Summary and analysis of the FCA s Asset Management Market Study Final Report. June 2017
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1 Summary and analysis of the FCA s Asset Management Market Study Final Report June 2017
2 Executive Summary The FCA published its final report on the Asset Management Market Study on 28 June. Overall its conclusions are not particularly surprising, holding fast to the findings of the interim report around governance, lack of adequate price competition, fund performance, and clarity of costs and charges. But the report does not bring this reflective period to an end. Instead the package of remedies envisages a substantial to do list for the regulator with further consultations published and expected, and new areas to be considered for regulation. To an extent the industry remains in a position of wait and see, although in the knowledge that the FCA continues its trajectory of wideranging reform and increased scrutiny of the asset management sector. The FCA continues to push for a single all-in fee to investors, on which it will consult later in the year, and intends future rules to require fund managers to clarify investment objectives, to explain their use of benchmarks and other comparators, and to improve disclosures which use past performance as an indicator. Investment consultants face the dual threats of becoming regulated by the FCA and a CMA market investigation reference in September. In addition, a further FCA market study, this time into competition in the investment platforms market, has been announced. In its remedies, the FCA has piggybacked off current and forthcoming regulatory frameworks, including the planned extension of the SMCR to strengthen the duty on fund managers to act in the best interests of their investors, and PRIIPS and MiFID II with their heightened investor protector disclosure regimes. With those regimes coming into effect in the course of 2018, we can expect that much of the associated change heralded through the market study, will be introduced within complementary time frames. The FCA has found that: > > there is weak price competition in the industry, particularly in the retail funds sector; > > there is considerable scope to improve cost transparency and communication of fund objectives and performance; and that > > changes should be made to the operation of the investment consulting market. These high level conclusions drive the menu of remedies that the FCA proposes and determine the programme of regulatory change that we can expect to see going forward.
3 What next: an overview of the proposed remedies and the timetable for change Issue Remedy Timing REMEDIES TO PROTECT INVESTORS Strengthen the duty to act in best interests of investors Lack of scrutiny as to whether investors best interests are being safeguarded Proposal to create an additional Prescribed Responsibility under the SMCR regime (to which the asset management sector will be subject in the near future) Proposal to require fund managers to appoint a minimum of two independent directors (and at least 25% of the total board membership) to the fund manager s board Mentioned in CP 17/18, although this will be consulted on later in the year as part of the consultation on the SMCR extension (promised in Q although the timetable may slip to Q3) This proposal is part of the current FCA consultation in CP17/18, which consultation period ends on 28 September 2017 Making it easier to switch Proposal to allow a mandatory conversion where there is an unresponsive unitholder in order to facilitate switching investors to better value share classes.fca also seeks views on whether trail commissions should be phased out in respect of payments to advisers on share classes sold prior to 31 December 2012 This proposal is part of the current FCA consultation in CP17/18. Regarding trail commissions, FCA requests views from the industry, to feed into further work in this area Assessing value for money Proposal to require fund managers to assess whether value for money has been provided to fund investors, taking into account economies of scale, fees & charges, share classes, quality of services and transparency This proposal is part of the current FCA consultation in CP17/18 The ability of a fund manager to use the box management may be incompatible with acting in the best interests of investors FCA proposes that retention of riskfree box profits by the fund manager be prohibited, with disclosure requirements on fund managers for how any such profits will be treated. FCA concedes that fund managers will be permitted to retain any profits made from holding positions between pricing points when using their own capital These proposals are part of the current FCA consultation in CP17/18
4 Issue Remedy Timing REMEDIES TO INCREASE COMPETITION AMONGST ASSET MANAGERS All-in fee Performance fees Fees and charges communications to investors, including to retail FCA remains in favour of a single all-in fee. The heightened investor protection and disclosure regimes required by PRIIPS and MiFID II meant that there was always going to be change in this area. FCA wants to ensure that fee structures align incentives between investors and asset managers, therefore it is considering whether further action may be required where there are asymmetric fees which do not align investor and asset manager incentives FCA considers investors need greater clarity about the charges they face and that the way in which this information is presented is the key FCA is planning to consult on disclosure methods, along with how to ensure consumer communications are clear as part of the Smarter Consumer Communications initiative FCA is considering consulting on rules requiring performance fees to be permitted only where a fund achieves a level of return above the fund s most ambitious target FCA intends to consult on fees and charges communications later in 2017 Presentation of past performance FCA proposes that when fund managers present their past performance, they must do so against the most ambitious target they set out to investors, and that they may not present against a particular benchmark or comparator where they did not initially set such a benchmark or comparator FCA intends to consult on new rules in this space < CONTINUED Transparency for institutional investors MiFID II means a more rigorous approach to costs and charges disclosure, and the FCA is supportive of templates which will allow institutional investors to compare the information received from asset managers more easily FCA is proposing to work with a group of stakeholders to ensure that any templates meet the needs of institutional investors and address FCA concerns
5 Issue Remedy Timing Objectives, benchmarks and performance reporting FCA considers that objectives and benchmarks need to be more clearly described in performance reporting for retail investors to be able to take an investment decision on the basis of them FCA is chairing a working group on the issue, with the aim of consulting on rules on how objectives should be written. Removal of barriers to pension scheme consolidation and pooling FCA considers that there are barriers to pension scheme consolidation and pooling which would otherwise benefit some schemes FCA has recommended the removal of barriers to the Department of Work and Pensions REMEDIES TO IMPROVE EFFECTIVENESS OF PLATFORMS AND INVESTMENT CONSULTANTS Effectiveness of investment consultants Regulation of investment consultants Having consulted on making a market investigation reference to the CMA, undertakings in lieu have been offered by three of the largest investment consultants. The FCA proposes to reject these and is seeking views from other interested parties FCA has recommended that the Treasury considers regulation of the investment consulting sector on the basis of a range of factors connected with weak competition in the investment consultant market FCA expects to make a decision on whether to make a market investigation reference to the CMA in September 2017 No further action from the FCA. Awaiting Treasury response Investigation into whether retail investors benefit from economies of scale when pooling their money via investment platforms FCA has announced that it will launch a Market Study in relation to investment platforms. The Market Study terms of reference document is expected shortly
6 Impact on Investment Consultants Impact on investment consultants: a closer look at the FCA s provisional decision to reject offered undertakings in lieu of reference from the three largest investment consultancy providers. > > The interim report on the Market Study, published in November last year, highlighted a number of concerns in relation to the provision of investment consultancy services that the FCA considered justified a referral to the CMA for an 18 month market investigation reference. > > Alongside its final report, the FCA has published for consultation a letter to the three largest investment consultancy providers, Aon Hewitt, Mercer and Willis Towers Watson, explaining why the FCA s provisional view is that acceptance of the undertakings the firms offered on 20 February 2017 would not be appropriate instead of making a referral to the CMA. The undertakings offered by the three firms had included provisions encouraging re-tendering of investment consultancy provisions (at least every ten years); provisions relating to public disclosure in an agreed form of data relating to: (a) performance in relation to manager selection within active management and performance in relation to fiduciary management solution of whole-funds; and (b) fee and cost structures in relation to fiduciary management services to prospective and incumbent clients. The undertakings also contained terms relating to conflicts of interest, including - centrally - the commitment that a consultant could introduce but not recommend its own products. > > The FCA s provisional decision to reject these undertakings is driven by its view that a fuller investigation of the investment consultancy market is needed, and that the FCA could not be confident that the undertakings offered by the three providers would achieve a solution as comprehensive as is reasonable and practicable to the concerns identified (which is the test applied to whether undertakings should be accepted). The FCA s concern that the undertakings would bind only 56% of the market appears a fair one: the CMA has order-making powers to cover the market as a whole. In addition, the FCA s comment that the undertakings would not resolve the underlying structural concern around investment consultants providing both advisory and fiduciary management services will resonate with a number of parties that commented on the interim report. The FCA justified the referral in part on the basis that this leaves open the door for the CMA to impose structural remedies if necessary. Whilst the CMA has imposed structural remedies in other markets, these are relatively rare, and such an outcome is to that extent fairly unlikely. Ultimately, whilst the offer of undertakings by the largest three firms shows a willingness to engage, it is hard to resist the conclusion that they were unlikely ever to succeed. > > The FCA invites comments on its proposal to reject the undertakings offered by 26 July, with a view to making a final decision on the market investigation reference in September 2017.
7 A final word on the FCA s competition remit One point that is mentioned by the FCA in its final report, and in a rather understated way, is nevertheless important for firms to consider: compliance with competition law. The FCA s investigation has led it to believe that there is a possible lack of awareness of competition law in some areas of the sector. It cites a particular concern around how the law applies to commercial relationships and interactions [between firms]. This somewhat coded language may suggest that the FCA believes that firms have shared competitively sensitive information with each other. In terms of action, the FCA report does not provide any further indication that this is something the FCA is pursuing; but market studies have in the past led to action by the CMA in its role as a concurrent regulator (for example as regards the Retirement Income Market Study, where the FCA followed up with a number of providers as regards potential breaches of competition laws). Not least given that the FCA now has several live investigations under the Competition Act 1998, asset management firms would be well advised to consider their compliance policies in this respect.
8 Key Linklaters contacts Financial Regulation Michael Kent (+44) Carl Fernandes (+44) Peter Bevan (+44) Sarah Parkhouse (+44) Nadia Swann (+44) Harry Eddis (+44) Martyn Hopper (+44) Nikunj Kiri (+44) Competition Nicole Kar Partner, Competition (+44) Investment Management Matthew Keogh Partner, Investment Management (+44) linklaters.com This publication is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice. Should you have any questions on issues reported here or on other areas of law, please contact one of your regular contacts, or contact the editors. Linklaters LLP. All Rights reserved 2017 Linklaters LLP is a limited liability partnership registered in England and Wales with registered number OC It is a law firm authorised and regulated by the Solicitors Regulation Authority. The term partner in relation to Linklaters LLP is used to refer to a member of Linklaters LLP or an employee or consultant of Linklaters LLP or any of its affiliated firms or entities with equivalent standing and qualifications. A list of the names of the members of Linklaters LLP together with a list of those non-members who are designated as partners and their professional qualifications is open to inspection at its registered office, One Silk Street, London EC2Y 8HQ or on and such persons are either solicitors, registered foreign lawyers or European lawyers. Please refer to for important information on our regulatory position. 7897_F/06.17
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