FCA Report: Response from Transparency Task Force

The long-awaited FCA asset management market study was finally published this morning. Robin will be posting his report shortly, but first here’s the response from Andy Agathangelou, Founder of the Transparency Task Force:

“In my view, the FCA should be congratulated for the highly engaging way in which they have gone about consulting with the market as a whole; it feels like the whole exercise has been truly consultative i.e. they haven’t just paid lip-service to the idea of gathering views.
The Interim Report published back in November was necessarily hard-hitting, with numerous robust remedies proposed that had the potential to shake-up the sector for the benefit of the consumer. The Transparency Task Force (TTF) were extremely pleased with the Interim Report as it was an honest set of constructive criticisms about a range of market behaviours that, when combined, cause widespread consumer detriment as well as on-going reputational damage to the sector.
At the heart of the Interim Report was the idea that much greater transparency was needed, for example on costs/charges and the many conflicts of interest that the sector is riddled with. The Interim Report aligned very well with the sentiment behind why the TTF was created in the first place, so it was very well received by our community as a whole.
But the main worry since November’s Interim Report has been whether the industry’s professional lobbyists representing the well-resourced trade bodies and professional associations (whose primary purpose is quite naturally to protect the well-being of their market-participant members and not the interests of the public-at-large) have been able to persuade the FCA to water-down the proposed remedies.
So have the FCA stood firm, or haven’t they?
Has the industry managed to once again impose its will on the Regulators? Or has the FCA properly delivered on its objectives to ‘protect consumers, enhance market integrity and promote competition’?
Has this wonderful opportunity to clean-up the UK’s Asset Management sector been seized, or lost forever?
Well, my initial view, having studied the Executive Summary and not yet having analysed the content in full is that the FCA have done a tremendous job, again. This looks like a great example of a Regulator doing what is necessary despite what must have been mountains of pressure and resistance from an industry that would have lobbied very hard to maintain the status quo as much as possible. To my mind, some of that lobbying has looked like parts of the industry are still in denial about what has really been going on; an example might be the Investment Association’s response to the FCA’s Interim Report, 146 pages that in parts make a brave attempt to argue that the FCA’s analysis, research and findings are wrong.
As I see it the key points from the Final Report are:
The FCA’s final findings are broadly consistent with the findings set out in the Interim Report.
Firms do not typically compete on price, particularly for retail active asset management services.
There is considerable price clustering on the asset management charge for retail funds, and active charges have remained broadly stable over the last 10 years.
There are high levels of profitability, with average profit margins of 36% for the firms the FCA sampled.
On average, both actively managed and passively managed funds did not outperform their own benchmarks after fees. This finding applies for both retail and institutional investors.
There is no clear relationship between charges and the gross performance of retail active funds in the UK.
There is some evidence of a negative relationship between net returns and charges, suggesting that when choosing between active funds investors paying higher prices for funds, on average, achieve worse performance.
There is little evidence of persistence in outperformance in academic literature, and where performance persistence has been identified, it is persistently poor performance.
There is around £109bn in ‘active’ funds that closely mirror the market which are significantly more expensive than passive funds.
Many institutional investors and some retail investors are increasingly focused on charges.
The FCA see a long tail of smaller institutional investors, typically pension funds, who find it harder to negotiate with asset managers. These clients generally rely more on investment consultants when making decisions.
The FCA have concerns in the investment consulting market. These include the relatively high and stable market shares for the three largest providers, a weak demand side, relatively low switching levels and conflicts of interest.
The FCA’s analysis suggests that retail investors do not appear to benefit from economies of scale when pooling their money together through direct – to – consumer platforms. The FCA also have concerns about the value retail intermediaries provide.
A package of remedies are to be introduced to make competition work better and lead to increased efficiency, whereby the UK’s asset management industry becomes a more attractive place for investors and so improve the relative competitiveness of the UK market.
The FCA are strengthening the duty on asset managers to act in the best interests of investors and are seeking to provide greater protection for investors.
There will be increased transparency of costs so that those seeking information can get it.
There will be improvements on how effective intermediaries are for both retail and institutional investors.
The FCA propose to strengthen the duty on fund managers to act in the best interests of investors through clarifying expectations around value for money, increasing accountability and introducing a minimum level of independence in governance structures.
The FCA are consulting on requiring fund managers to return any risk-free box profits to the fund and disclose box management practices to investors.
The FCA want to make it easier for fund managers to switch investors to cheaper share classes and are seeking views on whether they should consider introducing a phased-in sunset clause for trail commissions.
The FCA continue to support the disclosure of a single all-in fee to investors and MiFID II will introduce this for investors using intermediaries. This will include the asset management charge and an estimate of transaction charges.
The FCA support consistent and standardised disclosure of costs and charges to institutional investors. The FCA recommend that both industry and investor representatives agree a standardised template of costs and charges and propose to ask an independent person to convene a group of relevant stakeholders to develop this further. Following this, the FCA we will work with these stakeholders to consider whether any other actions are necessary to ensure that institutional investors get the information they need to make effective decisions.
The FCA are recommending that the Department for Work and Pensions (DWP) continue to review and, where possible, remove barriers to pension scheme consolidation. This should help those schemes who wish to benefit from economies of scale that might be achieved by such consolidation.
The FCA consulted on making a market investigation reference to the Competition and Markets Authority (CMA) to further investigate the investment consultancy services. The three largest investment consultants provided undertakings in lieu of the reference. The FCA are proposing to reject the undertakings in lieu and are seeking views from other interested parties on this proposal. We expect to make a final decision on whether to make a market investigation reference to the CMA in September 2017.
The FCA are recommending that the Treasury considers bringing investment consultants into the regulatory perimeter, subject to the outcome of the provisional market investigation reference to the CMA.
The FCA have announced that they will be launching a market study into investment platforms to look at how competition is working in that market.
On balance, therefore, my initial thoughts are that:
The FCA have held firm and this shows a very high level of commitment to their objectives to ‘protect consumers, enhance market integrity and promote competition’. Thank you FCA!
The FCA are continuing to operate in a firm but consultative manner; they seem to be balancing their approach very sensible.
The FCA seem to have their sights on the UK’s asset management sector being able to realise its true potential as a true jewel in the crown of UK PLC. The FCA’s ‘medicine’ is exactly what the sector needs. I expect there’ll be moans and groans from some but surely nobody wants the self-inflicted reputational damage the sector has endured for decades to continue longer than necessary.
Some market participants will need to conduct a strategic overhaul of their business models to flourish into the future, and some of those won’t have the appetite or ability to do that. At least now the ‘invisible hand’ of market forces will be able to work its magic because the protective layer of obfuscation and opportunistic opacity is being dismantled by a Regulator that isn’t scared to regulate.
Congratulations to the FCA for another superb piece of work, which I am sure will be appreciated by pro-consumer campaigners right around the world.”

Here’s a link so that you can read the final report.

Robin Powell

Robin is a journalist and campaigner for positive change in global investing. He runs Regis Media, a niche provider of content marketing for financial advice firms with an evidence-based investment philosophy. He also works as a consultant to other disruptive firms in the investing sector.