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International Restructuring Newswire
Welcome to the Q2 2024 edition of the Norton Rose Fulbright International Restructuring Newswire.
Global | Publication | November 2016
In the FCA’s Business Plan 2015/16 the regulator announced its intention to undertake a market study into the asset management market. The aim of the market study would be to understand whether competition was working effectively to enable both institutional and retail investors to get value for money when purchasing asset management services. The announcement in the Business Plan followed the FCA’s wholesale sector competition review where questions had been raised about the asset management value chain.
In November 2015 the FCA published its terms of reference for its market study into the asset management market. To allow the FCA to understand how asset managers compete on value, the market study would focus on the following questions:
The deadline for comment on the FCA’s terms of reference was December 18, 2015. Following this date the FCA began work on its market study.
An indication as to the FCA’s views on the market were brought to light in April 2016 when the regulator published on its website a reminder to asset managers regarding the importance of meeting investors’ expectations. The FCA had considered whether UK authorised investment funds and segregated mandates were operating in line with investors’ expectations as set by marketing and disclosure material, and investment mandates. The assessment was made against FCA rules and did not focus on fund performance. In the sample of funds reviewed the FCA found that some were not providing a clear enough explanation of how they were managed. The FCA gave the example that some had failed to disclose a constrained investment strategy and one included jargon that ordinary investors were unlikely to understand.
The FCA reminded asset managers that they must have appropriate oversight to ensure that the fund is being managed in accordance with the stated investment policy. The FCA also reminded asset managers that they have a responsibility to ensure that their funds are sold appropriately through third parties. The FCA gave as an example two funds that were available on execution-only platforms despite the asset manager having planned for them to be available only with advice.
All asset managers were asked to consider these matters and review their arrangements.
When the FCA’s terms of reference were finalised the regulator stated that it would produce an interim report during the summer of 2016. However, in August the regulator announced that the interim report would be delayed until Q4 2016. Some in the media speculated that the delay was due to the regulator’s investigation into absolute return funds which had proven to be popular with investors despite having posted negative returns in 2016. This, it was said, had led to concerns about how the funds were being marketed to investors.
The FCA’s interim report was published on November 18, 2016.
The FCA’s main finding was that the evidence it had collated suggested that there was weak price competition in a number of areas of the asset management industry. This had a material impact on the investment returns of investors through their payments for asset management services.
Unsurprisingly, the FCA believes that there is room for improved outcomes in both the institutional and retail parts of the asset management market. It therefore proposes a package of remedies:
The deadline for responding to the interim report is 20 February 2017. A final report and proposed amendments to the FCA’s rules are expected in Q2 2017.
Some in the market have criticised the FCA’s interim report arguing that it is a deliberate attempt by the regulator to push investors, both large and small, towards cheaper passive funds. Whilst not introducing a cap on the fees asset managers charge, the FCA’s proposals are seen as a heavy blow to active fund managers. In addition, in light of the comments in the interim report, some active managers may find themselves under more pressure as to how they market their funds to investors and may receive more questions on the real substance of their strategies.
The proposed “all-in fee” approach taking in all costs is intended to improve transparency and competition among asset managers but has already been criticised on the basis that it would be tougher than anywhere else in the world. The FCA has invited comments on four possible different models, including a proposal for asset managers to be forced to pay any costs incurred above the explicit fee charged to investors. In the press the FCA was reported as stating: “We would welcome feedback on the extent to which competition will provide enough pressure to prevent a single charge resulting in an increase in charges paid by investors or other unintended consequences such as sub-optimal levels of trading or changes to market practices.” With each possible approach there are advantages and disadvantages and some in the market have suggested that the best course of action would be to set a high level principle and let the consumer decide on the approach they prefer.
For investment consultants, the prospect of a market investigation reference to the CMA will require careful consideration and positive engagement with the FCA during the consultation period.
Arguably, the publication of the interim report is an important moment for the fund management industry and may challenge the fundamentals of the investment management model. Whether the interim report becomes a defining moment for the industry remains to be seen as one would expect that during the consultation period the industry will conduct an intense period of lobbying in order to prevent some of the more harsher proposals from becoming a reality.
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Welcome to the Q2 2024 edition of the Norton Rose Fulbright International Restructuring Newswire.
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