RE: Wholesale sector competition review call for inputs

Transcription

1 9 October 2014 Becky Young Policy, Risk and Research Division Financial Conduct Authority 25 The North Colonnade Canary Wharf London E14 5HS Submitted via to: RE: Wholesale sector competition review call for inputs Dear Sirs, BlackRock is pleased to have the opportunity to respond to the call for inputs on the wholesale sector competition review. BlackRock is one of the world s pre-eminent investment management firms and a premier provider of global investment management, risk management and advisory services to institutional and retail clients around the world. As of 30 June 2014, BlackRock s assets under management totalled 2.69 trillion across equity, fixed income, cash management, alternative investment and multi-investment and advisory strategies including the ishares exchange traded funds ( ETFs ). BlackRock has a pan-european client base serviced from 22 offices across the continent. Public sector and multi-employer pension plans, insurance companies, third-party distributors and mutual funds, endowments, foundations, charities, corporations, official institutions, banks and individuals invest with BlackRock. We welcome the opportunity to address, and comment on, the issues raised by this review and we will continue to work with the FCA on any specific issues. We include below our responses to the questions raised in the review on which we have comments. We would welcome any further discussion on any of the points that we have raised. Yours faithfully, Andrew Crain Managing Director Global Head of Regulatory Engagement and Development 1

2 General comments: Given the FCA s objective to promote effective competition, we agree that it is appropriate for the FCA to perform the review for which input has been requested. A regular review, or health check, may also be necessary as this should help to ensure that the competitive environment continues to function as the regulator would wish. However, fundamentally, on the basis of the matters we outline below, we believe that the UK asset management sector has appropriate levels of competition at this point in time. It is important to note that an asset manager is always acting on behalf of the client. Asset managers are agents and do not deal for their own benefit. The asset manager will be successful only if it is able to deliver for its client, against the pre-determined risk parameters and in-line with the client s objectives. Consequently, the interests of the client and the asset manager are essentially aligned; if the manager is unable to deliver for the client, that client is likely to seek an alternative solution to deliver against his objective and the manager will fail to earn any revenue. Competition in this facet of the wholesale market may enhance the offerings made available to clients, but the alignment of interests between clients and their asset manager should be viewed as the most important aspect of an asset manager s business model in delivering appropriate outcomes for consumers. However, putting aside this alignment of interests between the asset manager and the client, we believe that, fundamentally, there is an effective environment delivering competition in the wholesale sector of asset management. There are a large number of participants in the UK asset management market, ranging from large international operators, such as BlackRock, offering a broad range of solutions and capabilities, to smaller, niche participants who concentrate their efforts on specific product ranges, investment segments or client types. This variety not only provides the consumer with choice but also necessitates that every UK asset manager must compete for business as there is generally another manager who is willing and able to provide the solution which the consumer seeks. Whilst this competition has generated lower prices being charged by asset managers not least within the UK pensions market where regulatory changes and market forces have driven costs down over a number of years the effectiveness of competition within the wholesale asset management market should not be judged only on the price which is charged to clients. The price paid reflects the service which is delivered. Given recent markets, the performance which can be achieved from the lowest priced funds may not exceed the rate of inflation, as these funds may only be passively managed or have more vanilla exposures. Consequently, for clients to have the potential to achieve the return they seek in line with their objectives, they may need to consider more expensive funds which can provide access to other asset classes or more active management strategies. This does not mean that the outcome for the client is inappropriate, but is rather a reflection of the risk-reward conundrum associated with investment, and a willingness of clients to accept a more expensive fund in the hope that the investment performance will deliver an outcome which can provide meaningful growth. The primary means through which an asset manager is assessed is the performance that is delivered to the client. Regular reporting from the asset manager to the client enables the client to assess the performance of the manager, and the investment management agreement will establish and document the fees, charges and ongoing reporting that will be provided to the client throughout the relationship. Performance is measured net after costs have been deducted. Consequently, it is in the interests of the asset manager to minimise these costs in order that net performance is maximised. This ensures that the asset manager is cognisant of the need to keep costs at a level which do not negatively impact on the net performance that is presented to the client. Failure to do so would result in clients seeking alternative solutions and/or providers. Clients are focused on their investment objectives. If those objectives are not achieved, the client can move to a different provider or service offering. In addition, a client in the wholesale sector will seek to minimise concentration risk by choosing managers with different capabilities and expertise as opposed to have one manager manage all of their assets. This is therefore not similar to the retail market for financial services which, as exemplified by the retail banking 2

3 sector, is generally characterised by loyal, or sticky, clients who do not change providers with any regularity if at all and are less likely to diversify their assets across a number of providers. Given the willingness of wholesale clients to change providers, there is a competitive environment amongst asset managers, with a well-established request for proposal (RFP) process delivering competitive tenders, as managers compete to win, and retain, business from these clients. This necessitates that costs are managed appropriately and prevents asset managers from imposing excessive charges. Where an asset manager has a large amount of assets under management, this should not be considered to be a consequence of a lack of efficient competition. Instead, this should be viewed as a consequence of clients valuing the investment coverage of the asset manager and the performance which has been achieved for clients over time. This is not therefore a result of a firm holding an abusive position, but rather a reflection that some firms focus on niche strategies whereas other firms will offer solutions across a very broad range of products, strategies and asset classes, and can build assets under management by achieving volume in each of these. 3

4 Responses to questions Q1: Taking into account regulatory developments in this area, we welcome evidence on any competition issues in the market for data services in respect of both venue-traded and OTC products. Markets and associated infrastructure are soon to be subjected to a major overhaul as the revisions to the Markets in Financial Instruments Directive (MiFID) and the Markets in Financial Instruments Regulation (MiFIR) are implemented at the beginning of This follows amendments in the over-the-counter (OTC) derivative market which were instigated through the European Market Infrastructure Regulation (EMIR), some of which has yet to be implemented and most of which still needs to be fully embedded. The scale and impact of these changes should not be underestimated. In addition, it is worth pausing to reflect upon the changes to markets which the original MiFID introduced and, importantly, to recognise that these changes were not necessarily those that were envisioned when the original MiFID was being debated and implemented. When MiFID was being prepared, there was a desire to generate further competition in the market and provide enhancements to the levels of investor protection that were available. Greater competition should have been created by the increase in the number of trading venues, but the associated fragmentation of trading venues has not always resulted in benefits being provided to the end-consumer. The increased complexity of the market caused by the fragmentation made the collection of meaningful trade data difficult and restricted the availability of consolidated market data that would have delivered the transparency which MiFID sought. The revisions to MiFID and the new MiFIR should deliver additional competition in a number of respects, not least through the increased transparency that will be introduced. It is notable that the draft technical standards from ESMA call for a Commission review of the operation of the definition of a reasonable commercial basis three years after its introduction: this provides an indication of the likely period required before any meaningful conclusions should be made on the impact of this broad regulatory reform. One particular facet of the new requirements where competition is important will be the provision of a consolidated tape. The transparency which should be provided can be viewed as a public good and will be a key determinant of price formation. However, this transparency should be available without the need for value-added products to be purchased alongside and the costs related to purchasing the core consolidated tape must be reasonable. To ensure this and that the outcome achieved for Europe s end-investors is appropriate, relevant competition authorities need to be vigilant towards discretionary pricing systems based on the level of additional value-added products that the consolidated tape provider may require to be purchased. Furthermore, it is important to note that markets and their associated infrastructure are crossborder and increasingly so. If changes are made solely on a domestic basis, the impact is likely to be limited, and therefore it may be necessary for the FCA to cooperate with other regulators in order to be able to implement changes which could increase competition in this facet of the wholesale market. Any revisions to regulation which impact only UK markets would create inconsistencies with markets elsewhere, potentially generating regulatory arbitrage opportunities which may work to the detriment of the broader UK economy. Consequently, we believe it is necessary to await the outcome of the MiFID revisions and the new Regulation before performing any review of the effectiveness of competition in this space. In addition, if and when any further detailed analysis is performed, it will be important to assess the consequences of any proposed actions, and any unintended consequences. 4

5 Q11: We welcome evidence on whether sufficient incentives exist for asset managers to negotiate the best deal for investors; investors are able to assess effectively the quality of the asset managers; negotiations or are able to gain sufficient assurance that appropriate governance arrangements are in place; and there are other activities where the incentives of the asset manager and the client may not be aligned and where competition is not aimed at satisfying the needs of the investor. a. Negotiating the best deal for investors Fundamentally, the interests of an asset manager and its clients are aligned. Our business is built around a need to attract and retain clients and achieve satisfactory performance for those clients. If the performance does not equate to the expectations of the client, there are a number of alternative providers available to the client. To illustrate this, the Investment Management Association (IMA) the trade association for the UK asset management industry has approximately 200 members which are UK discretionary portfolio managers, UK based fund managers, or non-uk firms managing UK funds demonstrating the wealth of alternatives available in the UK market from which a client is free to select. If asset managers fail to provide the expected performance as evidenced by investment returns as well as the service delivered clients can easily move their investment to one of these other providers. Indeed, the movement of assets from one manager to another is so regular that a sub-sector has formed within the asset management industry to facilitate the transition of a client from one manager to another. We make money by making money for our clients. Our fees are a percentage of the assets that we manage. We seek to increase the volume of assets managed just as our clients invest with us in the hope that we will increase the size of their assets. If the client is not satisfied with the performance, the portfolio and relationship will be subject to review in order to consider whether there is an alternative means of supporting the client. However, if after this, the client remains unsatisfied, they are only too willing to move to another provider. When such decisions are made, we remain responsible to the client for the management of their assets until such time as they have been transferred to another manager. Clients assess an asset manager primarily by the investment performance which they achieve. This performance is measured net of fees so all costs incurred by the asset manager and chargeable to the client are factored into this figure. All asset managers are therefore incentivised to maximise the performance which they achieve which similarly means that all asset managers are incentivised to minimise the costs they incur such that the presentation of performance is maximised. Consequently, our fundamental objectives are aligned with those of our clients. If we do not achieve acceptable performance for our clients including through the minimisation of the costs we incur both of which are also what our clients want we do not have a business. This necessitates that in every action we take, we seek as far as permissible to minimise the costs incurred and achieve the best deal for our clients and therefore also for our business. Consistent with our desire to minimise costs, we welcome steps taken by service providers to automate any solution they provide to us. To this extent, we proactively work with our service providers to deliver further automation as this should reduce the costs imposed upon our clients as well as increasing the efficiencies which we can provide. The achievement of further automation will therefore benefit both the asset manager and the client; the reduction in cost reduces the drag on performance, and any increase in investment performance should prove beneficial for the asset manager through the retention of existing assets and the attraction of new assets. 5

6 b. Assessing the quality of negotiations and governance 1. The controls we operate do not vary depending on the paying entity The first point to note here is that our controls are the same irrespective of which BlackRock entity or fund is accountable; we operate one policy for the selection, ongoing appointment and oversight of any, and every, vendor from whom we receive a service. This ensures that the standards which we implore and impose are consistent, irrespective of the paying entity. The operation of a single policy reinforces the alignment between the interests of us as an asset manager and those of our clients. Every negotiation over outsourced services does not place the interest of any party over those of another and, equally, all factors are considered rather than focusing on only one element such as the price being paid. 2. Vendor selection and ongoing management The second point to note is that we operate a single policy which governs our approach to the selection and ongoing management of any service which is provided by parties external to the firm. We use a variety of vendors to provide services which are either outside our expertise or profession, or which can be sourced from a third party provider at a lower cost than we could perform the activity in-house. When any vendor is selected, we operate a single policy across the group. This policy applies irrespective of whether the vendor is being selected by BlackRock, Inc., a subsidiary, a consolidated entity, a fund managed by the group or a member of staff. For deals exceeding a specified size, a competitive bid must operate in order to ensure the vendor selected is the most appropriate for the matter being considered. In operating a single policy with the same controls and oversight, we do not have any opportunity to achieve an outcome for our clients which is in any way less optimal than the outcome which we would seek to achieve for ourselves. Before selection, the vendor is subject to due diligence, with ongoing oversight thereafter which features control reviews, risk assessments and performance monitoring. The policy and program which operate are designed to minimise the risk to BlackRock and therefore our clients of any vendor selection, whether the risk arises through the quality of the service, through the cost to the group or for some other risk exposure. This approach to vendor selection and ongoing management ensures that irrespective of which entity is outsourcing the controls and governance operate to the same level. This again prevents us from being able to put the interests of any one party ahead of another. 3. Wholesale clients willingly change providers if not satisfied with the services received The third point to note is that clients in the wholesale sector are significantly different to those in the retail sector; whereas the latter generally do not switch providers with any frequency, the former are only too willing to move from one provider to another if the service they receive, the costs they are charged, or the performance they achieve is not comparable with their interests or desires. This movement of assets can relate to an entire portfolio of a client or only a proportion of total assets, e.g. those associated with a specific strategy or mandate. This willingness to change manager creates an inherently competitive environment within the asset management sector whereby firms have to compete not just on performance, but also on risk management, service, ethics and culture in order to differentiate themselves in the market place and achieve sustainable levels of income and business. This willingness to move providers is predicated by: (a) an initial review and selection; and (b) ongoing due diligence and performance assessments which wholesale clients conduct on asset managers. The initial selection of the manager follows a pitch process where the client assesses the proposals from a short-list of potential managers. During this process, due diligence is undertaken on the asset manager and this will frequently include questions associated with the controls operated over those activities which are outsourced by the manager to a third party. After selection, an investment management agreement enters into force, and this will generally specify the terms on which the client will have access to the manager in order to perform ongoing due diligence. This ongoing due diligence can be 6

7 performed directly by the client or through an intermediary. The purpose of this due diligence is to seek clarity and assurances that the operations of the asset manager are appropriate for, and consistent with, the desired objectives of the client. Clients will typically want to understand the governance operated by the firm, and requests are frequently received in relation to the control functions which operate within the asset manager. No restriction is imposed on the questions which the client may ask of the asset manager, enabling the client or an intermediary on his behalf to acquire the information they consider necessary to assess the service which they receive. The due diligence enables the client to obtain data on many aspects of the asset manager s business and, whilst the questions being asked of the manager will vary from client to client, the process provides the client with the opportunity to acquire sufficient information from the asset manager in order to determine whether the service being received and the quality being provided are consistent with the client s objectives. In addition to ongoing due diligence, the asset manager makes available a variety of information in accordance with disclosure obligations in MiFID, designed to deliver additional clarity on various aspects of the asset manager s business. When the assessment is performed by an intermediary on behalf of the client, the intermediary will be able to compare and contrast the service being provided to the client with that of other asset managers, and is thus well placed to offer insight to the client on whether the service being received is the most appropriate for the client. Should the client be unable to discern sufficient comfort that the asset manager is operating in the client s best interests, or in line with the objectives agreed with the asset manager, the client will be more than willing to move his assets to another manager. Whilst the manager has a responsibility to act in the client s best interests and provide sufficient information to the client, we acknowledge that the client must assess the service which he has received. In this respect, a wholesale client is fundamentally different to a retail client. An example which illustrates this further is the transition management industry, a separate and distinct niche within asset management, which exists in order to facilitate the movement of a wholesale client from one manager to another. Transition management takes place primarily because there is competition in the asset management market. As the FCA note in the feedback statement following the thematic review into the UK transition management sector, there is over 165bn of assets transitioned in the UK every year, with over 700 individual transition mandates occurring per year in the period We have a dedicated function within our business which delivers transitions for clients, moving them from one manager to another; hence, this is not something which every asset manager outsources. These transitions may take place on behalf of clients with whom we have an existing relationship (e.g. by moving assets from or to a BlackRock mandate) or by transitioning assets on behalf of a client from one manager to another manager where neither mandate is being managed by BlackRock. Where a client requests a transition, this will often be agreed with a transition manager only after a competitive tender process is completed. By way of example, for the period since January 2013, approximately 73% of our transition business has been received only after a competitive tender where clients consider a panel with a short-list of potential transition managers to select from. The remaining 27% relates to repeat business or that acquired through an existing client relationship. We make two points here. First, irrespective of whether transition business is received after a competitive tender or direct from an existing client, the client will negotiate to agree the service that is to be received and the fee that is to be charged. The existence of such negotiations is a reflection of the bargaining power of the client who is safe in the knowledge that other competitive transition managers are available should the client not be able to achieve its desired service or fee level with that manager. If the manager is not competitively priced, selection is extremely unlikely. Furthermore, repeat business is achieved only because the offering is both cost effective and the service provided previously was in accordance with the client s demands and expectations. Second, the competition in this segment of the market is 7

8 such that fees have reduced over recent years. Although the price charged is only one way of assessing the competitive forces in a market, it does provide tangible evidence of competition between transition managers. The number of transition managers operating in the market has however reduced over recent years a consequence of active decisions to exit the market due to the profitability of the service. Whilst this reduction has generated more concentration, the quality of the remaining providers has arguably had to be enhanced in order to differentiate oneself from the competition. With fees reducing across the transition industry, the quality of the service that is provided is increasingly becoming a core differentiator. Therefore, the improvements which transition managers have made to their product offering and associated service in order to maintain market share will have benefitted the client, aligning the interests of the client with those of the transition manager. Q12: We welcome evidence on whether the bundling of ancillary services provided by intermediaries to asset managers is in the best interests of funds and investors. Where services are provided on a bundled basis, these generally result in a reduction in cost to the asset manager. This is beneficial for the client as the receipt by the asset manager of more services for a lesser cost enables a lower cost to be passed to the client. However, fundamentally, we will only pay for services which we consider add value; asset managers are unwilling to accept any service which adds additional cost but without an associated and quantifiable benefit also being received. It should also be noted that we have, over time, moved increasingly away from using bundled service provision as we focus on those providers who are able to add value to our business, rather than focus on one provider who is able to bundle multiple services. Furthermore, our recent experience has been that bundling of services is not something which prominently features in discussions with service providers. Q13: We welcome evidence on reasons for the differences in charges between retail and institutional funds. The potential discrepancy in the fee structure of retail and institutional funds should not be viewed as a lack of competition in the market. It is a result of basic economics. It is cheaper for an asset manager to operate an account for a large client when compared against the same volume of assets under management when aggregated across a large number of small investments. This is because the costs generated through client communications, dealing costs, other conduct of business obligations as well as portfolio and risk management, will be higher for those funds which have a large number of small clients. Investment consultants An investment consultant is often integral to the wholesale client in the decision making process of which investment strategy to follow and which asset manager to select. As part of this service, the consultant can be centrally placed in negotiations over the service provided and the associated fee. The consultant market is heavily concentrated amongst a very small number of core providers. As was identified in the recent Law Commission review of the fiduciary responsibilities of investment intermediaries, the advice which is provided by the consultant to a wholesale client for example, a pension fund will often be outside the scope of regulated activities under FSMA by virtue of the fact that it is only generic advice. The ability to achieve further competition in this arena is however difficult as was noted in the Law Commission s review. However, the difficulty should not prevent the FCA from considering if and how further competition could be achieved, especially given the increase in competition powers that will be delivered to the FCA at the point in 2015 when the remit of the FCA will extend beyond only those financial services which fall within the scope of FSMA. 8

9 Q15: We welcome evidence on any other areas where competition is not working effectively in the wholesale sector. The custodian market is very heavily concentrated on a handful of large providers. This does not mean that competition is not in existence between these custodians quite the opposite. We have changed custodians a number of times across our fund range and constantly monitor the service we receive from our custodians in order to assess whether it is consistent with our expectations and objectives. However, further participants in this space should generate additional competition. We recognise that scale is a significant inhibitor in this environment, insomuch as a custodian needs scale in order to function. Consequently, the ability to generate further competition in this space is extremely limited. The market for the provision of index services has recently seen a reduction in the number of providers that are operational. This can, at least in part, be explained by the actions of regulators around the globe in response to issues associated with LIBOR and the increase in regulatory scrutiny of indexes and index provision. However, and irrespective of the reason for the reduction in the number of providers, the consequence of the decrease in the number is that there will be less competition in the market place. Although the reduction in numbers will not create such a concentrated market as can be seen in some other facets of financial services provision, any reduction should be monitored from a competition perspective to ensure that sufficient incentives continue to operate and generate a competitive environment between those providers that remain active in the market. We suggest therefore that the FCA monitor this service to assess whether a sufficiently competitive environment continues to exist between those index providers which remain. 9