Investors get poor value for money from Britain’s 7 trillion pound (Dh32 trillion) asset management industry because there is not enough competition and a lack of transparency on fees, the industry regulator said on Friday.
To remedy this situation, the Financial Conduct Authority has proposed a single fee for investors in funds in the world’s second largest asset management market but has stopped short of recommending a cap on fees.
It also launched a consultation into whether the investment consultancy market should be referred to Britain’s Competition and Markets Authority for a full blown anti-trust probe. This market, which advises funds on asset manager selection and investment products, is outside the FCA’s remit.
Just three companies account for 60 per cent of the consultancy market, the report said.
“There is a strong culture of gifts and hospitality in the investment consultancy sector which could influence the ratings given to managers,” the FCA said.
Analysts said a single fee would allow investors to see upfront for the first time how much they are paying for trading costs.
“The eye-catching headline is the proposed introduction of an all-in fee so that investors can easily see what is being taken from the fund,” Paul McGinnis, analyst at Shore Capital, said in a note.
The difference from the existing fee structure “could be that these measures contain certain costs [including transaction costs] that are not known in advance by the investor”, McGinnis said.
FCA Chief Executive Andrew Bailey said the watchdog wanted to make sure that asset managers were “pursuing energetically” their duty to act in their customers’ best interests so investors got value for money.
“We want to see greater transparency so that investors can be clear about what they are paying and the impact charges have on their returns,” Bailey said.
Accounting firm PwC said this would change the way the market operated by referring to direct and legally enforceable rights for investors.
“The industry will need to work hard to demonstrate how it already best serves investors and how they intend to meet the concerns expressed,” Amanda Rowland, a regulation partner at PwC.
The FCA’s proposals, which run to 200 pages, are the interim results of a year-long study into the asset management industry which found that “limited” competition in actively managed funds, which account for 77 per cent of the total market, offer poor value for money.
“On average, these costs are not justified by higher returns,” the FCA said.
Even though a large number of firms operate in the market the asset management industry as a whole has enjoyed sustained, high profits over a number of years, the FCA said.
The watchdog has proposed a “significant package of measures”, including a stronger duty on asset managers to act in the best interests of investors.
It has proposed the “all-in” fee so that investors in funds can easily see what is being taken from the fund in charges, stopping short of more radical measures.
“A price cap is a competition measure that is a last resort.
That is not a good response from the point of view of encouraging competition,” Bailey told reporters.
It has also recommended that Britain’s finance ministry should consider bringing the provision of institutional investment advice under the FCA’s remit.
The watchdog’s final report, along with any proposed rule changes, will be published next summer.