Today is a momentous day for the regulation of the UK asset management industry. The Financial Conduct Authority has issued an interim report on completion in the industry and, on the face of it, this appears to be the hard-hitting report that my colleagues and I on the Transparency Task Force had been hoping for.
Here is a statement from our Founding Chair Andy Agathangelou:
“The Financial Conduct Authority’s Interim Report has just been published so there’s not been a chance for a detailed analysis yet but their opening comments are extremely significant, particularly these points:
The FCA highlight the fact that despite a large number of firms operating in the market, the asset management industry has seen sustained, high profits over a number of years. This does seem to indicate the FCA have concluded that market forces are not functioning effectively. What is preventing that from happening?
They comment that fund performance is not always reported against an appropriate benchmark. This is known by many in our campaigning community to be a major issue, as inappropriate benchmarking distorts the view of true performance, and amongst other ills can sometimes be used as an unjustified basis for selecting actives over passives. One wonders whether this might increase the ratio of passives to actives in the UK; at the moment we’re at roughly 20% passive, 80% active, whereas in the USA it is fast-approaching 50/50. This is therefore another significant move being made by the FCA.
They have found concerns about the way the investment consultant market operates and go on to say that they have made a provisional decision to ask the Competition & Markets Authority look into the Investment Consulting sector. Could this be the opening of a ‘can of worms’ that no regulatory intervention has been bold enough to do until now? My take on this is that the FCA are asking challenging questions about the extent to which investment consultancies add value.
They are seeking to strengthen the duty on asset managers to act in the best interests of investors. This piece alone will be of tremendous interest to pro-consumer organisations who have been calling for this move for many years. I suspect that the Investment Association might find themselves revisiting the list of principles that had been championed by their more-enlightened leadership in the form of Daniel Godfrey before some of their members resisted attempts to be more accountable for looking after their clients’ interests; so much so that Daniel Godfrey parted company with them. It’ll be an interesting day at the Investment Association…
They are even talking about the idea of introducing an all-in fee to make it easy for investors to see what is being taken from the fund. Wow, this would be a seriously progressive approach to costs disclosure and is exactly the kind of costs regime that is needed. Let’s hope this helps avoid the ‘patchwork quilt of protocols’ that trade bodies seem to prefer over market-wide regulation.
In conclusion, it is worth reflecting on what the FCA exists for – it’s stated aims are:
“We aim to make financial markets work well so that consumers get a fair deal” and they seek to do this through protecting consumers, enhancing market integrity and promoting competition.
Based on what I’ve reads so far, the FCA’s Interim Report on their Asset Management Market Study shows they know what needs doing and they are willing to take on the industry to bring about the changes that are needed. This looks like excellent news.
I predict fierce and possibly fiery opposition to the FCA’s proposals by the lobbyists and trade bodies that would like to maintain the ‘sustained high profits’ the sector has enjoyed at the expense of the consumer for many, many years.
I think today could become a watershed moment in the history of financial services regulation. The people who are there to protect the consumer are now serious about doing exactly that. Congratulations to Becky Young, Kate Blatchford, Mary Starks, Robin Finer and their many colleagues at the FCA. There will be ripples right around the regulatory world today, I’m sure, and it might just be that the UK becomes a world-leader in financial services regulation that our post-Brexit world needs us to be. Congratulations also to the many members of the press that have been doing a great job in recent months in helping to shine a light on what needs to be seen.
Almost everybody will be a beneficiary of the FCA’s work and those that might lose out deserve to do so. “Sunlight is the best disinfectant” and the FCA are blowing away the clouds. Hooray for that!”