The FCA regulates a market with over £7 trillion of assets under management, making it the second largest market in the world. The FCA has recently completed their Market Study, which had set out to discover how well the market works and if it offers value for money for investors.
Although the report did not present any significant surprises, it did reinforce a regulatory agenda aimed at improving investor protection. According to Andrew Bailey, Chief Executive at the FCA, the FCA have “put together a comprehensive package of reforms that will make competition work better and help both retail and institutional investors to make their money work well for them”.
The objectives of these reforms are to
In order to achieve these, the FCA will work through consultation papers, recommendations and other regulatory change initiatives.
This report should be seen by the industry as a guide for the FCA’s expectations of the industry. It should be welcomed by the industry, as the ultimate objective is to strengthen the industry and increase long-term savings and the industry view has been generally positive, as there no significant surprises within the report. While for most, the recommendations are reflective of initiatives, which are already in progress, for the rest, this is an important reminder to divert focus to these issues.
EY’s “FCA Asset Management Market Study: A blueprint for the industry” outlines a barometer of good market practice, dealing with the separate areas of focus, and what the actions firms may consider.
Fees and charges – All-in fee: The FCA proposes an all-in fee to include all the costs that an investor will incur. This should provide clear transparency to investors. Although some in the industry have commented that this may make funds less competitive, as the fees may appear higher than those funds, who do not disclose an all-in fee, the concept of an all-in fee is included within MIFID II and PRIIPS, meaning the funds and managers subject to those regulations will require those disclosures.
Application to Ireland: Other regulators may also give consideration to the question as to whether more can be done to provide investors with clear information on the fees and charges they can expect to pay.
Fees and charges – performance fees: The FCA will also consider performance fees in the future. It may consider applying performance fees only to where a fund has exceeded its most ambitious performance targets.
Application to Ireland: This structure could reduce the scope for performance fees for Irish funds, where, typically, they charge performance fees based on outperformance of a high watermark.
Governance: Funds will be required to have at least two independent directors. The FCA has also noted an option, where they would require boards to be majority independent and / or chaired by an independent director.
Application to Ireland: Irish funds are already very familiar with this governance model, with most Irish fund boards having two or three independent directors.
Value for money – SM&CR and Value for money – switching: The FCA propose to impose additional duties to act in the best interest of investors by introducing “value for money” as a responsibility under the Senior Managers and Certification Regime.
The proposals do not however outline metrics as to how to measure and evaluate value for money. Firms need to ensure that value for money and investors’ interests are at the centre of their decision-making.
The FCA have found that investors do not proactively switch in share classes that offer better value for money. This is more of a concern for non-advised clients. Future proposals may focus on removing barriers to switching without expressed consent, where that is in the best interests of investors.
Application to Ireland: The Central Bank is cognisant of the FCA’s focus on value for money within this Market Study, and has performed certain reviews and analysis on Total Expense Ratios in 2016. They have commented that although fees and charges disclosures are comprehensive, they can also be disjointed and overly complex.
If you have any questions on this topic, or any other asset management topic, get in touch with me or your usual EY contact.