The FCA has published the final report of its Asset Management Market Study and accompanying consultation paper (CP17/18). The study is intended to apply the themes and thinking around fairness to clients and transparency that we have seen in the distribution market through RDR, further up the value chain.
Whilst the interim report flagged most of the results, there are now some immediate takeaways that firms can expect to see come up in their supervisory interactions with the FCA. The final report signals an increased focus on providing the end retail consumer with value for money. This could challenge some of the long held assumptions that some firms have about how they structure funds and handle some transactions within them. In particular, any retention of box profits and the use of investment consultants in the value chain is likely to be challenged by supervisors to ensure that they are acting in the end retail investors’ interests. It is likely that governance structures that do not include sufficient independent directors and are not seen to explicitly promote fairness for the end retail client, will also come under fire from supervisors.
The final market study report, published on 28th June, mostly confirmed the findings set out in the interim report published last year. The FCA noted that despite a large number of firms operating in the market, they found evidence of “sustained, high profits over a number of years”. In addition, the FCA found that investors are not always clear what the objectives of funds are, and fund performance is not always reported against an appropriate benchmark. Finally, the FCA found concerns about the way the investment consultant market operates.
The key areas highlighted in the report are:
- All in fee – this will be consulted on and viewed in the light of MIFID 2 coming in January 2018, but the direction of travel is that this will come
- Fund governance – a minimum of two independent directors on fund managers’ boards
- Investors’ interests – a strengthened duty on fund managers to act in the best interests of investors
- Fund objectives – a working group will be set up to look at making fund objectives more useful; and on use of benchmarks and performance reporting.
- Investment platforms – a market study into investment platforms will be undertaken
- Investment consultants – final decision on whether to refer the institutional advice/consultancy market to the Competition and Markets Authority to be published in September.
Three things to look at in your firm:
- Use of investment consultants – be clear where they are used in the value chain and why. Assess what they are adding for the end retail investor
- Rebates, box profits and other flows – be clear about where your firm might be benefitting from payments that may be due to the fund and amend to the benefit of the end retail investor
- Governance – make sure you have independent directors or look to boost their number. Ensure that all committee terms of reference and tone from the top looks to providing value for money for the end retail investor.