FCA’s Asset Management Market Study

In the FCA’s 2015/2016 Business Plan, following feedback from their wholesale sector competition review which was published in February 2015, the Asset Management Market Study was announced. Ensuing this, the following concerns have been raised and have become the underlying scope for the market study:

  • whether investors find it difficult to monitor asset managers and ensure they are getting value for money;
  • the role of investment consultants and whether potential conflicts of interest arise from the provision of both advice and asset management services; and
  • whether asset managers have the incentive and ability to effectively control costs incurred on behalf of investors along the asset management value chain;

running in parallel with the above questions, the FCA will also be considering whether there are any barriers to innovation and technological advances which are preventing investors from obtaining more beneficial outcomes i.e. due to regulatory requirements/rules.

On 18 November 2015, the FCA released terms of reference in regards to scope and focus of the Market Study, below we have provided a summary of its key points.

Terms of Reference

The focus of the study will be on asset management services provided to retail and institutional investors.

Although the scope of the study has been initially extended to cover distribution, asset management products and providers, and ancillary and third party service providers – the FCA may reduce this scope if it does not believe that further investigation is necessary.

The answers that the FCA will collect from this market study should indicate whether competition is working effectively to provide both institutional and retail investors adequate value for money in the purchases they make and the services received.

The main topics to explore in relation to value for money and the questions that the FCA will ask through their Market Study are:

  1. how asset managers compete to deliver value:
    • how do investors choose between asset managers?
    • how does the current market structure affect competition between asset managers?
    • how do charges and costs differ along the value chain?
  2. whether asset managers are willing and able to control costs and quality along the value chain:
    • can investors monitor costs/quality of services paid for out of the fund?
    • if service providers focus on winning business from asset managers do they deliver value for end- investors?
    • are asset managers able to control costs along the value chain?
  3. the effect of investment consultants and other advisers on competition for institutional investment management:
    • how does advice given by investment consultants affect competition for asset management?
    • how are conflicts within the business model of investment consultants managed?
    • can clients monitor the services provided by investment consultants?

Regardless of the current regulatory focus, the FCA considers the market study to be just as important for investors to achieve potential solutions which regulatory initiatives may not. The market study aims to fill the lacunae between initiatives which can help investors make better decisions (e.g. transparency and disclosure rules) and actually monitoring the quality of information provided and the investors’ ability to use it. Additionally, by reviewing the asset management industry this way, the commonly known “advice gap” dilemma will inevitably by highlighted and consequently the importance of new services will be emphasized as it ties in with the FCA’s overall goal of encouraging effective competition.

Overall, the FCA states that the goal is to look at the markets and establish whether investors are getting value for money. Ideally, the interim report will be published in summer of this year which will explain the preliminary conclusions found and, where appropriate, the FCA may look to address any concerns and remedial action in their final report in Q1 2017.

Going forward, it will be important for managers to consider how they will respond to FCA requests for information and similarly if they do not think the FCA will request information, whether it would be in their best interests to supply evidence voluntarily.

To access the full FCA terms of reference market study, please click  here.

Should you require any further advice or information on the above, Cleveland & Co, your external in-house counsel, are here to help.

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