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Today New City Initiative is comprised of 52 leading independent asset management firms from the UK and the Continent, managing approximately £400 billion and employing several thousand people.

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The FCA's plan for Asset Managers

The FCA's plan for Asset Managers

Many in asset management were bracing themselves for an uncomfortable summer period ahead of the UK Financial Conduct Authority’s (FCA) final report on the industry. Having been caught off guard somewhat by the extent of the criticism in the AMMS Interim Report in November 2016, the spectre of the FCA referring asset managers to the Competition and Markets Authority (CMA) could not be discounted. 

While the report does make for uncomfortable reading at times, the bulk of the recommendations can be accommodated and are broadly fair. Active managers reading the report certainly had their nerves calmed when they arrived at Section 1.7. Here the FCA confirmed that it never intended for its interim findings to be construed as arguing the case for passive funds over active. 

The debate over passive versus active has somewhat consumed the industry since the AMMS interim findings were first released. The big issue for the FCA is not so much if people invest into passive or active – both obviously have their respective merits and are key to a balanced investment portfolio, but whether clients are paying active fees for closet tracker products. NCI has always taken a firm line that investors should only pay for performance, and we believe that boutique providers are very well placed to deliver this. 

Governance 

Governance is central to the FCA’s report. The FCA said it would use the Senior Managers & Certification Regime (SMCR) as a tool to ensure fund managers are adhering to their duty of acting in accordance with the interests of the end investors. 

The FCA also recommended enhanced board independence, advising managers appoint at least two independent directors, or have such individuals comprise 25% of the board’s membership. A handful of asset managers have expressed concern that qualified, independent directors are not in abundant supply, and those that are tend to be expensive. 

NCI believes in robust governance, as we feel that having a strong board can ensure business interests are aligned strongly with investors’ needs.  Institutional investors are increasingly scrutinising manager boards in due diligence, and many operations’ teams do veto investments if they feel corporate governance is subpar. As such, we feel a more independent and strengthened governance set-up can only be an advantage for the fund management industry. 

An All in one Fee

Fee transparency has long been an area of interest for the FCA, and it was expected that an all-in-one fee charge inclusive of transaction costs would be proposed. Such a charge, argued the FCA, would help investors understand better what they are paying, but also help them compare different prices across asset managers more effectively. NCI believes strongly in fee transparency, and we are looking forward to engaging with the FCA on the matter.

However, there are some challenges, which were cited by the FCA itself. “Some warned against investors becoming too focused on charges or not understanding the charges. A number of respondents argued that while charges are important they are not the only thing that investors should consider,” it read. The paper cited other respondents who complained that incorporating transaction charges into the headline fee would be practically complex, mainly because such costs can be difficult to predict ahead of time. 

Another risk of an all in one fee could be that it inappropriately incentivises asset managers to not trade even if it was in the clients’ best interests. This would immediately result in the manager being in a conflict of interest situation, and could put them in non-compliance with their new obligations. Again, this is obviously a scenario that nobody wants to see emerge. 

One of the bigger challenges of the FCA’s proposal is that a single figure fee could make it difficult for clients to compare funds accurately, unless a breakdown of the component charges is provided. An all in one fee could also dent the competitiveness of the UK asset management industry, as charges may appear higher than their peers in other markets. The UK financial services industry – including fund management – is facing huge challenges and threats to its eminence over Brexit, and now is a difficult time to introduce rules which could undermine its ability to compete internationally. 

Switching Share Classes

In the FCA’s AMMS interim report, the regulator criticised the asset management community for making it difficult for retail investors to switch share classes. It identified managers often levied charges on investors looking to switch, and said the process could be an administrative headache. This meant investors – predominantly retail - simply stayed in fund share classes which may not necessarily be in their best interests. 

NCI members acknowledged in response to the AMMS that switching share classes was operationally straightforward, and could be done “at a push of a button.” However, permission must be given by the investor for switching, and this can be surprisingly difficult to obtain and creates administration, which the clients rarely want anyway. The FCA agreed that switching share classes needed to be simplified, and that it would support removing the obligation of the manager to explicitly seek investor approval to do so. 

“Several respondents suggested removing the opt-in requirement to seek consent from investors before moving them into a different share class where they would be better off. Respondents also suggested replacing the opt-in requirement with an opt-out style requirement. Respondents felt that this should be considered especially in cases where the investors are not paying trail commissions. Respondents argue that this would be more straightforward for investors, from whom consent is often difficult to obtain, and make it cheaper for asset managers to implement bulk switching,” read the paper. 

NCI also pointed out in its AMMS response that switching could have associated tax implications, and can result in investors being subject to capital gains tax. As a result, many investors simply are reluctant to switch. The FCA recognised this issue in the final report, and we look forward to working with them more closely on this matter. 

Future FCA Areas of Scrutiny

➢ The FCA said it would consult further on whether to refer investment consultants to the CMA. The FCA believes there are high levels of concentration in the consultancy market, a lack of transparency over fees, and potential conflicts of interest particularly where providers offer fiduciary management services. This could precipitate further regulation of consultants. 
➢ Further scrutiny is to be undertaken on investment platforms, in terms of their competitiveness and cost efficiencies.
➢ Managers of private equity and hedge funds should expect similar FCA scrutiny in due course.