FCA: improvements to the UK's asset management industry plannned

30 June 2017

Editor

EU regulation

The UK's Financial Conduct Authority (FCA) has proposed a series of changes to improve the governance of fund managers, to strengthen their duty to act in the best interests of investors and to use its senior managers regime to bring individual focus and accountability to this duty in its final report of its asset management industry study .

The final report confirms the findings set out in the interim report published last year. This found that price competition is weak in a number of areas of the industry. Despite a large number of firms operating in the market, the FCA found evidence of sustained, high profits over a number of years. The FCA also found that investors are not always clear what the objectives of funds are, and fund performance is not always reported against an appropriate benchmark. Finally, the FCA found concerns about the way the investment consultant market operates.

To address this the FCA  is proposing to require fund managers to appoint a minimum of two independent directors to their boards; introduce technical changes to improve fairness around the management of share classes and the way in which fund managers profit from investors buying and selling their funds. The regulator is now consulting on the changes to its handbook which will enact these changes. The consultation runs until 28th September.

The FCA also decided that trustees of pension schemes have limited or variable experience together with limited resources, resulting in a high dependency on investment consultants and trustees are not able to assess the quality of advice provided by consultants. The regulator also believes there are relatively high levels of concentration and relatively stable market shares among investment consultants, which the FCA said indicates that competition may not be working effectively in this sector.

The leading investment consultants in the UK market - Aon Hewitt, Mercer and Willis Towers Watson - had proposed to make changes to their business practices to avoid additional FCA rules. However, the FCA has reached a provisional view to reject their proposals suggesting that they do not go far enough. Instead, it wants a full study of the market by the Competition and Markets Authority and suggests greater structural changes may be necessary to meet its competition concerns. The FCA is consulting on its decision and this consultation will end on 26th July.

Responding to the FCA report Chris Cummings, chief executive of the Investment Association, said: “Our industry looks after pensions and investments for millions of UK households, helping them to lead more prosperous lives into retirement. With this role comes significant responsibility. We strongly support the FCA’s objective of ensuring our industry serves its customers in a competitive, accountable and transparent manner.

"We welcome the regulator’s recognition of the industry’s work to date on developing a consistent and transparent disclosure code for charges and costs which can be built on further with consumer groups. The FCA has listened to our calls to make it easier for savers to switch between share classes, which we welcome."

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