, this could mark a pivotal shift in the relationships between asset managers, intermediaries and customers.
One of the softest approaches mentioned by the FCA could in fact – if done properly – be the gravest change. The FCA’s first recommendation is to place additional duties on firms to act in the better interest of investors. On the face of it, we’ve all heard this before. But in today’s environment, the one thing guaranteed to come with additional duty, is additional reporting and evidence.
Any potential reforms around this ‘duty of care’ will be done via changes to the governance structure, either at fund or firm level. As implied by the report, the watchdog believes this could be the only way to make sure investors are paying a fair price for what they get.
The reason for this, which the FCA highlights over and over again in the report, is that there is little price competition, mainly due to the fact asset managers don’t wish to compete on price. One could suggest this is partly down to transparency, something the FCA is tackling, but also down to the fact their investors place less emphasis on cost. And this isn’t something the FCA can change, even if it wanted to, by regulation.
The FCA knows that bringing down costs for investors does not create a fairer market, it just shifts the focus. It will hit asset management profits and, as proved by the report, margins are cushioned enough to take a hit. But it doesn’t change market structure.
The only way to create a more competitive market is to create a level playing field between investor and fund group. Transparency, so asset managers show their hands, and governance, so fund firms are scrutinised on behalf of advisers and investors, seem the most sensible ways to do that and it should create a more efficient market.
There are no easy answers to governance, and the FCA’s six proposals on this all have inherent flaws or fall short of the mark. But this is where the FCA will dedicate a lot of its time. After all the talk of fees, governance is the way in which the regulator thinks it can achieve its aims. Almost every other suggestion in the report is essentially tinkering to make things clearer for investors, or formalising work already begun, so changes to scrutiny will be coming next.