We have published the final findings of our asset management market study. As part of this, we set out a package of remedies to address the concerns identified.
Our market study
We published the terms of reference for the asset management market study in November 2015. We set out our intention to understand how asset managers compete to deliver value to both retail and institutional investors. Following our terms of reference, we conducted analysis of over 20,000 shareclasses and 30,000 investment strategies.
In November 2016 we published the interim report. This set out our provisional view on the way competition works for asset management services, the resulting outcomes for investors and our proposed remedies to address concerns which we identified.
Having considered the consultation feedback to the interim report and carried out further work, we confirmed the key findings set out in the interim report as final and in June 2017 we published our final report.
We found that price competition is weak in a number of areas of the industry. Despite a large number of firms operating in the market, based on our sample, we found evidence of sustained, high profits over a number of years. We also 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, we found concerns about the way the investment consultant market operates.
In the asset management market study final report we proposed a package of remedies consisting of:
- measures to give protection to investors who are less able to find better value
- measures to drive competitive pressure on asset managers
- proposals to improve the effectiveness of intermediaries
We have proposed this overall package of remedies to make competition work better in this market, and protect those least able to actively engage with their asset manager. We consider that this will increase efficiency, lead to the UK asset management industry being a more attractive place for investors and so improve the relative competitiveness of the UK market.
Our overall package of remedies is designed to bring together a consistent and coherent framework of interventions. We recognise that some investors are not well placed to find better value. Because of this, we are strengthening the duty on asset managers to act in the best interests of investors and are seeking to provide greater protection for investors. The remedies package also seeks to enable those investors who are able, to exert greater competitive pressure on asset managers. It will increase the transparency of costs so that those seeking information can get it. We are also working towards providing greater clarity of fund objectives and performance reporting. Finally, the package seeks to improve how effective intermediaries are for both retail and institutional investors.
For the remedies involving potential policy changes we have consulted on these in two phases. In April 2018 we published the first policy statement on part of the package of remedies (PS18/8). Alongside this we published a second consultation paper relating to the rest of the package of remedies (CP18/9).
The first policy statement (PS18/8) includes remedies to better protect investors from the results of weak competition. In this we:
- make final rules requiring fund managers to assess annually whether the charges taken from a fund are justified in the context of the overall value provided by the fund (an ‘assessment of value’)
- make final rules requiring that independent directors make up at least 25% of an Authorised Fund Manager’s board (with a minimum of 2 independent directors)
- introduce a new prescribed responsibility for fund managers which will take effect alongside the wider extension of the Senior Managers and Certification Regime (SM&CR)
- make rules to prevent fund managers retaining risk-free box profits
- publish revised guidance to make it easier for fund managers to convert investors to cheaper share classes where this is in their interests
Remedies to drive competitive pressure on asset managers
As set out in the final report, we want investors to receive clear and simple information about the costs they will pay for asset management services through an 'all-in-fee' in pounds and pence. Under MiFID II and PRIIPs consumers should now see the full costs and charges, expressed as a single fee, for most transactions in investment products, and on an ongoing basis.
This is a significant step forward, and we want this transparency to have an impact in terms of awareness and scrutiny of charges. But how the new information is presented will be important if it is to help consumers make more informed choices. To better understand this we conducted behavioural testing on:
- ways to increase engagement with charges through the use of review screens
- ways to raise investors’ awareness of the impact of charges on their investments over time through warning statements and charts
- ways to help investors make effective price comparisons through the use of comparator charts
We published the results of the testing in April 2018 in Occasional Paper No. 32.
We found that these measures led to investors paying more attention to charges in their decision-making, without appearing to change the importance they placed on other fund characteristics, such as risk and brand. In some cases, they also improved their understanding and awareness of charges. Our findings suggest that clearly presenting understandable and engaging information about charges in a prominent way is important to ensure it is effective.
The findings are consistent with a significant body of previous work and reinforce the importance of disclosing costs and charges in a clear and meaningful way.
Firms should consider the results when thinking about how their disclosures are working. We will consider changing our rules and guidance to mandate certain forms of disclosure in light of the outcome of our Investment Platforms Market Study.
The market study made clear the importance of funds having clear objectives, and identified room for improvement in this area. Clear objectives allow investors to understand what a fund is trying to do, compare different funds, and monitor how well the fund is performing.
This is a complex area and we wanted to involve the right people to make progress on this issue. We chaired a working group, which met from September and concluded its work early in 2018. The output from this group informed our thinking in this area.
We also welcome the intention of the Investment Association to develop industry guidance, in conjunction with consumer input, as to how objectives may be explained more clearly to investors.
Use of benchmarks and performance fees
We want to make our expectations clearer regarding how firms communicate to investors about the benchmarks they may use for a fund. We are also making a minor change relating to the fairness of performance fees. We are consulting on a number of measures in this space (CP18/9) including:
- A ‘requirement to explain’ so that AFMs explain their decisions about the use of benchmarks, or if no benchmarks are used, explain how fund investors should assess a fund’s performance.
- Requiring AFMs to be consistent in their references to benchmarks in their interactions with fund investors.
- Making it clear that where AFMs show a fund's past performance in disclosures they must show it against any benchmarks used as a target for the fund’s performance or that act as a constraint on the fund’s portfolio construction that they have.
- Clarifying that performance fees must be taken net of all other fees.
This work is aligned this work with our other remedies given the links between objectives, benchmarks and performance.
Disclosures to institutional investors
We want to see more consistent and standardised disclosure of costs and charges to institutional investors. We appointed an independent working group to make recommendations to us on a standardised disclosure template to provide institutional investors with a clearer understanding of the costs and charges for a given fund or mandate. The working group made their recommendations to us in Summer 2018, at which time we welcomed the recommendations. We will continue to work with investors and industry to play our part in the next steps as recommended in the group’s report.
Remove barriers to pension pooling
DWP continues to review and, where possible, remove barriers to pension scheme consolidation. For more information please refer to their recent White Paper.
Proposals to improve the effectiveness of intermediaries
Final decision to make a Market Investigation Reference (MIR) to the CMA on investment consultancy and fiduciary management services
In September 2017 we made a final decision to make a MIR on investment consultancy and fiduciary management services.
The Competition and Markets Authority published their provisional decision report in July 2018 and we welcomed the CMA's work in our response. We will continue to work closely with the CMA ahead of their Final Report due for publication before the end of 2018.
Investment Platforms Market Study
On 17 July we launched our market study into investment platforms.
In June 2017 we published the final findings of our asset management market study. As part of this, we set out a package of remedies to address the concerns identified.
The asset management market study final report includes the following annexes:
- Annex 1: Additional feedback and detail on our responses (PDF)
- Annex 2: Fund merger and closure analysis (PDF)
- Annex 3: Segregated mandate pricing analysis (PDF)
- Annex 4: Assessing the relationship between the price and performance of retail equity funds in the UK (PDF)
- Annex 5: Assessment of third party datasets (PDF)
In November 2016 we published our interim report which set out our views based on our work to date on how competition works and on outcomes for investors.
Annexes to the interim report:
- Annex 1: Views from stakeholders on the Terms of Reference (PDF)
- Annex 2: Recent Regulatory Developments (PDF)
- Annex 3: Consumer Research (PDF)
- Annex 4: Econometric Analysis – Retail (PDF)
- Annex 5: Institutional Demand Side (PDF)
- Annex 6: Econometric Analysis – Institutional (PDF)
- Annex 7: Fund Charges Analysis (PDF)
- Annex 8: Profitability Analysis (PDF)
- Annex 9: International Comparisons (PDF)
Research and reports:
- Appendix 1 NMG Consumer Survey Technical Report (PDF)
- Tilba, Baddeley & Liao (2016) research report on the effectiveness of oversight committees (PDF)
- Provisional decision to make a market investigation reference on investment consultancy services (PDF)
This outlined the scope of our market study.
05/04/2018: Information added Latest information on remedies added
02/08/2017: Information added We updated the 'Next steps' section of this webpage.