It seems that it is not just DAN Norman 2England football teams that are unable to hit the target. The final FCA Asset Management study published earlier this month, while addressing a few key issues, has completely missed a great opportunity to reform asset management into a world class, customer focussed industry for the UK.

 

 

And this failure is even more worrying given the fact that widening the appeal of UK asset management on the global stage and, encouraging / facilitating greater participation in long term investment for retail customers, is arguably more important than at any time in recent history.

 

What’s in the report?

 

The remedies the FCA are taking forward fall in to three areas.

To help provide protection for investors the FCA proposes to:

 

  • strengthen the duty on fund managers to act in the best interests of investors
  • require fund managers to appoint a minimum of two independent directors to their boards;
  • remove box profits.

 

To drive competitive pressure on asset managers, the FCA will:

 

  • support the disclosure of a single, all-in-fee to investors;
  • support the consistent and standardised disclosure of costs and charges to institutional investors;
  • recommend that the DWP remove barriers to pension scheme consolidation and pooling;
  • chair a working group to focus on how to make fund objectives more useful and consult on how benchmarks are used and performance reported.

 

To help improve the effectiveness of intermediaries, the FCA will:

 

  • launch a market study into investment platforms;
  • seek views on a market investigation regarding the institutional advice market to the Competition and Markets Authority;
  • recommend that HM Treasury considers bringing investment consultants into the FCA’s regulatory perimeter.

 

Fiddling while Rome burns.

 

For those with long memories you will remember the FSA Occasional Paper in February 2000 (extract below):

 

“Retail investors cannot easily measure the price of investing through the investment funds they must choose between, in part because a significant element of this price is mostly not disclosed at all. Moreover, even where retail investors can identify elements of this price, they may not place sufficient weight on this information in taking investment decisions.

If they had the knowledge & the information needed to assess which funds provided value for money portfolio management & risk management services, then they would be able to exercise more effective investment decisions.

The FSA intends to pursue these possibilities further, in consultation with the industry, consumers, and other interested parties”.

 

So, 17 years later the regulator is still thinking about it. One wonders if there is an asset management cartel with deep political influence that managing to endlessly delay the decision-making process for some reason?

How can there ever be price competition if the consumer (or their agent) does not know the price?

 

Why this matters?

 

I will acknowledge that transparency does not directly lead to market take up – but if the press is full of “liar, liar” articles about the rip off reputation of the industry there is no chance of retail investors ever trusting it. That “rip off” charge needs to be removed and replaced by banner headlines proclaiming, “UK Asset Managers lead the world for transparency, value and confidence”. Because it is confidence, and confidence in your financial future, that they are supposed to sell. And currently the industry it is a million miles from it.

The most recent ONS data (chart 1.) shows 7 years of decline in the saving ratio. Latest UK household savings ratio is below 2%, by contrast the average savings ratio in the past 54 years is 9.2% of disposable income. Households have less to save and yet the need to save is growing (withdrawal of final salary schemes, increasing longevity and need for long term care provision (we are living longer in poor health). Government has acted with Auto Enrolment but the FCA needs to act to ensure savers trust the mechanism for saving.

 

FCA DAN 0717

Chart 1. Saving Ratio: ONS Monthly economic commentary: June 2017

On a mission

The FCA mission (entrusted to it by Parliament) is:

1. Protect consumers
2. Integrity
3. Promote competition

The Interim Asset Management study showed a wide range of areas where the industry was failing:

Excessive fees, lack of transparency, poor benchmarking, customers are being ripped off – does that sound like “protecting consumers”?

Box profits paid to managers P&L, absolute return funds that are anything but, and a massive £109bn in “closet trackers” with active fees – no “integrity” here?

The report found “weak price competition in a number of areas of the asset management industry. Firms do not typically compete on price, particularly for retail active asset management services” – so no “promotion of competition” either?

On all three principles the Asset Management industry is failing – so why has the regulator not thrown the book at it?

As Gina Miller noted: “the regulator’s final 114-page report, which contains the word “consult” 29 times versus the word “decide” just twice, is a travesty” and “FCA said £109bn is sitting in potential closet trackers, (which is fundamentally mis-selling) but it does not state how this is to be addressed”.

When the FSA found, what it thought was poor outcomes from the payment of commission, it acted to fundamentally change the business model of the whole retail advice industry. So, with an industry many times larger and with arguably greater evidence of systemic poor outcomes, why has it failed to act in so many areas?

 

Some good news

 

However, there is good news on the horizon for UK investors from, of all places, the EU in the form of MiFIDII. The new legislation comes into force in January 2018 will force fund managers to reveal the total cost of investing, including transaction costs, and show these charges in pounds as well as in a percentage.

And, in the institutional world, the FCA has acted – it is referring the investment consultancy industry to the Competition and Markets Authority.

As Henry Tapper notes: “Recently, the big three have extended the scope of the services they provide to include vertically integrated products like fiduciary management, master-trusts and the white labelling of fund solutions. The FCA decision, will be greeted with a sigh of relief by small schemes and their advisers who have consistently suffered from the imperious behaviour of the big three”.

 

More good news

 

And few will disagree with the FCA’s desire to “strengthen the duty on fund managers to act in the best interests of investors” and to improve corporate governance by having more independent directors.

Aberdeen’s Martin Gilbert said this was a positive development.
“I am a vocal advocate of the benefits of involving independent directors in fund governance, having seen how they help elsewhere in the world.”

However, Gilbert said the FCA has not gone far enough on its fund governance proposals.

“Aberdeen would advocate going further than the FCA currently suggests by introducing two independent directors on to the Boards of UK open-ended fund ranges.

Perhaps the merger of Standard Life Investments and Aberdeen Asset management will allow him to take the lead?

The Association of Professional Fund Investors (APFI)
APFI makes some excellent points about the levels of skill required to select and manage investments: “APFI holds that identifying and selecting good managers, that are consistent and competent, is not easy. Here the value in professional fund selection, diversification and prudent switching should add value net of fees to the end investor”.

Their wider submission is worth a read and points to the need for good investment fund governance: “We believe such standards should also extend to all fund rating agencies, insurance providers, distributors, workplace pensions and platforms”.

Daniel Godfrey also reminded us that there is a huge disconnect between the long term need for investment (and stewardship of that investment) by investors and an asset management industry fixated on short-term relative returns. How can companies benefit from long term supply of capital from investors if asset managers only worry about next quarter’s performance figures?

“The effect of this disconnect damages returns in the long-term by depriving the economy of long-term for positive impact. Even the biggest asset managers do not have agency to reform the chain without a mandate from clients”.

This goes to the core of the issue and yet the FCA report is almost silent on this point.

In summary

 

In the long run, hopefully not in another 17 years, we will see some change.

But my fear is that too much is still open for further consultation, so there is going to be little immediate change. The lobbying has already started by asset managers – they have a vested interest (and profit) from the status quo.

The FCA is likely to fail – it should have acted already.

And if retail investors can’t rely on the FCA to bring down costs, force transparency and demand good practice they will have to do it for themselves by voting with their feet.

David Norman
david.norman@tcfinvestment.com





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