The FCA Turns Its Eye To Asset Management

The FCA’s long-anticipated report into asset management has now been published and although many of its proposals are still subject to consultation (for which read potential change), it gives an insight into the FCA’s thinking on the topic and to what the future might hold. Here are 7 of its key points summarised.

Emphasis on fund managers acting in the best interests of their customers

In an ideal world, this should be taken as a given, but mis-selling scandals (such as PPI) have highlighted the fact that those working in finance can be motivated by both carrots and sticks to act in a way which runs counter to the best interests of the consumer. It is presumably with this in mind that the FCA has proposed new requirements on governance structures and, in particular, the requirement for the board to monitor obligations placed on asset managers.

Improved disclosure of costs

Asset management costs vary widely and there are obvious reasons for this. Passive funds, such as index trackers, require very little in the way of management effort and hence tend to have the lowest costs. Actively-managed funds can cover anything from the FTSE 100 to start-up, high-tech stocks in Asia and hence require significantly different levels of management activity and professional expertise. At the same time, however, the cost of asset management is clearly going to have an impact on the return an investor ultimately receives and hence the FCA wants to see much greater, up-front transparency about what an investor can reasonably expect to pay. The FCA has previously expressed support for a single charge to cover everything related to the management of the asset, including transaction costs and reiterates its stance in its report.

Benchmark and performance reports (for consultation later in the year)

One of the issues raised by the FCA is the tricky one of judging quality in the asset management sector. On the one hand, as previously noted, asset management covers a huge range of options, which makes like-for-like comparisons difficult to impossible. Additionally, today’s fast-moving world can make it difficult to compare one year with the next, for example, as recent times have so capably demonstrated, events such as elections and referenda can have a significant economic impact, which can then feed through to the world of asset management. At the same time, however, it’s the FCA’s job to protect consumers and it is therefore entirely understandable that they would want some form of reporting in place to help consumers to determine whether or not a given fund offered value for their hard-earned money.

Initiating a study into investment platforms

The FCA wishes to find out whether the relationship (if any) between investment platforms and external fund-rating firms could compromise the quality of the information presented to both private investors and financial advisors. As the old saying goes, “information is power” and it would be hard to find an area where that was more true than the area of financial decision making.

A recommendation that the Treasure considers greater regulation of investment consultants

Given that the FCA is a regulatory authority and, more specifically, a regulator authority which was created out of the devastation of the 2008 financial meltdown, it’s hardly a surprise that it favours extending the scope of regulation in the financial sector. In practical terms, any changes in this area would presumably have to be subject to the findings of the provisional market investigation by the Competition and Markets Authority. The FCA report indicates that this is the case.

A recommendation to make it easier for pension schemes to consolidate and pool their resources

In all walks of life and commerce, bigger buyers tend to have more negotiating power.