The UK Financial Conduct Authority (FCA) should use its latest market study of the asset management industry to reduce barriers to entry for smaller firms so as to bolster competition.
The market study, which is due to be published in early 2017, acknowledged that high barriers to entry inhibited competition, which dis-incentivised existing managers from offering value for money to their end investors. The FCA also said it recognized regulation could act as a hindrance to emerging managers and stated it wanted to understand “whether existing regulations are preventing new firms from competing or preventing existing providers from expanding.”
Regulation has added significant costs to asset management. A study published by The New City Initiative (NCI), a think-tank representing the interests of asset managers, found 46% of its members spent around 10% to 20% of their management time dealing with regulatory compliance. 8% of respondents told the NCI survey that regulatory compliance consumed in excess of 20% of management time.
“Regulation introduced since the financial crisis, such as the Alternative Investment Fund Managers Directive (AIFMD), the European Market Infrastructure Regulation (EMIR) and the soon-to-be-implemented Markets in Financial Instruments Directive II (MIFID II) have all had a disproportionate impact on smaller managers, and discouraged a number of high-calibre start-ups from entering the market. This reinforces the position and dominance of the larger players. This ultimately deprives investors from allocating into a diverse range of high quality managers,” said Dominic Johnson, chairman of the NCI and CEO at Somerset Capital Management.
“Competition is crucial in any industry, and healthy competition is essential to ensure that fund managers do not rest on their laurels but continue to maintain an excellent service to investors, both retail and institutional. Regulation must be sensible but it must not unduly stifle innovation or competition. A lack of viable competition in any marketplace, not just fund management, is a disservice to consumers and investors,” he added.
The FCA study is also going to review whether investment consultants, which advise a significant number of institutional investors, do not suffer from any conflicts of interest. The clout of investment consultants is huge. A study by Aon Hewitt found more than half of pension funds with in excess of £1 billion had some form of fiduciary management in place.
However, some have expressed concerns that a handful of consultants have launched their own investment management products. “We will also assess situations where firms are creating their own pension products, such as master trusts, where they are simultaneously distributing and competing with asset management products,” read the FCA paper.
The FCA has taken a tough line on asset managers. In November 2012, the Financial Services Authority (FSA), the FCA’s predecessor, sent its “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.