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.
The asset management market study final report includes the following annexes:
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 are now confirming the key findings set out in the interim report as final.
The final report follows the interim report published last year which 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.
We have proposed an 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.
In the asset management market study final report published in June 2017 we proposed a package of remedies consisting of:
We published a consultation paper relating to the first group of remedies alongside our final report and that consultation remains open.
This update is about recent developments and next steps in relation to the second and third elements above.
We are also proposing that the Senior Managers and Certification Regime (SM&CR) be extended to cover asset managers. The consultation on our proposals explains how the SM&CR will change how we regulate individuals working as asset managers.
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 want to involve the right people to make progress on this issue. We will chair a working group, which will meet from September and conclude its work by the end of the year. We have sent out invitations for this group to a range of stakeholders including fund managers from across the industry with different business models and investment strategies, as well as platforms, advisers and investor representatives. The output from this group will inform any consultation proposals we bring forward. If we consult on changes to our rules this will be in Q1 2018.
To ensure the process is open and transparent and that we gather the broadest feedback possible, we will publish the minutes of working group meetings on our website and invite comment on these.
We want to make it clearer to firms what we expect from them when they are explaining to investors how they use a benchmark (or why they do not) for measuring fund performance. This includes the consistency of performance reporting across all communications with investors.
We plan to align this work with our other remedies given the links between objectives, benchmarks and performance. Therefore, we intend to consult on these topics in Q1 2018.
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. Important changes in this area will be delivered by MiFID II and PRIIPs, both of which will apply from January 2018.
Specifically, investment firms will need to provide information about:
These will include the estimated transaction costs investors can expect to pay. The aggregated costs and charges must be totalled and expressed as a cash amount and as a percentage.
At the end of each year investment firms must also provide information about all costs and charges actually incurred, including transaction costs, which could be compared to the estimate. ESMA has provided guidance on these disclosures.
This is a significant increase in the transparency of fees and charges in asset management. We want this transparency to have an impact in terms of awareness and scrutiny of charges. How the information is presented will have an impact on how effective it is. We require that communications be fair, clear and not misleading. We have also done significant work on Smarter Consumer Communications and use of behavioural economics. From this, we have learnt that:
We expect firms to have regard to the findings above when presenting to investors the information required by MiFID II. In practice this means displaying this information clearly and prominently.
In addition we are currently testing some specific ways to improve the effectiveness of the forthcoming MiFID II and PRIIPs requirements by assessing the behavioural impact of certain complementary measures. We are testing:
We will publish the findings from the behavioural testing in Q1 2018. If the testing shows that there are ways in which we can make the single charge disclosure more effective for investors, we will consult on any proposed changes to our rules and guidance at that time.
Finally, while we are not generally intending to apply MiFID costs and charges disclosure to all non-MiFID business, as set out in PS17/14, we are considering how aggregated information about costs and charges should be displayed when funds might be bought either through an intermediary or directly from a fund manager. If we believe rule change is required to clarify what we expect in this area we will consult on this alongside other remedies in Q1 2018.
We want to see more consistent and standardised disclosure of costs and charges to institutional investors. We have appointed Dr Chris Sier to chair a working group of industry and investor representatives on institutional disclosure, with a view to agreeing a template for disclosure of costs and charges. Dr Sier is Professor of Practice at Newcastle University Business School and is an expert in pension scheme costs and charges who has worked closely with the Local Government Pension Scheme (LGPS) in developing their template for institutional disclosure. Dr Sier is also the government’s FinTech envoy for the north of England.
Dr Sier will assemble the working group shortly, which will include a range of industry and investor representatives, and will seek views from other stakeholders as part of their work. We expect the first meeting to be held in September. By the end of the year the group will aim to achieve consensus on the following areas:
The group will later consider disclosure for non-mainstream asset managers, and we expect that the working group membership may change at this point to reflect the different focus.
We consulted on our provisional view to reject the undertakings in lieu of a market investigation reference, offered by the three largest investment consultants. The consultation period has now closed and we will consider responses received before making a decision on the undertakings and the provisional market investigation reference in September.
On 17 July we launched our market study into investment platforms.
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:
Research and reports:
This outlined the scope of our market study.