FCA launches study of asset management industry

FCA plans year-long study into asset managers, looking at competitiveness and achieving value for money for clients.

The UK’s Financial Conduct Authority (FCA) has outlined details of an upcoming study into competition in the asset management industry.

The regulator plans to focus on three key areas as part of a year-long assessment of the industry; how asset managers deliver value, whether they are motivated and able to control costs, and what effect investment consultants have on competition for institutional asset management.

Both retail and institutional investors will be covered by the study and the FCA also intends to examine whether there are barriers to innovation or technological advances in asset management.

One likely area of focus will be whether asset managers are adopting the FCA’s measures to create more accountability in the way research is purchased. For the past two years, the regulator has increasingly pushed firms to ensure they set strict research budgets and understand the value of the research they are buying.

This comes as the policymakers at the European Commission debate whether there should be a ban on asset managers using dealing commissions to pay for sell-side research under the Markets in Financial Instruments Directive II (MiFID II). MiFID II, which is likely to be pushed back one year from its original implementation date of January 3, 2017, could have a major impact on how much research asset managers purchase.

Asset managers have criticized the rules arguing it could result in some research-dependent firms missing out on investment opportunities. Others point out barely any sell-side research is actually read and MiFID II will result in managers being more selective in the research they purchase. Most expect fund managers will increase their management fees or create pre-funded research payment accounts agreed upon with their clients.

Commenting on the study, Christopher Woolard, director of strategy and competition at the FCA, said: “Asset managers provide an important economic function, bringing together those with money to invest and companies and governments that need capital. Given the significant role they play in the economy, it is essential that competition works effectively for these services.

“The UK is a world leader in asset management. Our market study aims to ensure that both retail and institutional investors can get value for money when purchasing these services – which we expect to further strengthen the UK’s position as a major centre for asset management.”

The FCA will shortly approach market participants for information and data required to look into the areas outlined and will host a number of roundtables and meetings with the industry and other stakeholders. Interim findings are expected in the summer of 2016 with a final report due in early 2017.

This is the latest in a series of reviews of the asset management space by the UK regulator. In November 2012, the Financial Services Authority (FSA), the precursor to the FCA, sent its now infamous “Dear CEO” letter to the heads of some of largest asset managers in London warning them about conflicts of interest. The FCA has also scrutinised the outsourcing arrangements at asset managers, particularly in regards to custodian banks and third party technology providers. It urged asset managers to make sure they have systems and processes in place to deal with the failure of an outsourced provider.