Asset managers face sweeping reforms after FCA report

The asset management industry will face sweeping reforms if the recommendations outlined in a recent Financial Conduct Authority (FCA) report are implemented.

 

Published in June, the findings of the FCA’s investigation revealed several areas where improvement was needed, including client transparency, price competition and investment advice oversight.

The FCA recommendations

The UK’s £7 trillion asset management sector was accused of “sustained high profits” despite a large number of firms operating within the market. As such, the FCA made recommendations that fell into three key areas:

 

Helping investors

• Strengthen fund managers’ obligations to ensure the best interests of clients always come first;
• Enforce the Senior Managers Regime to maintain accountability;
• Require fund management boards to hire at least two independent directors; and
• Introduce technical changes that control the profits fund managers make when investors buy and sell their funds.

Driving competition

• Support the disclosure of a single, all-in fee for investors;
• Back a standardised disclosure of costs and charges to institutional investors;
• Advise the Department for Work and Pensions to eliminate barriers that prevent pension schemes from being pooled and consolidated; and
• Chair a working group to explore the use of benchmarks within the industry and ensure fund objectives are more useful.

Enhance intermediary effectiveness

• Begin a market study to explore investment platforms; and
• Suggest to HM Treasury that investment consultants are brought under the FCA’s regulatory purview.

Andrew Bailey, FCA chief executive, said the asset management sector must be competitive and attractive, as well as providing value for people who rely on firms for their financial wellbeing.

 

“The asset management sector is important to the economy, managing the savings of millions of people and in the current low-interest environment it’s vital we help people earn a return on their savings,” he explained.

 

“We have put together a comprehensive package of reforms that will make competition work better and help both retail and institutional investors to make their money work well for them.”

Industry experts welcome the changes …

Many of the recommendations are still subject to change based on future consultations, but a number of the big four consultancy firms have cautiously welcomed the reforms as a step in the right direction.

 

Mark Pugh, PwC asset and wealth management leader, said many positives were hinted at in the report, but there is still “much detail to digest”.

 

“The industry supports many of the FCA’s aspirations. We are pleased to see acknowledgement of the ongoing ‘business as usual’ regulatory agenda, including MiFID 2 and PRIIPS,” he explained.

 

Deloitte noted that while asset managers aren’t required to make any changes yet, the impact of the recommendations will be substantial if they go ahead in their current form.

 

“The proposals on governance are likely to be among the most significant for firms. They will require changes to individual accountability, to fee charges and well-established current practices,” the organisation stated.

… but not everyone is happy

Some industry experts claimed the FCA didn’t go far enough. Gina and Alan Miller from wealth management firm SCM Direct said the UK investment industry had been “ripping off the consumer for decades”.

 

Specifically, they drew attention to the fact that the FCA had to reinforce the message that fund managers should have their investors’ best interests at heart.

 

“While the FCA is finally pursuing a pro-consumer agenda, it is disappointing that they still appear to be dragging their feet on some key aspects,” the pair added.

 

Daniel Godfrey of The People’s Trust said investment managers would breathe a sigh of relief at the report, as it spared them some of the harshest measures they feared after an interim FCA statement in November.

 

“A way needs to be found to break the links of this dysfunctional chain so that investment can focus on sustainable wealth creation, not short-term, relative performance,” he stated.

 

Nevertheless, any changes to the asset management industry are likely to have a notable impact on compliance recruitment within the sector. Many of the new regulations will require more stringent oversight and benchmarking processes, potentially leading to a greater focus on corporate governance.

 

Our 2017 Market Report combines our review of the prevailing conditions in the compliance recruitment market with the results of our latest employer survey. 

 

Image: relif via iStock