Market Study
MS15/2.3
June 2017
Asset Management Market Study
Final Report
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MS15/2.3
Financial Conduct Authority
Asset Management Market Study Final Report
In this final report we set out
our final findings of the Asset
Management Market Study
Please send any queries to:
Competition & Economics Division
Financial Conduct Authority
25 The North Colonnade
Canary Wharf
London E14 5HS
Email:
assetmanagementmarketstudy@
fca.org.uk
This relates to
Contents
1 Executive summary 3
2 Overview of our remedies package 9
3 Next steps 15
Part A: Final ndings 16
4 How do investors choose between asset managers? 18
5 How do retail intermediaries aect competition
between asset managers? 29
6 What do prices, performance and protability
tell us about how competition is working? 33
7 Are asset managers willing and able to control
costs along the value chain? 44
8 Are there barriers to entry, innovation and
technological advances? 47
9 Feedback on other topics in the interim report 50
10 The role of investment consultants 54
Part B: Our current thinking on a package of remedies 65
11 Governance 67
12 Objectives, benchmarks and performance 73
13 Transparency of fees and charges 82
14 Other remedies relating to retail investors
and retail intermediaries 92
15 Other remedies relating to institutional
investors and investment consultants 97
Appendix 1
Glossary of terms used in this document 107
Appendix 2
Abbreviations used in this paper 110
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1 Executive summary
The wider context of this study
1.1 The asset management industry plays a vital role in the UK’s economy. Asset
managers manage the savings and pensions of millions of people, making decisions
for them that will affect their financial wellbeing. Asset managers generate returns
for their clients by investing clients’ money in a wide variety of UK and international
enterprises. More broadly, by directing funding to firms they think are most likely
to grow, asset managers support businesses that provide jobs and drive economic
growth. Asset managers also have an important role in the corporate governance of
the businesses they fund.
1.2 The UK’s asset management industry is the second largest in the world, managing
around £6.9trillion of assets. Over £1 trillion is managed for UK retail (individual)
investors and £3trillion on behalf of UK pension funds and other institutional investors.
The industry also manages around £2.7trillion for overseas clients.
1.3 The services offered to investors involve searching for return, risk management and
administration. The investor bears virtually all the investment risk. Over three quarters
of UK households are saving for, or receiving, occupational or personal pensions that
rely on these services, whether directly or indirectly. This includes over 9 million people
saving for their retirement through defined contribution (DC) pension schemes and
approximately 1.4million savers currently building up pensions in defined benefit (DB)
pension schemes.
1
There are also around 11million savers with investment products
such as stocks and shares ISAs. These investors are willing to put their money at risk to
generate potentially greater returns than they can get through cash savings.
1.4 We launched our market study into asset management in November 2015. We
looked at this sector because we want to ensure that the market works well and the
investment products consumers use offer value for money. Improvements in value for
money could have a significant impact on pension and saving pots.
1.5 In November 2016, we published the interim report of our Asset Management Market
Study. The report considered how asset managers compete to deliver value for both
retail and institutional investors. Our interim report found that evidence suggested
that there is weak price competition in a number of areas of the asset management
industry.
1.6 We consulted widely on our interim findings and proposed remedies. We received
153 written responses and held discussions with almost 200 stakeholders from 135
organisations through a series of round tables and one-to-one meetings. Following the
interim report, we also undertook further work, both on areas highlighted in the interim
report and in response to the feedback we received.
1 The DB figure excludes approximately 5m deferred members of private DB schemes and several million building up benefits in
funded (and unfunded) public sector schemes.
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1.7 One point raised in the feedback, which we want to address, was a perception that
our interim findings suggested that passive funds were preferable to active funds.
This is not the case. Rather than focusing on one strategy over another, we think it is
important that investors understand both the total cost of investing and the objectives
of the fund or mandate they are investing in, so that they can choose the product that
best meets their needs.
1.8 In light of the feedback received and the additional analysis undertaken, we have
reached a final set of findings, which we set out below. These final findings are broadly
consistent with the findings set out in the interim report.
Final ndings
Price competition
1.9 We find 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. We carried out additional work on the pricing of segregated
mandates which are typically sold to larger institutional investors. This showed that
prices tend to fall as the size of the mandate increases. These lower prices do not
seem to be available for equivalently sized retail funds.
1.10 We confirm our interim finding that there is considerable price clustering on the asset
management charge for retail funds, and active charges have remained broadly stable
over the last 10 years. We agree with respondents who said that, in and of themselves,
price clustering and broadly stable prices do not necessarily mean that prices are
above their competitive level. However, we also found high levels of profitability, with
average profit margins of 36% for the firms we sampled. Firms’ own evidence to us
also suggested they do not typically lower prices to win new business. These factors
combined indicate that price competition is not working as effectively as it could be.
Performance
1.11 We looked at fund performance, and the relationship between price and performance.
In our additional analysis, we found substantial variation in performance, both across
asset classes and within them. However, our evidence suggests that, on average,
both actively managed and passively managed funds did not outperform their own
benchmarks after fees. This finding applies for both retail and institutional investors.
1.12 We looked at whether some investors, when choosing between active funds may
choose to invest in funds with higher charges in the expectation of achieving higher
future returns. However, our additional analysis suggests that there is no clear
relationship between charges and the gross performance of retail active funds in
the UK. There is some evidence of a negative relationship between net returns and
charges. This suggests that when choosing between active funds investors paying
higher prices for funds, on average, achieve worse performance. Similar academic
studies of the US mutual fund industry have typically found a negative relationship
between fund charges and fund performance.
1.13 It is widely accepted that past performance is not a good guide to future performance.
We find that it is difficult for investors to identify outperforming funds. This is in part
because it is often difficult for investors to interpret and compare past performance
information. Even if investors are able to identify funds that have performed well in the
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past, this past performance is not likely to be a good indicator of future performance.
There is little evidence of persistence in outperformance in academic literature,
and where performance persistence has been identified, it is persistently poor
performance.
1.14 We found some evidence of persistent poor performance of funds. However, we also
noted that worse performing funds were more likely to be closed or merged into
better performing funds. In our additional work, we found that the performance of the
merging poorer performing funds improves after they have been merged. However, we
also found that the performance of the recipient fund, on average, deteriorates slightly
after the merger, although it is not clear that this is a direct result of the merger. While
mergers and closures may improve outcomes for some investors, not all persistently
poorer performing funds are merged or closed. It can also take a long time for worse
performing funds to be closed or merged.
Clarity of objectives and charges
1.15 We have concerns about how asset managers communicate their objectives to
clients, in particular how useful they are for retail investors. We find that many active
funds offer similar exposure to passive funds, but some charge significantly more for
this. We estimate that there is around £109bn in ‘active’ funds that closely mirror the
market which are significantly more expensive than passive funds.
1.16 We consider value for money for asset management products typically to be some
form of risk-adjusted net return. This can be broken down into performance achieved,
the risk taken on to achieve it and the price paid for the investment management
services. Investors' awareness and focus on charges is mixed and often poor. There
are a significant number of retail investors who are not aware they are paying charges
for their asset management services. However, we have found that many institutional
investors and some retail investors are increasingly focused on charges.
Investment consulting and other intermediaries
1.17 We find significant differences in both the behaviour and outcomes of different
institutional investors. A number of, typically, large institutional investors are able
to negotiate very effectively and get good value for money. However, we also see a
long tail of smaller institutional investors, typically pension funds, who find it harder
to negotiate with asset managers. These clients generally rely more on investment
consultants when making decisions.
1.18 We have identified concerns in the investment consulting market. These include the
relatively high and stable market shares for the three largest providers, a weak demand
side, relatively low switching levels and conflicts of interest.
1.19 More generally, we recognise that asset managers play a role alongside others in the
chain that delivers investment products to consumers. Our analysis suggests that
retail investors do not appear to benefit from economies of scale when pooling their
money together through direct – to – consumer platforms. We also have concerns
about the value retail intermediaries provide.
Package of remedies
1.20 The feedback we received from respondents helped us refine our thinking about how
to address the concerns we identified. As a result, we are proposing an overall package
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of remedies to make competition work better in this market, and protect those least
able to actively engage with their asset manager. We consider that this will increase
efficiency, lead to the UK asset management industry being a more attractive place for
investors and so improve the relative competitiveness of the UK market.
1.21 Our overall package of remedies is designed to bring together a consistent and
coherent framework of interventions. We recognise that some investors are not well
placed to find better value. Because of this, we are strengthening the duty on asset
managers to act in the best interests of investors and are seeking to provide greater
protection for investors. The remedies package also seeks to enable those investors
who are able to, to exert greater competitive pressure on asset managers. It will
increase the transparency of costs so that those seeking information can get it. We
are also working towards providing greater clarity of fund objectives and performance
reporting. Finally, the package seeks to improve how effective intermediaries are for
both retail and institutional investors.
1.22 We recognise that there are a number of recent and forthcoming regulatory changes
which will affect asset managers, and the remedies we have proposed sit within this
wider policy context. These include Markets in Financial Instruments Directive (MiFID)
II, Packaged Retail and Insurance-based Investment Products (PRIIPs) and the Senior
Managers and Certification Regime (SM&CR). In considering the most appropriate
remedies, we have thought about whether the concerns we have identified will
be addressed by these regulatory changes. Where we believe that forthcoming
regulations will at least partly address our concerns, we are looking at ways in which
we can complement these changes. Our remedy package is designed to support and
complement these initiatives. In some areas we are aware that there is likely to be
further clarification at a European level, and we intend to consult on related proposals
in light of this.
Remedies which provide protections for investors who are not well placed to nd
better value for money:
1.23 We propose to strengthen the duty on fund managers to act in the best
interests of investors through clarifying our expectations around value for money,
increasing accountability through the SM&CR and introducing a minimum level of
independence in governance structures.
1.24 We are consulting on requiring fund managers to return any risk-free box profits to
the fund and disclose box management practices to investors.
1.25 We want to make it easier for fund managers to switch investors to cheaper share
classes and are seeking views on whether we should consider introducing a phased-in
sunset clause for trail commissions.
Remedies which will drive competitive pressure on asset managers:
1.26 We continue to support the disclosure of a single all-in fee to investors and MiFID II will
introduce this for investors using intermediaries. This will include the asset management
charge and an estimate of transaction charges. We are testing ways to improve the
effectiveness of forthcoming disclosure and will consult on any proposals later in the year.
1.27 We also support consistent and standardised disclosure of costs and charges
to institutional investors. We recommend that both industry and investor
representatives agree a standardised template of costs and charges and we propose
to ask an independent person to convene a group of relevant stakeholders to
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develop this further. Following this, we will work with these stakeholders to consider
whether any other actions are necessary to ensure that institutional investors get the
information they need to make effective decisions.
1.28 We will chair a working group to consider how to make objectives clearer and more
useful for investors, before considering any subsequent rule changes. We intend to
consult on requiring managers to be clear about why or why not a benchmark has
been used and requiring that their use or otherwise of benchmarks is consistent
across marketing materials. We also propose to consult to clarify that where managers
present past performance they must do so against the most ambitious target held out
to investors.
1.29 We are recommending that the Department for Work and Pensions (DWP) continue to
review and, where possible, remove barriers to pension scheme consolidation. This
should help those schemes who wish to benefit from economies of scale that might be
achieved by such consolidation.
Proposals to improve the eectiveness of intermediaries
1.30 We consulted on making a market investigation reference to the Competition and
Markets Authority (CMA) to further investigate the investment consultancy services.
2
The three largest investment consultants provided undertakings in lieu of the
reference. We are proposing to reject the undertakings in lieu and are seeking views
from other interested parties on this proposal. We expect to make a final decision on
whether to make a market investigation reference to the CMA in September 2017.
1.31 We are recommending that the Treasury considers bringing investment consultants
into the regulatory perimeter, subject to the outcome of the provisional market
investigation reference to the CMA.
1.32 We have announced that we will be launching a market study into investment
platforms to look at how competition is working in that market.
Measures of success
1.33 As part of Our Mission
3
, we explained the importance of undertaking evaluations after
significant interventions. We also set out a framework for measuring the value we
add through our activities. This includes measuring our own operational efficiency,
measuring the impact of our interventions and measuring outcomes in markets.
1.34 Through our ongoing supervisory work, we will review the implementation of key
remedies and assess the impact they have on firms’ behaviour and outcomes across
the market. In addition, our sector views present a high level overview of how the
market is evolving.
1.35 We may also undertake a more detailed review of the impact of our interventions once
they have had time to establish themselves. This may look at the impact interventions
have had on the competitive dynamics of the market, through looking at changes in
2 Investment consultancy services’ is defined in paragraphs 5.2-5.4 of the terms of reference in our published provisional decision to
make a market investigation reference www.fca.org.uk/publication/market-studies/ms15-2-2-a-mir.pdf
3 www.fca.org.uk/publications/corporate-documents/our-mission
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investor outcomes such as price paid or net performance, or the effects on investor
behaviour, fund flows and the effectiveness of governance.
Next steps
1.36 Alongside this final report, we have published a consultation paper on some of the
remedies.
1.37 Our overall package of remedies can be split into three groups:
• Remedies which we are consulting on alongside this report. This report sets out our
overall proposals and the accompanying CP17/18 and our letter to the UIL parties
set out the relevant detail and questions for stakeholders on our proposals aimed at:
–
strengthening the duty on fund managers to act in the best interests of investors
–
requiring fund managers to return any risk-free box prots to the fund
–
facilitating switching investors to cheaper share classes
–
proposing to reject the undertakings in lieu of a market investigation reference
• Final remedies which do not require further consultation:
–
recommendation that the Treasury considers bringing investment consultants
into the regulatory perimeter
–
recommendation to DWP to remove barriers to pension scheme consolidation
and pooling
–
recommendation to both industry and investor representatives to agree a
standardised disclosure of costs and charges to institutional investors, asking an
independent chair to convene relevant stakeholders to develop this further and
working with stakeholders to consider whether any other actions are necessary.
–
launching a market study into investment platforms shortly
• Remedies for which we give our initial views on these proposals in this document and
plan to publish relevant detailed consultations at a later stage:
–
costs and charges disclosure to retail investors to be consulted on later this year
–
benchmarks and performance reporting to be consulted on later this year
–
convening a working group on objectives and consulting on any rule changes at a
later stage, subject to the outcome of the working group.
1.38 In addition to publishing further consultations later in the year, we will publish our decision
on whether to refer the market for investment consultancy services to the CMA.
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2 Overview of our remedies package
2.1 We proposed a package of remedies in the interim report which included a range of
options to address the concerns we identified. As for all market studies, we have had
regard to a range of remedy options. These include using rule-making powers and
publishing guidance, supervisory action and formal investigations by our Enforcement
Division as well as giving the industry an opportunity to develop measures that address
our concerns and improve client outcomes.
2.2 The feedback we received on both our findings and our remedy proposals was helpful
to refine our thinking on both our individual proposals and the overall package. Our
remedies are intended to work together supporting and reinforcing one another to
achieve a cohesive package. We intend that the remedies, by acting together, will make
competition work better in the market, as well as protecting those least able to actively
engage with their asset manager.
2.3 Due to the timing of European legislation, and related work being undertaken at
European level, which will affect some of the areas in which we identified issues, we will
be approaching the consultation on and implementation of our remedies in phases.
Please see CP17/18 for remedies that we are consulting on alongside this report.
These relate to governance, box management and share class switching. Where
remedies do not require further consultation they are set out in this document. We
plan to consult on most of the remaining remedies later in the year.
2.4 As we noted in the interim report, we have considered the impact our proposed
remedies will have on the attractiveness of the UK as a place to do business and will
continue to do so with the final package of remedies. Although we recognise that the
proposed package of remedies will probably increase costs for some firms, we expect
that the benefits will outweigh any costs. We also expect that any improvements to
outcomes for investors will lead to the UK asset management industry being a more
attractive place to invest and therefore improve the relative competitiveness of the UK
market.
2.5 We recognise that there are a number of recent and forthcoming regulatory changes
which will affect asset managers and the remedies we have proposed sit within this
wider policy context. These include MiFID II, PRIIPs and the SM&CR. In considering
the most appropriate remedies, we have thought about whether the concerns we
have identified will be addressed by these regulatory changes. Where we believe that
forthcoming regulations will at least partly address our concerns we are taking these
into account and we are considering our scope for addressing our specific concerns as
effectively as possible. Our remedy package is designed to support and complement
these initiatives. Where our interventions are impacted by potential clarifications of
the detail of upcoming regulatory initiatives at European level we intend to consult on
related proposals in the light of that work.
2.6 This section summarises our remedy proposals at a high level and explains briefly how
they fit with the other remedies in our package. More detail of each remedy is provided
in the relevant sections of Part B of this document.
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Our package of remedies
Asset Management Market Study:
Our package of remedies
For further information please see www.fca.org.uk/publications/market-studies/asset-management-market-study
Remedies to give
protection to investors who are less able
Strengthening the duty
on fund managers to
act in the best interests
of investors and
introduce independent
scrutiny of this
Proposing to reject the undertakings
in lieu of a market investigation
reference to the CMA on investment
consultancy services and seek
views on this proposal. Make a �nal
decision on making this market
investigation reference to the
CMA in September 2017
Recommending the
Treasury considers
bringing investment
consultants into the
FCA’s regulation,
depending on the
outcome of the provisional
market investigation
reference to the CMA
Launching a
market study into
investment
platforms
shortly
Supporting the
disclosure of a single
all-in fee to investors
Supporting consistent
and standardised
disclosure of costs and
charges to institutional
investors
Chairing a working group to
provide investors with clearer
and more useful objectives.
Consulting on how
benchmarks are used
and performance is
presented
Recommending that
the DWP remove
barriers to pension
scheme consolidation
and pooling
Requiring fund managers
to return risk-free box
and
disclose box management
practices to investors
Making it easier for
fund managers to
switch investors to
cheaper share classes
Remedies to drive competitive pressure on asset managers
Governance
2.7 We are consulting on proposals to:
• clarify expectations around value for money
• ensure transparency of actions that governance bodies take to satisfy their
consideration of value for money
• introduce independence in governance structures
2.8 We are consulting on these proposals for Authorised Fund Managers (AFMs) alongside
this document where we also consider the degree to which these rules should apply to
other similar investment products. For further information please refer to CP17/18.
2.9 We are also setting out our intention to introduce a new Prescribed Responsibility under
the SM&CR
4
to act in the best interests of investors including a consideration of value for
money.
5
4 A set list of responsibilities under our and the PRA’s rules that must be allocated to firms’ Senior Managers with the intention to
ensure that every part of a firm’s business or activities has a Senior Manager with overall responsibility for it. The SM&CR is an
accountability framework.
5 We will formally consult on the introduction of the new prescribed responsibility as part of the wider consultation on the roll out of
the SM&CR regime later this year.
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Objectives, benchmarks and performance reporting
Objectives and benchmarks
2.10 We are exploring options to improve the language used in, and clarity of, objectives to
make them more useful for retail investors. We will chair a working group on this issue,
and will make sure that the consumer perspective is firmly represented alongside that
of the industry. We will consider whether the working group’s output should be turned
into new rules on how objectives should be written.
2.11 Following consideration, we do not think that all funds should have to use a specific
benchmark, comparator or numerical target return, whether in their objectives or
otherwise. However, we intend to consult on an approach so that an AFM that chooses
not to set a benchmark, comparator or numerical target return for a fund must, firstly,
explain its reasons for so doing to investors and, secondly, is prevented from using any
other benchmark, comparator or target in marketing. In addition, we intend to consult
on requiring those managers that do use a benchmark, comparator or numerical target
return to explain their reasons for doing so and to use it consistently across regulatory
and marketing materials.
2.12 For further information on our current thinking please refer to Chapter 12.
Past performance presentation by Authorised Fund Managers
2.13 We continue to work on the remedy proposals in this area. We are considering
introducing rules and/or guidance to clarify that where AFMs present their past
performance, they must do so against the most ambitious target they set out to
investors. We also intend to consult on rules such that where an AFM does not set
a specific benchmark, comparator or numerical target return for a fund the AFM
must not present the fund’s past performance against any benchmark, comparator
or target. We will also continue to consider how past performance disclosure and
communication at other points in the consumer journey may affect consumer
decision-making and outcomes.
2.14 We intend that any future proposals on clarity of objectives and the use of benchmarks
and comparators, along with increasing transparency of cost and charges will enable
investors to better understand what their fund is trying to achieve, and monitor
performance against any targets. These combined will better equip investors to
understand instances of persistent underperformance.
2.15 For further information on our current thinking please refer to Chapter 12.
Transparency of fees and charges
Fees and charges communications
2.16 There are significant changes coming in through MiFID II and PRIIPs which will affect
the way that charges are communicated to investors including the MiFID II proposal
which will require the disclosure of a single all-in fee to investors using intermediaries.
This will include the asset management charge, an estimate of transaction costs and
any intermediary fees.
2.17 While we consider that this will provide investors with greater clarity about the charges
they are likely to face, we think that the way in which this information is presented to
Our package of remedies
Asset Management Market Study:
Our package of remedies
For further information please see www.fca.org.uk/publications/market-studies/asset-management-market-study
Remedies to give
protection to investors who are less able
Strengthening the duty
on fund managers to
act in the best interests
of investors and
introduce independent
scrutiny of this
Proposing to reject the undertakings
in lieu of a market investigation
reference to the CMA on investment
consultancy services and seek
views on this proposal. Make a �nal
decision on making this market
investigation reference to the
CMA in September 2017
Recommending the
Treasury considers
bringing investment
consultants into the
FCA’s regulation,
depending on the
outcome of the provisional
market investigation
reference to the CMA
Launching a
market study into
investment
platforms
shortly
Supporting the
disclosure of a single
all-in fee to investors
Supporting consistent
and standardised
disclosure of costs and
charges to institutional
investors
Chairing a working group to
provide investors with clearer
and more useful objectives.
Consulting on how
benchmarks are used
and performance is
presented
Recommending that
the DWP remove
barriers to pension
scheme consolidation
and pooling
Requiring fund managers
to return risk-free box
and
disclose box management
practices to investors
Making it easier for
fund managers to
switch investors to
cheaper share classes
Remedies to drive competitive pressure on asset managers
Governance
2.7 We are consulting on proposals to:
• clarify expectations around value for money
• ensure transparency of actions that governance bodies take to satisfy their
consideration of value for money
• introduce independence in governance structures
2.8 We are consulting on these proposals for Authorised Fund Managers (AFMs) alongside
this document where we also consider the degree to which these rules should apply to
other similar investment products. For further information please refer to CP17/18.
2.9 We are also setting out our intention to introduce a new Prescribed Responsibility under
the SM&CR
4
to act in the best interests of investors including a consideration of value for
money.
5
4 A set list of responsibilities under our and the PRA’s rules that must be allocated to firms’ Senior Managers with the intention to
ensure that every part of a firm’s business or activities has a Senior Manager with overall responsibility for it. The SM&CR is an
accountability framework.
5 We will formally consult on the introduction of the new prescribed responsibility as part of the wider consultation on the roll out of
the SM&CR regime later this year.
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investors will have an impact on how this is used. Therefore we are testing ways to
improve the effectiveness of any forthcoming disclosure in order to understand the
role of the prominence and formatting of charges information in encouraging investors
to focus on the impact charges have on their investments and enabling effective price
comparison. This will inform the development of any future remedies in this area.
2.18 We intend to consult on our proposals on fees and charges communications later in
the year. For further information on our current thinking please refer to Chapter 13.
Institutional disclosure
2.19 We support consistent and standardised disclosure of costs and charges to
institutional investors.
2.20 Any template should be free of jargon, accessible and easy to understand. We
consider that the purpose of a standardised disclosure template would be to provide
institutional investors with a clear understanding of the costs and charges for a given
fund or mandate. This should allow investors to compare charges between providers
and give them a clear expectation of the disclosure they can expect.
2.21 We recommend that both industry and investor representatives agree a standardised
template of costs and charges and we propose to ask an independent person to
convene a group of industry and investor representatives to develop this further. We
will work with these stakeholders to consider whether any other actions are necessary
to ensure that any templates meet the needs of institutional investors and address our
concerns. For further information on our current thinking please refer to Chapter 13.
Trustee disclosure
2.22 We do not propose to require trustees to publicly disclose all cost and charges
information.
2.23 Section 44 of the Pensions Act 2014 will place a duty on us and the DWP to require
the disclosure and publication of information about transaction costs in defined
contribution workplace pensions. We will, in due course, consider the legal measures
needed to meet the duties.
6
Other remedy proposals
Box management practices
2.24 We are consulting on proposals to require firms to return any risk-free box profits to the
fund and to disclose box management practices to investors.
7
We are proposing that:
• AFMs must pass risk-free box prots back to the fund
6 www.fca.org.uk/publication/consultation/cp16-30.pdf
7 In dual priced funds the bid-offer spread between prices to buy and sell the fund reflects the costs of buying and selling the
underlying securities needed to create or cancel units. This means that when customers enter or exit the fund, the costs of their
transactions do not dilute the value of existing unitholders’ units. Where there are buyers and sellers of the fund on the same day,
buy and sell orders can be matched with each other without incurring the transaction costs priced into the bid-offer spread. This
is because existing units can be transferred from selling to the buying customer without any need to buy and sell the underlying
securities. The transfer can be completed by passing all of the dealing of the units through the ‘manager’s box’. Some asset
managers take the resulting money from the spread itself which the client has already ‘paid’ but will not be ‘spent’ transacting in the
market. The asset managers’ capital is never at risk in this process as matching is instantaneous.
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• AFMs approach to box management must be disclosed in the fund prospectus
2.25 We are consulting on these proposals alongside this document see CP17/18.
Share class switching
2.26 We are consulting on proposals to facilitate switching investors to better value share
classes. We are proposing to modify our guidance to clarify that when dealing with
unresponsive unitholders the AFM can undertake a mandatory conversion if the
following conditions are met:
• the power to undertake a mandatory conversion must be set out in the prospectus
in line with COLL 4.2.5R 5(d)
• the AFM must have made all reasonable attempts to contact unitholders
• the AFM is satised on reasonable grounds that the change will not result in
detriment to investors
2.27 We intend that these changes will remove the barriers we heard were making it difficult
for asset managers to switch investors into new, better value share classes.
2.28 We are consulting on these proposals alongside this document see CP17/18.
Pension pooling
2.29 We are recommending that DWP continues to review, and where possible, remove
barriers to pension scheme consolidation and pooling. We believe that some schemes
will be able to benefit from pooling assets, though we have found some barriers to
doing this. We are therefore hoping to minimise these where possible.
2.30 For further information on our current thinking please refer to Chapter 15.
Ongoing work on retail and institutional intermediaries
Platforms
2.31 Respondents have confirmed our view that further work is warranted to assess
the significance and scope of the issues raised. As a result, we will be launching the
Investment Platforms Market Study. The study will consider how investment platforms
and firms offering similar services in adjacent markets compete to win new customers
and retain existing customers.
2.32 Further information will be released shortly in our Investment Platforms Market Study
Terms of Reference document.
Investment consultants
2.33 We considered that competition was being adversely affected in the institutional
advice market by a weak demand side, persistent levels of concentration, high barriers
to entry and vertically integrated business models. We consulted on making a market
investigation reference to the CMA to further investigate the investment consultancy
services. The three largest investment consultants provided undertakings in lieu (UIL)
of the reference, which offer commitments to disclose charges and performance
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information in a standardised format, alongside changes to address conflicts of
interest and strengthen their internal processes.
2.34 Whilst we welcome the UIL proposals submitted, we have provisionally concluded that
we cannot be confident that the UIL would provide as comprehensive a solution as is
‘reasonable and practicable’ in addressing the features we have identified which may
prevent, restrict or distort competition in the investment consultancy services. See
Chapter 15.
2.35 We have written to the firms indicating that we are proposing to reject these and are
seeking views from other interested parties on this proposal.
8
We expect to make a
final decision on whether to make a market investigation to the CMA in September
2017.
2.36 We are recommending that the Treasury considers bringing investment consultancy
services into the regulatory perimeter. We do not currently regulate the asset
allocation advice provided by investment consultants and employee benefit
consultants. This means we are not able to set performance standards or assessment
criteria for this advice. We also have limited authority to ask industry to develop ways to
measure and assess advice themselves.
Ongoing compliance with competition law
2.37 Our engagement process during the market study has indicated a possible lack of
awareness of competition law in some areas of the sector, in particular as to how
the law applies to commercial relationships and interactions with one another. We
remind firms of the importance of ensuring their business activities are undertaken in
compliance with competition law.
9
8 Please send views to assetmanagementmarketstudy@fca.org.uk.
9 See www.bankofengland.co.uk/markets/Documents/femrjun15.pdf for further guidance on the application of competition law to
wholesale markets
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3 Next steps
3.1 We have now completed the market study phase of this work. However, we will
continue to discuss the remaining elements of our proposed package of remedies with
stakeholders.
3.2 Any new rules and guidance will be subject to cost benefit analysis and formal
consultation. We have published a consultation paper alongside this report, which
includes our remedy proposals on governance, share class switching and box
management. The closing date for responses to these consultations is 28 September
2017.
3.3 We are also seeking views on our proposal to reject the UIL alongside this report.
The closing date for responses is 26 July 2017. We expect to publish our decision on
whether or not to make a market investigation reference to the CMA in September
2017.
3.4 We have also begun work on behavioural trials for disclosure. We are currently
prioritising what we would like to test based on consultation responses, existing and
forthcoming policy, and other research in this area. We will use the findings of these
trials to inform the design of our remedies.
3.5 We expect to publish further consultation papers on most of the remaining remedies in
the package before the end of 2017.
3.6 Once our remedies have been implemented we will keep them under review to monitor
whether they are having the effect we desired.
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Part A: Final findings
Feedback on interim ndings, our response and additional analysis
Many respondents agreed with the key findings we presented in our interim report. Where we
have received additional information from respondents these comments have not changed our
overall conclusions.
• Neither active and passive funds outperfom their benchmarks after costs. We found
examples of poor value for money products in both active and passive strategies.
• The conclusions we drew on both retail and institutional investor behaviour remain
unchanged.
• We continue to believe that price clustering, when combined with our understanding of how
rms set prices, the protability analysis, and the absence of relationship to performance,
demonstrates that price competition is weak for actively managed products. We have
identied issues in both retail and institutional intermediaries and believe further work is
merited.
• We found mixed evidence on cost control in this market.
The additional analysis we undertook after the interim report does not materially change our
overall conclusions.
In the interim report, we set out analysis aimed at helping us understand how asset
managers compete. In Part A we give an overview of the feedback we have received
against each of the main topics we analysed. Part A also outlines the additional analysis
we had either planned at interim report stage, or have carried out based on the
responses we received. Against each set of responses we also explain how these have
informed our view of our analysis. For detailed technical feedback and our responses to
these, please see Annex 1.
This chapter includes sections covering the analysis we undertook to answer the
following questions:
How do investors choose between asset managers?
• How do intermediaries and fund governance bodies aect competition between
asset managers?
• What do prices, performance and protability tell us about how competition is
working?
• Are asset managers willing and able to control costs along the value chain?
• Are there barriers to entry, innovation and technological advances?
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We have set out analysis and responses relating to investment consultants in Chapter
10 of this report. We also include a section for feedback on other topics raised by
respondents.
For more information about our proposed remedies please refer to Part B of this
report.
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4 How do investors choose between asset
managers?
4.1 We looked at how investors choose between asset managers. At interim review stage
we found that:
• Investors typically consider value for money to be some form of risk-adjusted net
returns.
• Investors are not always readily presented with a choice of passive funds through
platforms and rating providers.
• When choosing products and providers, past performance, reputation and charges
matter. Institutional investors are more sensitive to price than retail investors.
• Past performance information is dicult to interpret and compare and does not
appear to help when trying to identify future outperformance.
• Tools available to assist both retail and institutional investors in identifying
outperforming products, such as best buy lists and investment consultant
recommendations, do not allow investors to identify products that on average, after
charges, outperformed the stated benchmark.
• It is important that both retail and institutional investors take information about
charges into account when choosing and monitoring investment products. This is
because charges are a drag on performance and reduce the net returns investors
receive.
• Switching is fairly infrequent. There are no major barriers to switching but investors
nd it hard to judge whether and when it is best to switch.
• Institutional investor scale and expertise matter in terms of how eectively oversight
bodies negotiate. There is scope for consolidation to improve how eective
oversight is, particularly among smaller trust-based pension schemes.
Market dynamics and eciency
4.2 Some respondents claimed that the asset management industry is competitive
because there is low concentration, a wide range of available products and asset
classes, and that more recent reductions in fund holding periods was consistent with
low barriers to switching.
10
4.3 Several respondents felt that asset managers differentiate themselves based on value
and quality of service. Other respondents felt that active managers do not compete on
fees, but on investment philosophy and strategy instead.
10 In this context it is the amount of time between when the fund was bought and sold.
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4.4 Several respondents argued that we had not sufficiently acknowledged the strong
growth of passive investments. They argued that the growth of passive investments
places competitive pressure on active managers.
4.5 Respondents noted that active management makes important social contributions
which are not fulfilled by passive management, including:
• Supporting price formation, which benets indices and passive funds. They stated
that price formation further ensures ecient allocation of capital, leading to
economic growth.
• Contributing to corporate governance and stewardship.
• As a signicant net exporter, they benet the UK economy.
4.6 These respondents warned of the risks of excessive passive management, which include:
• Over-valuation of assets which are highly weighted by the indices. Conversely there
may be an under-valuation of assets assigned a low weight or not readily covered by
indices. They argued that this may result in reduced innovation and competition.
• Price-setting that is increasingly determined by hedge funds with short-term returns
horizons, leading to larger divergences between prices and long-term values.
4.7 Other comments and recommendations included:
• The focus of competition in active management should shift from short-term return
against benchmark to stewardship. Respondents argued that this can be achieved by
asset managers disclosing their stewardship and corporate governance activities.
• We should ensure fair competition between dierent business models and empower
investors to make choices, and not favour one business model over another.
• We did not appear to acknowledge the contributions of active management beyond
delivering returns for investors. Some noted that the pursuit of value for money
appeared to be our only concern, which could undermine the economic functions of
active management.
Market dynamics and eciency – our response
We agree that there are many providers of asset management services
and a wide range of available products and asset classes.
11
We have
also seen some consolidation in the industry, and some industry
commentators have suggested that this is likely to be a trend. A large
or small number of competitors do not necessarily mean that there is
eective or ineective competition. We note that we do not think that
asset management is a particularly concentrated market, although there
are some asset classes or strategies that are more concentrated than
others.
11 Although we note there may be some types of investments where the market is more concentrated.
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We recognise that there is price competition for some asset management
products, but we found that this is likely to be limited in the active segment.
We note that asset managers compete on other factors, though we have
identied issues with the clarity of objectives. We also found that it is hard
for asset managers to signal future delivery of returns.
We have seen that the proportion of total assets under management
(AUM) held in index tracking funds has increased since 2008. We also note
that this growth has occurred at the same time that charges for passive
funds have fallen on average. By contrast, charges for active funds have
remained broadly constant on average over this time period. If passive
growth had led to a substantial increase in competition among active
managers, we could have expected active prices to have fallen. So, there
is currently insucient evidence to conclude that the growth in passive
products has led to a material increase in competition faced by active
managers. Nonetheless, we acknowledge that passive management has
the potential to increase competitive pressure on active managers.
We agree that active management plays an important role in accurately
pricing assets in a well-functioning market. Accurate pricing of assets
in turn allows both equity and debt capital to be eciently allocated
to the rms that would generate the greatest economic returns to
society. Active management can also aect rm behaviour by exercising
shareholder rights. These are important economic functions of active
management.
We also recognise that passive styles seek to replicate the returns of
the market index as opposed to stock picking and therefore do not
contribute to the accurate pricing of assets by construction. However,
passive management can and does provide stewardship to the
businesses it invests in.
12
We understand concerns around the potential
impact that an increasing share of passive investment can have on
pricing stability and whether prices accurately reect assets’ underlying
value. A number of these concerns have been raised publically in the
context of the US market, which has a higher percentage of passive than
the UK.
13
We continue to monitor the market dynamics between active
and passive management.
The purpose of this market study is not to identify and encourage one
investment strategy over another. It is to examine whether the asset
management industry is functioning well, whether investors can identify
the investment products most suitable for their needs, and whether
those products offer appropriate value given their costs, regardless of
the specific investment strategy. As we discussed in paragraph 4.10
of the interim report, different investment strategies can cater for
investors with different investment objectives. We have taken different
approaches to assessing the value for money achieved by different
broad strategies, such as active management, passive management,
or absolute return strategies. This allows for their different investment
12 COBS 2.23R requires firms to disclose the nature of their commitment to the Financial Reporting Council’s Stewardship Code, or
their alternative investment strategy. Most major UK passive managers are signatories to the Stewardship Code.
13 Various sources estimate that passive management represents approximately 30% of the market in the US whereas in the UK it is
closer to 20%.
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objectives and enables us to identify nuanced issues specific to each
strategy. We do not favour any particular investment strategy over
another, and think it is important that investors consider which product
or strategy best meets their needs, including taking into account the
objectives of the fund, the price they will pay and the risk that is being
taken on.
Fund ows
4.8 Some respondents suggested there is a stronger correlation between performance
and fund flows, in both directions, than our interim report presented. In particular,
these respondents argued that underperformance leads to significant outflows.
They suggest that this is driven by intermediaries reacting to fund performance and
directing the investment flow of retail investors.
4.9 Some respondents argued that there are a wide range of drivers of fund flows, and our
interim report had not reflected them all.
Fund ows – our response
Our interim report aimed to understand whether specic measurable
factors were drivers of fund ows and, if so, whether these were useful
predictors of fund performance in the UK. We accept that there are a
wide range of factors that aect ows between funds. However, many
of the other potential drivers of fund ows mentioned by respondents
are not quantiable. As a result we have not assessed all possible drivers.
We note that for the institutional segment, several ‘soft’ drivers of ows
mentioned by respondents would be captured indirectly in our analysis
through investment consultant ratings.
We have undertaken further analysis on the link between performance
and fund ows. This analysis conrms the nding in the interim report
that there is a strong link between past performance and fund ows.
This demonstrates that some investors react to aspects of fund
performance, by moving money between rival investment products in
response to changes in performance. In particular, good performance
is rewarded with net inows of funds. However, in the interim report
we found that past performance is not a good indicator of future risk-
adjusted net returns.
14
While poor performance sees fund outflows, we have also found
evidence of persistent poor performance. This suggests that not all
investors react to sustained periods of relatively poor performance by
switching to a rival investment product. For further information please
refer to Annex 2.
14 See paragraphs 6.46-6.50 of the interim report
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Value for money
4.10 Many respondents noted that value for money cannot simply be measured by net
returns against a benchmark. They said it must also take account of a range of other
factors such as volatility, stewardship, and whether a product meets specific liabilities
or objectives.
4.11 Many respondents also pointed out that value for money is highly subjective. They
argued that each investor will seek out products that satisfy their own view of value
for money. Encouraging investors to focus on charges alone may lead investors to
purchase products that are not suited to their investment objectives.
4.12 Several respondents said that the asset management industry was not delivering value for
money. They cited 'closet trackers', high profitability and management fees which are set in
relation to other asset managers' prices rather than the value added by the specific asset
manager.
4.13 Some respondents called for us to express and codify qualitative and quantitative
factors of value for money. Others called for the industry to better explain the value
they offer by explaining their objectives more clearly.
Value for money – our response
We accept that no single measure of value for money will capture
the circumstances of every retail and institutional investor. Overall,
the research presented in the interim report suggests that the most
likely single measure of value for money from an individual investor
perspective is a form of risk-adjusted net return.
At an industry level, we consider that protability represents a useful
indicator of overall value for money. The persistently high levels of
prot earned by asset management rms suggest that prices lie above
competitive levels, which in turn indicates that on average investors
may not be achieving value for money. Put another way, the protability
analysis suggests that of the gross performance delivered by asset
managers, a greater amount is taken by managers in the form of annual
management charges (AMC) than would be taken in a more competitive
marketplace.
At the individual investor level, industry participants often examine
net returns against a benchmark as a measure of value for money. In
these cases the benchmark can act as a proxy for the risk element. We
recognise that a comparison of net return against a benchmark is not
always the most appropriate measure of value for every product, as
noted by respondents.
The analysis in the interim report used net returns against a benchmark
to assess value for money from an investor perspective. Based on
responses received since the interim report, we have additionally
presented returns split by asset class so that we are able to ignore
products which are not suited to an assessment against a benchmark.
We have considered performance further in Chapter 6.
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We received a specific comment that absolute return funds should
not be included in an examination of returns against a benchmark. We
note that in the interim report we treated these funds separately (see
paragraph 6.64 of the interim report). Our findings at the interim report
stage were based on funds that as of September 2016, had reported 24
months of rolling performance. There were 74 absolute return funds that
had reported 24 months of rolling performance. Of these, 6 funds had
reported negative performance for 20 or more months over the last 24
month rolling period. In addition, 27 funds in the sample reported negative
rolling performance for 12 or more months. While the performance data
of this sector over a 24 month rolling period may not be representative of
its long-term performance, these numbers suggest that customers can
face a relatively high likelihood of negative performance.
Financial capability
4.14 Many respondents said retail investors have a low level of financial literacy and
understanding of the relevant products. Most respondents suggested that, as financial
education is not the direct responsibility of the asset management sector, we should
be working with the Government and the wider financial services industry on this.
4.15 Some respondents felt that the interim report did not sufficiently address the issue of
financial education.
4.16 Respondents articulated their understanding of our aims to be empowering
consumers, achieving the objectives of the study and leading to a more competitive
market place. Some said that greater information provision by firms or regulators
would not be enough to achieve these aims as retail investors need to improve their
understanding of financial matters and increase their level of financial literacy and
capability before more information alone would be effective.
4.17 Respondents also raised concerns about the lack of standardisation of language or
methodology when communicating performance or costs to investors. They argue
this makes it difficult for investors to understand asset management products.
Financial capability – our response
We agree that investor education is important. However, nancial
education is unlikely to be the only solution to the concerns identied.
Improving nancial literacy in the UK could bring benets, but concerns
about clarity of objectives, complexity of performance reporting and a
lack of cost transparency all make it dicult for even well engaged and
informed consumers to make eective decisions. We therefore think
that it is important to improve the clarity and accuracy of what is being
sold and any reporting so investors are better able to compare products.
Please see Chapter 12 for our proposals on objectives and performance.
For investors who are unable to assess these eectively, we consider
that strengthening the requirements on governance bodies will help to
deliver better outcomes.
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Any improvements to nancial education may have longer term eects,
but we have identied issues that we need to address now and therefore
are making proposals to make the delivery of information available to
consumers.
As a couple of respondents acknowledged, financial capability and
education is outside our remit. We continue to liaise with those
organisations that are best placed to work on these issues including,
for example, the Money Advice Service, the Treasury and the
Department for Education.
Consumer research on retail investors
4.18 Many respondents agreed with our finding that retail investors do not focus sufficiently
on charges. However, many respondents raised a number of issues about the
consumer research:
• Whether we can generalise research ndings on unadvised investors more broadly
to all retail investors.
• Whether the small sample size of 40 unadvised investors in the qualitative research
produces informative ndings. Respondents warned about the danger of making
important policy decisions based on the ndings from a small sample. Some
suggested we should conduct further qualitative research with a larger sample.
• The apparent contradiction between the ndings that 77% looked at charges when
they made their investment, 45% said charges were inuential in their investment
choice and 51% stated that they do not pay fund charges or that they are not sure
whether they pay fund charges.
• Our nding that a lack of switching indicates that some investors do not readily
switch away from funds oering poor value for money. Respondents argued that this
could be due to investors having long-term investment horizons. Respondents also
noted that holding periods have reduced, suggesting that investors are switching
more readily. Other respondents agreed that switching may not lead to better
outcomes.
• A respondent suggested that more money is invested in cheaper share classes,
which they saw as evidence that investors are price sensitive.
Consumer research – our response
We used both qualitative and quantitative techniques in our consumer
research. We recognise that we used a relatively small sample of 40
participants in the qualitative research, and we noted the potential for
self-selection bias in the interim report. The main purpose of this phase
of the research was to inform and guide the larger scale, quantitative
research that followed. The sample selection was not intended to be
statistically representative of unadvised retail investors, but to reect the
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range of unadvised retail investors in the market. We therefore consider
the sample size suitable for the purpose of the qualitative research.
We also found that the qualitative ndings (based on 40 interviewees)
were broadly consistent with the quantitative ndings (based on a larger
sample of 2,500 respondents which is representative of the population
of non-advised retail investors), and provided discussion in the interim
report where our ndings dier between the two research phases.
On the question of whether investors take charges into account, our
interim report acknowledged that the evidence is mixed. We found
that 55% of survey respondents looked at fund charges when they
made their most recent investment.
15
When respondents were later
asked whether they paid fund charges, only 49% stated that they pay
fund charges (with another 22% stating ‘not sure’). We consider these
ndings to be broadly consistent with each other. We did some additional
analysis outside the market study on platforms and the ndings are
similar as we found that few investors suciently engage with charges.
We agree that the research ndings for non-advised retail investors
may not directly apply to advised retail investors. In our remedy design
process, we will consider the impact of any proposed remedy on advised
and non-advised retail investors, and will consult on any proposals.
We remain satisfied that the findings in our interim report reflect investor
awareness and knowledge about fund switching, and the inclination of
investors to do so. A significant number of non-advised retail investors
appear to continue to face some perceived barriers to switching.
16
Platforms – clickstream data
We performed additional analysis outside the market study, looking at the investor journey on a
platform, and the findings are broadly consistent with our initial findings. Our previous analysis
as part of the interim report suggested that a significant number of investors did not focus on
charges when making investment decisions.
We worked with a firm to obtain six days’ worth of data on visits to their online investment
platform. This rich dataset contained millions of customer visits, showing the pages people
visited and in what order, as they used the website. We also obtained data on the investments
they made and their holdings at the end of that month.
We used the data to quantify how much customers focus on charges when they make online
investment decisions, as well as characterising some other broad patterns of behaviour.
16
15 We asked ‘Did you look at any of the charges when you made your investment’ and 77% of respondents answered ‘Yes’. Of those
that answered ‘Yes’ we further asked ‘Which charges did you look at when you make your investment’ and 72% answered ‘Ongoing
fund charges’.
16 The data tells us what page a customer is looking at but not what they look at on that page, so we have to make some assumptions,
based on what charge information is present on the page and how prominent it is. These results are indicative only: they are based
on 6 days of data and we make no causal analysis – we cannot say what has caused the observed behaviour.
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Engagement with charges
Overall, we find that customers rarely engage
17
with charges associated with fund investment.
• Of all the visits to the website to look at funds, fewer than 9% looked at charges. Under 3% look
at documents (including the KID).
• On average, when customers engage with charges, they do so for longer than when they
also look on other pages. They spend just over 60 seconds on charge-related pages and 43
seconds on non-charge related pages per visit.
• A strong indicator of engagement with charges is when customers sort lists of funds by
charge, which would show that they wish to minimise charges. Customers only do this during
0.1% of visits.
• Customers are slightly more likely to enagage with charges towards the end of a visit rather
than at the start.
• As a percentage of time spent across all customers, the majority of time was on the account
and portfolio summaries (about 25%) and factsheet landing pages (over 10%).
• Those who buy passive funds tend to have higher engagement with fees. Out of all visits where
clients buy funds, 17% engage with fees. Out of visits where clients buy passive funds, 21%
engage with fees.
Typical paths through the website
We identified three ‘typical paths’ that customers took as they used the webite. They are based
on the route that clients take to get to fund factsheet landing pages and indicate the way that
they look for and buy funds.
1. ‘Reviewers’ – These are customers who mostly go to the website to check their existing
investments. They start in their portfolio summary and then go and look at funds.
2. ‘Choosers’ – These are customers that use recommendation lists to navigate to the factsheet
landing page.
3. ‘Searchers’ – These are customers that use keyword searches internally from the website or
externally from search engines in order to nd funds.
The likelihood of viewing charges differs depending on the typical path a customer takes through
the website. Overall, we find that customers who engage with charges tend to buy cheaper funds.
• ‘Choosers’ and ‘searchers’ pay more attention to charge information than ‘reviewers’ and are
more likely to buy funds than ‘reviewers’. They make up 18 and 19% of (fund related) visits
respectively.
• ‘Choosers’ and ‘searchers’ also tend to buy cheaper funds.
18
• Of the ‘choosers’, those who choose from the Index tracker list are most likely to view platform
charges.
• Although very few customers sort by fees, those who do tend to buy cheaper funds.
1718
17 Engagement with charges is defined as visiting pages which predominantly contain charge information. We don’t include the fund
landing page in this definition, as it contains lots of information besides charges and is the first page that a customer will be routed
to when looking at a fund, so isn’t a good indicator of active engagement with charges.
18 For choosers this is partly because they are more likely to buy funds recommended by the firm, which are generally cheaper, but
across the board they buy cheaper funds..
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As the data is taken from just six days, we can’t say whether behaviour is a characteristic of the
customer generally, or just their behaviour at the time. However, it indicates that customers who
engage with charges do take them into account in their purchase decisions and tend to minimise
them.
Institutional investors
4.19 Responses suggested that the focus of our assessment of institutional investors was
too narrow and could have focused more on investors other than pension trustees
while other responses pointed to the small sample size as a weakness of our evidence.
They suggested that this may have led us to understate the level of switching in the
investment consultant market.
4.20 More generally, respondents agreed that there are weaknesses in the pension trustee
segment of the market and an undue focus on manager selection is a key issue which
should be addressed. A number of respondents suggested that trustees, given their
limited time and resources, should spend more time focusing on their investment
strategy and overall risk management and asset allocation.
4.21 Respondents agreed that trustees rely on investment consultants. They do this, firstly,
because they are often required to take advice, particularly where they do not have the
expertise and, secondly, because they are potentially liable if things go wrong. However
some respondents felt that our interim report focused unduly on this.
4.22 Some respondents felt that we had drawn unsuitable comparisons between fund
manager selection and scheme selection. These respondents were of the view that
the incentive structures of the defined contribution (DC) market further differ from the
incentives present more generally in scheme selection. Respondents reported that
this was due to factors such as fee constraints and risk-aversion due to the potential
for legal action against the employer if they choose default options which result in bad
outcomes in the future.
4.23 Respondents generally agreed that the issues we had identified at the interim report
stage in pension trustee decision-making reflected their own experience. This, for
example, included support for the idea that larger pension schemes were more likely to
have greater resources to assess quality than smaller schemes. However respondents
did note that different trustee groups’ experiences varied.
Institutional investors – our response
We believe the greater focus on pension schemes in our analysis was
appropriate. This is due to the size and structure of the pensions market
and the greater likelihood of competition issues compared to other areas
of the institutional market.
We acknowledge the limitations of the institutional investor survey and
we highlighted this in the accompanying annex of our interim report.
However we think the results from the survey, combined with other
pieces of evidence, create a reliable view of the issues institutional
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investors may face. For example, during our institutional roundtables we
heard mixed views from trustees on the levels of empowerment they
felt. Where respondents raised concerns about specic gures taken
from the survey we have sought to take further evidence into account.
For example, we have used data provided by investment consultants
to review the level of switching between consultants. We found further
evidence that a large proportion of institutional investors did not switch
providers over a ve year period as at least 74% of clients did not leave
their provider in this time.
19
We have not collected data that would provide evidence that trustees
spend less time on asset allocation than other factors but note that
this feedback has come up numerous times throughout the study
from a range of parties. The Pensions Regulator has recently published
guidance for trustees which covers this, including a suggested order of
investment decisions from those most likely to impact future outcomes
to those least likely to do so.
20
We continue to agree that DC schemes may be risk-averse and this
could have an eect on investment selections they make and the
outcomes scheme members achieve.
We recognise that outcomes vary by trustee group and, while we have
drawn conclusions based on our analysis and discussions with firms,
we agree that not all investors will face the same challenges. Some
trustees are very effective buyers, though there are a large number
of smaller schemes who may encounter issues when negotiating. We
also accept that while size can be a determinant of outcomes, it is not
the sole factor. Small schemes with good levels of expertise and good
governance structures can achieve relatively good outcomes. For
further information please refer to Chapter 15.
19 This is discussed further in chapter 10.
20 www.thepensionsregulator.gov.uk/guidance/db-investment-one-governance.aspx
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5 How do retail intermediaries affect
competition between asset managers?
5.1 We considered the role of intermediaries and the extent to which they act in the
investor’s interests. At interim review stage we found that:
• Retail platforms can secure discounts on fund charges but this practice did not
appear to be widespread. It is not clear that retail investors benet fully from the
potential buyer power available to platforms.
• Investors can be charged a range of dierent platform fees, potentially making it
dicult to understand the full cost of investment.
• Platforms represent an important route to market for new funds and managers, and
perform useful due diligence.
• Within the advice market, we identied concerns about the impact of increasing
vertical integration of advice and fund management in some rms, the growth of
model portfolios and the role of third party rating providers on competition and value
for money.
5.2 In this section we have included the discussion on the relevant findings in the retail
market. We have considered the role of investment consultants in Chapter 10.
Advisers, value chain and vertical integration
5.3 A large number of respondents said we needed to consider the entire value chain when
assessing the asset management industry, and value for money in particular. This is
largely because they consider that:
• holistic evaluation and solutions are better than a piecemeal approach
• advice costs are often claimed to be one of the largest portions of the asset
management value chain
5.4 A number of respondents also had concerns about conflicts of interest in vertically
integrated firms. For example, one respondent argued that vertical integration has
increased since the RDR and that in their opinion this could be interpreted as providers
seeking alternative routes to regain their influence on the retail market.
5.5 Some respondents had concerns about model portfolios and outcome-focused
products. The main issues raised were:
• poor value for money, including extra fees for limited additional value
• potentially higher tax liabilities if investors use a model portfolio
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• poor transparency
5.6 While our interim report did not look at how financial advisers shape choices, we
referred to research which suggested that partially advised investors are much less
likely to invest in passive funds compared to non-advised investors.
21
We received
mixed responses on the types of funds that advisers were recommending. Some
respondents argued that advisers are increasingly recommending passive funds, but
that this trend is not necessarily in the client’s best interest. By contrast, others argued
that the market structure still favours active funds.
5.7 One respondent argued that asset managers continue to charge registration fees to
investors, despite the fact that this work is now not predominantly done by them.
Advisers, value chain and vertical integration – our response
Some of these issues will be covered in our market study into investment
platforms. The study will explore how ‘direct to consumer’ and
intermediated investment platforms compete to win new and retain
existing customers. The study will explore whether platforms enable
retail investors to access investment products that oer value for money.
The Investment Platforms Market Study will allow us to understand the
causes of any competition problems in this market and assess what
we can do to improve competition between platforms and improve
consumer outcomes.
The financial advice industry continues to be one of our priorities
and we will continue to monitor and act on any risks to our objectives
in this area.As part of our work implementing the Financial Advice
Market Review recommendations, the FCA and the Treasury have
been working together to develop indicators to provide an overview
of the market for advice and establish a baseline to help monitor
developments in the market. The work considers issues from both
supply and demand side perspectives and will be published on the
FCA’s website in Q3 2017.
Fund ratings
5.8 Several ratings agencies responded to our interim report. They acknowledged that
there are conflicts within some of their business models, but argued that they manage
these effectively. Other respondents were more concerned that conflicts distort the
effectiveness of ratings, and therefore consumer choice and outcomes. The lack of
negative ratings was cited as evidence that the ratings are biased. Some felt that the
visibility of passive funds and fund coverage more generally could be increased by
ratings agencies to the potential benefit of consumers.
21 Platforum consumer research – referenced in paragraph 4.21 of the interim report
www.fca.org.uk/publication/market-studies/ms15-2-2-interim-report.pdf
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5.9 To ensure fund ratings work in the interests of consumers, some respondents called
for the fund ratings industry to be regulated. There were calls for specific interventions
in the market, such as RDR type rules preventing payments from asset managers to
fund ratings companies.
5.10 In the interim report we outlined our findings on whether best buy lists add value by
helping consumers identify funds that perform better than those which are not on
a best buy list. Some fund rating providers questioned the evidence we used for the
interim report and cited internal research which they said proves the value of their
ratings.
5.11 Respondents suggested that we conduct further work on the following areas:
• conicts of interest in the business models of ratings providers
• clarity on the purpose of ratings and their subsequent performance
• ratings of passive funds
• fund coverage by ratings companies
• for advised investments, the lack of alignment between who benets from ratings
and who pays for them
Fund ratings – our response
We agree that fund ratings can have an impact on how investors choose
products and they are likely to play an important role in competition for
asset management products. They can also have a positive eect on
competition where any conicts are managed eectively.
As part of the Investment Platforms Market Study we will assess the
extent to which platforms are dependent on third party fund rating
rms and how platforms ensure any conicts of interest do not aect
the quality of information they make available to investors and nancial
advisers. We will consider if further action is needed as a result of this.
Since the interim report we have done further analysis of the value of
certain ratings providers. This analysis uses additional data provided by
some rms in our data sample (see Annex 1). The further work does
not change our overall conclusion that ratings and best buy lists can
on average help investors identify funds that outperform funds not on
best buy lists. However, our analysis shows that over our assessment
period ratings and best buy lists did not on average identify funds that
outperformed their Morningstar category benchmarks.
We received a comment that the interim report’s analysis of the
predictive value of the Morningstar Analyst Rating, a forward-looking
assessment of funds, was based on a limited historical data set. We
consider that the data set used for this analysis (8 years of data) was a
sufficiently long time period to evaluate the predictive value of these
ratings using our default methodology. We recognise that when we ran
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sensitivities which assume investors hold funds for 3 or 5 years, our
sample size for this rating system reduced substantially. Following the
interim report, we were provided with a full history of the Morningstar
Analyst Rating, dating back to 2002. We have re-run our analysis using
the longer data set and find that Gold-, Silver- or Bronze-rated funds
outperformed not-rated (or neutral-rated) funds. This finding applies
when we considered this over different holding periods including one-
month and five-years. However, Gold-, Silver- or Bronze-rated funds
did not outperform their Morningstar category benchmarks.
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6 What do prices, performance and
profitability tell us about how
competition is working?
6.1 We looked at outcomes for investors and asset managers in terms of performance,
price and profitability.
6.2 On pricing, at interim review stage we found that:
• There is evidence of price clustering for active funds for sale in the UK. Prices paid by
institutional investors in segregated mandates are often discounted and so there is
less price clustering.
• Charges for active funds have remained stable over time. By contrast, charges for
passive funds have been falling in recent years.
• There is little evidence that rms compete on the basis of price, particularly for
active products.
• Some investors may choose to invest in funds with higher charges because they
expect to achieve higher future returns. However, recent academic and Morningstar
research from the US suggests that higher charging funds are not on average
generating higher performance, compared to cheaper funds in the same investment
category. Our initial analysis indicates that there is no clear link between price and
performance.
6.3 On performance, at interim report stage we found that:
• Institutional active investment products, on average, outperformed their
benchmarks before charges were deducted. After charges there was no signicant
return over the benchmark for institutional products.
• Active funds for sale in the UK, on average, outperformed benchmarks before
charges were deducted, but underperformed benchmarks after charges on an
annualised basis by around 60 basis points (bps).
• There is little evidence of persistent outperformance in the academic literature, but
there is some evidence of persistent underperformance. Our analysis provides some
evidence of persistence of relatively poor performance. However, we have also found
that asset managers are more likely to close or merge worse-performing funds.
Further analysis was required to determine whether fund mergers result in better
outcomes for investors.
• Some investors seek a target absolute return, rather than primarily seeking
outperformance against a benchmark. However, the funds oering these styles of
investment often provide misleading performance reporting to investors.
• Passive funds, after costs, would generally underperform against the relevant market
benchmark. The market index is a theoretical construct which does not take into
account the costs of investing. A cheap passive fund which closely tracks the index
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will have a low tracking dierence and generate net returns close to the market
benchmark.
• While passive funds are on average cheaper than active funds, around £6bn is
invested in passive funds which are signicantly more expensive than average.
• Some investors appear to be paying ‘active’ prices for products that are only
partly active (i.e. products which are similar to passive products, but just take small
positions either side of the benchmark). Many investors in expensive ‘partly active’
products would be likely to achieve greater value for money by switching to a cheaper
passive fund in the same investment category.
6.4 On profitability, at interim review stage we found that:
• Average prot margins for our sample of rms are around 35% for the period 2010
to 2015. All the asset management rms in our analysis earn a return on the capital
employed which is greater than our estimate of the cost of capital. When adjusting
protability to reect that asset management rms’ employees share in the
prots of the rm through wages and bonuses, the estimated protability of asset
managers is even higher.
Pricing of active management products
6.5 Think tanks and interest groups generally agreed that price competition is weak in
active asset management. However, firms and a trade body suggested that investors
are able to assess value for money, respond to prices, and switch funds. They point
out the growing AUM held in passive funds in the UK in recent years as evidence of
investors switching to cheaper funds.
6.6 Respondents noted that price clustering does not necessarily mean a lack of
competition in active management, as it may point to effective competition. They also
argue that price competition appears to be working well between active and passive
management. However, many of these respondents also noted that price competition
could be encouraged if investors were better able to assess value for money.
6.7 Some respondents disagreed with our finding that the OCF for active funds has not
changed significantly over time. They argued the analysis did not consider charges
weighted by AUM, or post-RDR pricing trends. Some respondents provided alternative
analyses of pricing trends, which they argued showed different results, such as a trend
fall in prices over 2013-2015. Other respondents argued that prices have not fallen in
line with yields in recent decades.
6.8 Some respondents argued that the differences between pricing of active and passive,
and between different sectors, is due to factors such as cost bases, investment
processes and technology. They argued, therefore, that price stability is not an
appropriate measure to gauge competitiveness in the active management industry.
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Pricing of active management products – our response
We acknowledge that price clustering on its own does not mean that
competition is not working eectively, and that it could be present in
markets where there is competition on price. However, when considered
alongside other evidence, such as our ndings on protability, rms’
pricing decisions and the absence of a clear relationship between prices
and performance (see Annex 4), we take this to be an indicator that price
competition is not working eectively.
Our interim report presented analysis of price clustering using the AMC
and the OCF. We recognise that, while the price clustering was more
pronounced when looking at the AMC, there still appeared to be certain
price points for the OCF. This reects the fact that the OCF contains
charges levied on behalf ofthird parties.
We have considered the responses giving alternative analyses of pricing
trends over time. Many of these analyses are limited in their value as
they only consider a short time horizon, such as a three year period.
The interim report presented money-weighted pricing trends over the
2005-2015 period, which we consider is a more meaningful period to
assess pricing trends. Over this period the analysis showed that, for
active funds, bundled OCF charges had uctuated slightly around a fairly
stable level of approximately 1.6%. Over the shorter, post-RDR period of
2013-2015, the interim report showed that ‘clean’ active share classes
on average experienced relatively small price decreases.
Interim report Figure 6.14 (Page 112): Trends in the AUM weighted
OCF for active share classes over time
By contrast, the interim report found that both bundled and ‘clean’
passive funds saw substantial price falls over the same time periods.
AUM weighted OCF
Source: OCF data and information about the fees structure of share classes from a sample of asset
managers enriched with information from Morningstar direct. AUM data from Morning star Direct.
2005
1.80
1.60
1.40
1.20
1.00
0.80
0.60
0.40
0.20
0.00
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Bundled Clean
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Interim report Figure 1.4 (Page 13): Trends in the asset-weighted
OCF for index-tracking share classes over time
AUM weighted OCF
Source: OCF data and information about the fees structure of share classes from a sample of asset
managers enriched with information from Morningstar direct. AUM data from Morning star Direct.
2005
0.90
0.80
0.70
0.60
0.50
0.40
0.30
0.20
0.10
0.00
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Bundled Clean
Some respondents argued that price falls for ‘clean’ share classes over
2013-2015 reected a sharpening of competition following RDR, and the
increased take-up of passive funds. We accept that these developments
could have caused prices to fall. Specically, if industry developments
had led to a substantive increase in competition for active managers,
we would have expected active prices to have fallen materially and we
have not seen this. Additionally in our view the 2013-2015 period is too
short a sample to conclude that competition has improved signicantly.
Nonetheless, we acknowledge that industry developments have the
potential to increase competitive pressure on active managers.
We note that the analysis in the interim report presented headline
prices, rather than actual prices faced by investors. Our analysis
of platform data suggests that the majority of funds were not
discounted over the periods we examined in the interim report.
Segregated mandate pricing
The interim report showed our initial examination of prices faced by segregated mandates, and
we have done some more work to examine this further. Using data requested from a sample of
asset managers, we find that management charges faced by segregated mandates tend to be
substantially lower than retail funds, even after controlling for size and asset class.
We examined whether the higher average prices faced by retail investors are explained by the
higher costs of serving the retail segment. Analysis of the profitability data we collected shows
that, while costs per AUM are higher in the retail segment than in the institutional segment,
revenue per AUM is even higher for the retail segment. This suggests that margins earned
by asset managers are higher for the retail segment, so higher costs do not fully explain the
average pricing differentials between retail funds and segregated mandates. We note that the
remaining differential could reflect differences in negotiating strength between mandates and
funds, even after controlling for size.
We also find that the management charge for segregated mandates tends to fall as the size of
the mandate increases. In addition, we find that the money-weighted average charge faced by
mandates has been fairly constant over the 2006-2015 period.
For further information please refer to Annex 3.
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Performance
6.9 Many respondents argued that the evidence in our report did not support our finding
that ‘active funds underperformed their benchmarks after charges’. They argued that
overall the interim report presented mixed and inconclusive evidence on performance
by various types of funds. Some respondents also argued the interim report was
misleading as it failed to point out that passive funds also underperformed against
benchmarks.
6.10 One respondent argued that, if, active performance on average matches the
benchmark return net of fees, this would mean that active is on average outperforming
passive. Another respondent also argued that some of the assumptions on which we
relied for our theoretical description of the market do not hold in reality and therefore
we should not suggest that on average passive would outperform active.
6.11 Respondents also proposed a number of adjustments to our fund performance
analysis. The most common comments were that the final report should:
• incorporate risk into our assessment of performance
• remove distribution costs from an assessment of the value added by asset
managers
• present performance results on a more granular basis because an average masks
the fact that many sub-groups of asset managers and product types outperform
6.12 A number of asset managers also presented evidence to suggest that their own funds
have outperformed their benchmarks, even if the industry on the whole has not.
Performance – our response
Based on the analysis undertaken in the interim report, a review of other
studies, and our further work undertaken following feedback received to
the interim report, our overall view remains that both active and passive
funds have not on average historically outperformed benchmarks net of
fees. This nding applies to retail and institutional investors.
We also nd substantial variation in average historical performance both
across asset classes and within asset classes. An average performance
nding at an asset class level does not necessarily apply to all investment
categories or strategies within that asset class, and does not necessarily
apply to every fund or fund family operating in that asset class.
For further information please refer to Annex 1 & Annex 5.
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Price and performance
Our interim report summarised results from studies of the US mutual funds industry which
suggest that there is a negative relationship between the charges of a mutual fund and the
performance of a fund manager. It also included our initial results from the UK retail active fund
industry which suggested that there was no clear relationship between price and performance.
Following the interim report we have done further analysis of the relationship between the OCF
of retail active funds in the UK and the performance generated, both gross and net of fees.
For the three equity categories we analysed, we found that the majority of funds cluster within
a narrow price range but often deliver very different levels of return. Where there was price
variation the majority of results showed no statistically significant correlation between price and
performance.
We conclude that the weight of evidence suggests that there has been no clear relationship
between the gross performance of retail active equity funds in the UK and the level of
OCF in the period examined. We find some evidence that more expensive active funds
underperformed cheaper active funds when considered net of fees.
For more detail on our work please see Annex 4.
Absolute return funds
6.13 Respondents broadly agreed with our analysis that there are problems in the way that
firms explain absolute return funds. Respondents noted that it is potentially difficult to
accurately and clearly explain the outcomes of an absolute return fund as they perceive
difficulties in providing benchmarks against which performance can be measured
easily.
6.14 Respondents raised concerns about elements of absolute return funds that may
be difficult for investors to understand. These included the wide range of targets,
the different measurement periods for targets, charges, the mix of asset classes
underpinning the strategies, the use and lack of common definition of the term
‘absolute return’ and the differences between expectations and outcomes.
6.15 Several respondents asked us to do more work in this area. This included requests for
us to investigate how prevalent specific performance targets are, how professional
fund investors measure performance and whether performance outcomes were being
achieved.
Absolute return funds – our response
We agree with respondents that absolute return funds can full a role
for investors. Absolute return funds also continue to be popular with
investors.
We are still concerned with the way that absolute return funds, and
particularly their performance, are understood by investors. We
are concerned that many absolute return funds do not report their
performance against the relevant target return. Performance for some
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funds is shown against cash alone, despite, for example, having a ‘cash +
2%’ target. This could potentially be misleading investors about the real
outperformance compared to expectations.
We also have concerns about AFMs of absolute return funds charging
a performance fee when returns are lower than the relevant fund’s
most ambitious performance target. This leads to the manager being
rewarded despite not achieving what the investor considers to be the
target performance.
We also agree that the wide range of charges and targets could be
confusing to retail investors, and is unlikely to help investors compare
performance even within the absolute return sub-sector.
A respondent asked us to consider the outcomes of absolute return funds.
We considered this at interim report stage
22
and our analysis suggested
that customers face a relatively high likelihood of negative performance.
We also found that funds in this category can have high volatility, with
some funds showing an annualised volatility greater than 10%.
Please refer to our remedies for objectives and performance
disclosure in Chapter 12.
Partly active funds
6.16 Respondents generally shared our concerns that expensive partly active funds provide
poor value for investors.
6.17 Respondents highlighted various concerns with our method to identify partly active
funds, including that:
• the use of active share and tracking error are not accurate proxies for partly active
funds
• the risk of mistakenly labelling genuinely active funds as partly active
• the advantages of active management not captured by an analysis of cost and
tracking error
• tracking error is not a determinant of future outcomes
6.18 Respondents suggested that concerns around partly active funds are best addressed
through improved disclosure of fund objectives and costs. They cautioned against
encouraging investors to consider only a fund’s active share in their portfolio selection.
They argue that where this is used it should be considered alongside other manager
and firm metrics. One firm recommended that the industry convene a working group
to design a simple disclosure to investors based on a basket of measures that reflect
how much a fund is actively managed.
22 See page 110 paragraph 6.64
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6.19 One asset management firm suggested that the availability of investment data
combined with competitive pressure, have made partly active funds less commercially
viable to provide. They believe that these funds will be driven out of the market without
our intervention.
Partly active funds – our response
We welcome rms’ agreement that expensive active funds which closely
mirror the benchmark do not serve investors’ interests well. We agree
that there are various methods to determine how active a fund is, and
that higher tracking error does not necessarily lead to higher returns
and lower tracking error to lower returns. We agree that neither tracking
error nor active share should be the sole basis to identify partly active
funds. However we continue to be concerned that over £100bn is in
funds that appear to closely follow the market but are charging ‘active’
prices.
23
We also continue to have concerns about how asset managers
communicate the objectives and outcomes of these funds to investors.
We want investors to have sucient information to be able to compare
products and prices to nd the right fund for them. If investors consider
that a partly active fund represents the best balance of risk and return
for them, they should be able to access this at a competitive price. If
an investor wants a fund manager to be taking decisions that move
their holdings further away from the benchmark, they should be able to
identify which products oer this. We want to be sure that investors are
clearer about what they are paying and what the fund is oering in return.
In addition, we consider that our remedy to strengthen fund governance,
will encourage rms to consider whether those funds that closely
replicate the market but charge high fees, deliver value for money.
For further information on our remedies on governance please see
Chapter 11 and on objectives, benchmarks and performance see
Chapter 12.
Protability
6.20 Some respondents agreed that profitability was high in the asset management
industry although others argued that high returns are required for establishing funds
due to the set up risks. Some respondents felt the evidence we presented did not
demonstrate high profitability and therefore we should not conclude that price
competition is weak.
6.21 Some respondents felt that the sample time period was not long enough and that a
longer time period would lower our estimate of profitability. They also felt the sample
size was too small and that our choice of firms and use of money weighted averages
23 This estimate is based on tracking error.
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meant we focused more on the profitability of large established firms. Respondents
argued that these firms have higher margins and this skewed our analysis.
6.22 In terms of our methodology, respondents felt that profit margins cannot be compared
between industries and therefore our finding of high margins was invalid. Respondents
also argued that front line staff costs cannot be added back and that this materially
distorts profitability.
Protability – our response
Our time period excludes the nancial crisis, largely because rms told
us that they could not provide the information we had requested during
that period. We undertook cross-checks using publicly available data for
this period and consider our analysis to be robust.
We accept that our sample included larger sized rms and this was
intended to avoid placing a disproportionate burden on smaller rms
as we asked rms for a large amount of information. We also intended
to achieve the greatest possible coverage of the whole market and
focusing on the larger rms enabled us to do this. We estimate that our
analysis covers just over half of the asset management market.
24
We
recognise there could be variations between dierent sizes of rms and
their protability, however alternative analysis provided to us does not
show a clear link between the size of the rm and protability.
To estimate economic returns, we must make adjustments for both
human capital and real economic prots. We still consider that the cost
of asset manager salaries can be treated in a similar way to prot sharing
from an economic standpoint and should be adjusted for in this analysis.
Applying an uplift to capital without addressing economic prot is likely
to understate the economic return on capital employed (ROCE), though
such an approach still produces results which are on average above our
cost of capital benchmark.
As an alternative, accounting data, without any adjustment, shows
operating margins of 36% and ROCE between 20-45% across rms in
our sample for the six years we analysed.
For further detail on our work on profitability please see Annex 1.
Economies of scale and pricing structures
6.23 Respondents commented on drivers of economies of scale at industry, fund and
investor level. Respondents also noted that there can be benefits of economies
of scale other than lower cost, including additional capabilities or access to more
information, which can lead to better performance.
24 By assets. www.fca.org.uk/publication/market-studies/ms15-2-2-annex-8.pdf
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6.24 Respondents also noted the loss-making profile of some smaller funds. They agreed
with our finding that at launch smaller funds are already passing on ‘future’ economies
of scale, to some extent, by subsidising the OCF while the fund grows to be self-
sustaining and profitable. Respondents also argued economies of scale diminish above
a certain fund size.
6.25 Responses were less clear about whether economies of scale are passed to investors.
Some respondents argued that managers were obliged to pass on some economies of
scale and gave tiered pricing as an example of this.
6.26 Several respondents felt that firms could do more to pass on economies of scale
through transparent tiered fee structures. However, others felt that both institutional
and, through platforms, retail consumers can already access tiered pricing.
6.27 Others said they see significant potential unintended consequences in tiered pricing. A
respondent said that tiered pricing could encourage investors to enter larger funds due
to their lower fees. However, returns on larger funds could be reduced as the fund runs
into capacity constraints. There was concern that the loss of return could be greater
than the reduced fee structure and that the tiered pricing system could encourage
consumers to invest in funds that offer poorer value for money.
Economies of scale and pricing structures – our response
Economies of scale can arise at the fund level or at the rm level, both
of which may benet the asset manager. The extent to which investors
benet depends on the extent to which any economies of scale are
passed on from the manager to investors.
At a fund level, we have found that asset managers tend to benet from
economies of scale and these do not seem to be passed on fully to
investors. We are therefore consulting on requiring governance bodies
to consider the extent to which economies of scale have been passed
on by the asset manager when they consider value for money.For
further information please refer to CP17/18. We note that larger funds
can experience diseconomies of scale but these tend to aect funds’
capacity to invest, and so lead to lower returns to investors, rather than
create higher costs for asset managers.
25
Whilst rising AUM leads to economies of scale for asset managers at a
rm level, we agree that the number of funds and the number of clients
often associated with a change in AUM can have some eect on the size
of cost savings. For example, we were told cost savings for the manager
from rising AUM would be greater if this is concentrated in one large fund
rather than ten smaller funds.
As AUM grows the average cost of ancillary services can also fall, as xed
overheads are spread across more business. Larger asset managers
can leverage their size to negotiate a share of these savings. We would
expect this to be taken into account by governance bodies as part of
their consideration of value for money.
25 For further information please see, for example, page 93 of the interim report.
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Retail platforms can secure discounts on fund charges but this
practice is not widespread and, where this happens, the discounts are
not generally very large. As noted in the interim report, it is not clear
that retail investors benefit fully from the economies of scale available
to platforms. We will consider this further as part of the Investment
Platforms Market Study.
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7 Are asset managers willing and able to
control costs along the value chain?
7.1 We looked at how asset managers control costs and the quality of third party services
they buy on behalf of the investors.
7.2 At interim stage we found that:
• Charges to third parties appointed by asset managers constitute around 20% of the
total fund charges, although there is signicant variance around this average.
• Third party charges are generally transparent to asset managers who, in turn,
disclose them to investors. These are mainly clear and transparent, the exception
being transaction costs. While the revenue taken by asset managers is disclosed as
part of the OCF, we are concerned that risk-free box prots are opaque and are not
passed through to investors.
• Procurement of some ancillary services appears broadly appropriate and eective.
• Asset managers appear to be poorer at controlling transaction costs, although we
have observed some progress in this area.
• Asset managers are incentivised to control the quality of services by both
reputational eects and regulation.
• Bundling of ancillary services is frequent but raises no signicant competition
concerns.
• There may be competition problems in some ancillary services markets, notably
transfer agency, index and data provision, which limit asset managers’ ability to
control price and quality.
Cost control
7.3 There were mixed responses on our analysis and findings on this topic, although this
was partly due to how respondents interpreted our findings.
7.4 Several asset managers agreed that transparency of charges could be improved for
investors.
7.5 Several respondents said that the implication that managers do not control charges
was inaccurate. Respondents generally agreed with the finding in our interim report
that firms appear to be relatively good at controlling the cost of ancillary services
where these are included as part of the OCF. Some respondents felt that charges
were controlled whether or not they were part of the OCF as they affected fund
performance.
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7.6 Several respondents explained the differences between costs that can be controlled
by the asset manager and those that cannot, such as stamp duty and some elements
of transaction cost. Other respondents explained the differences between costs that
are related to different functions undertaken by the manager, such as differences
between transaction costs and other costs.
7.7 A depositary suggested we do further work in this area, particularly looking at the
potential conflicts of interest inherent in and the effects of bundling services on
smaller asset managers.
7.8 Several respondents have argued that Figure 1.2 in the interim report, which was an
illustration showing the potential impact of the OCF and transaction costs on fund
returns, double counted transaction costs.
Cost control – our response
Market participants told us that asset managers should and do have an
incentive to control the costs and services they pay for as the costs will
aect net performance. However, the evidence from our supervisory
work is not so clear. On trading and execution costs, for example, we
found that most rms do not have adequate management focus, front
oce business practices or supporting controls to meet our current
requirements on best execution.
26
We have also found that rms can
earn signicant administration fees on top of the AMC. These total
received fees can exceed the costs that the manager incurs, and we nd
that asset managers do not often reduce ad valorem administration
fees, even as economies of scale are achieved.
We agree that our analysis on cost control did not cover, for example,
small asset managers and we did not do a formal and detailed evidence
gathering exercise as part of our analysis. As we acknowledged in our
interim report specically about our ndings on bundling, smaller asset
managers may have less buyer power, which may aect how they are
able to purchase services.
Our analysis did not explicitly split out costs that cannot be controlled by
the asset manager including stamp duty. Though we agree that we could
further sub-categorise costs we do not think that this materially changes
our position. We still consider that costs which are complex or costly for
the asset manager to control or those which may be a revenue stream
for the asset manager are not controlled as eectively as other costs.
For clarity, Figure 1.2 in the interim report was intended to be
illustrative only and it was not intended to and did not contribute to our
overall findings. We recognise that in this example, by using a gross
return for the funds, transaction costs should already be captured
within this. Therefore we accept that by deducting transaction costs
in addition to the OCF, we double counted transaction costs for active
and passive funds. Notwithstanding this illustration, both fees and
transaction costs contribute to the total cost of the fund, and we have
26 www.fca.org.uk/publications/multi-firm-reviews/investment-managers-failing-ensure-effective-oversight
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considered transaction costs in more detail as part of our proposal for
a single all-in fee in Chapter 13.
Data and index providers
7.9 Respondents agreed that there were issues in both data and index provision that we
should consider further. They gave us examples of pricing structures and charging
models that suggested competition was not working well for these services.
7.10 We have continued to hear issues including little choice or opportunity to switch to
another index provider, even if quality is poor or prices too high. This happens for a
variety of reasons, including that the relevant index is effectively a market standard and
because it would require changes to internal systems.
Data and index providers – our response
We did not receive any responses which provided evidence that was not
consistent with our interim ndings on data provision. We continue to
believe there may be issues with data provision in line with those we set
out in the interim report.
We have considered the responses that provided further information on
issues with index provision. These suggest that prices have increased
for index provision, in some instances very signicantly, despite no
associated improvement in service level.
Therefore the responses we have received on index and data provision
do not give us reason to believe that our original views should change.
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8 Are there barriers to entry, innovation
and technological advances?
8.1 We looked at product development and innovation in the asset management market.
We also considered whether there are barriers to competition, particularly where they
reduce the incentives or ability to innovate and introduce technological advances.
8.2 At interim stage we found that:
• There is some evidence of innovation, particularly in investment products and
strategies. However, some of the developments we have seen are more likely to have
an ‘evolutionary’ rather than ‘revolutionary’ eect on competition in the medium to
long term.
• We do not see innovation in the ways active management rms charge for their
services and we are interested in further exploring the reasons why.
• There is limited evidence of signicant structural or regulatory barriers to entry in
the asset management market.
• There are ways in which intermediaries and distributors can both encourage and act
as a barrier to innovation in the market for some asset management products and
services.
Barriers to entry and innovation
8.3 Several respondents commented on our analysis and findings on barriers to entry.
Some felt that barriers were higher than we suggested and cited the general volume
and complexity of regulation and the potential ramifications of EU withdrawal. A
respondent agreed that incumbents do have an advantage when launching new funds.
8.4 A small number of respondents commented on the effects of investment consultants,
expressing views that investment consultants had a minimal impact. This was
despite other respondents noting that investment consultants’ charging structure
incentivises them to focus research on managers who are likely to receive positive
recommendations, including larger asset managers.
8.5 Respondents noted that data protection rules were acting as a barrier to innovation
in the use of cloud-based solutions. Respondents also noted that financial promotion
rules stopped innovative social media solutions.
8.6 A data provider raised the ‘per use’ payment structure in place for benchmarks, and
noted that this may act as a barrier to entry for smaller firms.
27
27 Respondents described that data providers often charged a licence fee but then also fees each time an index was used elsewhere
such as in a data centre or on distribution or marketing materials.
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8.7 Some respondents felt that our interim report understated the amount of innovation
in the asset management market. Respondents referred us to new strategies and new
distribution techniques including ‘robo-advice’.
Barriers to entry and innovation – our response
Since the publication of the interim report we have observed some entry
and innovation in the market such as entry into the platform market and
the introduction of new charging structures.
We agree that the general level of regulation and other macro-economic
factors such as the UK’s withdrawal from the European Union could
create challenges and barriers to entry. Two of our ve principles
28
that
will guide our advice to Government on EU withdrawal are:
• cross-border market access – open markets are an important enabler
of healthy competition, supporting our objectives
• consistent global standards – across regions and jurisdictions in order
to minimise the risks of regulatory arbitrage
We still believe that consultants and rating providers can act as both an
entry mechanism and a barrier for some funds.
It is worth noting that there are several ongoing initiatives looking at
potential barriers that may affect parts of this market. This includes
the package of remedies from the Financial Advice Market Review
(FAMR), which considered both supply and demand-side barriers.
The FAMR recommendations update was published in April 2017
and the review of the outcomes from FAMR is expected in 2019. We
have also undertaken previous reviews looking at regulatory barriers
to, for example, innovation in digital and mobile
29
, and cloud-based
solutions.
30
As part of our Smarter Consumer Communications work
we also considered the impact of regulation on good communication
and the impact of innovation on communications.
31
Liability Driven Investment
8.8 More respondents were confident that the market for Liability Driven Investment (LDI)
services was working well, though some respondents felt strongly that it was not.
28 These principles are provided in the FCA Mission. The other three of the five principles are:
• Cooperation between regulatory authorities
• Influence over standards
• Opportunity to recruit and maintain a skilled workforce
29 www.fca.org.uk/publications/feedback-statements/fs16-2-feedback-statement-call-input-regulatory-barriers-innovation
30 www.fca.org.uk/publications/finalised-guidance/fg16-5-guidance-firms-outsourcing-%E2%80%98cloud%E2%80%99-and-other-
third-party-it
31 www.fca.org.uk/publications/discussion-papers/smarter-consumer-communications-further-step-journey
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8.9 Respondents commented on the complexity of LDI strategies and had mixed views
on whether this was beneficial for clients. Investment consultant respondents said
that adopting LDI led to better outcomes for schemes. However one think tank
was unconvinced that these strategies provided better returns, especially given the
additional risk.
LDI – our response
We found no further evidence to suggest that we should alter our
ndings or undertake further specic analysis on LDI.
We considered the responses raised in light of our institutional
disclosure proposals in Chapter 13 and 15. We also considered
the degree to which these responses relate to the wider issues
that trustees face in evaluating the advice provided by investment
consultants, and this is reflected in our findings in Chapter 10. We
would expect that if investment consultants can better demonstrate
the quality of advice they have provided, then trustees would be better
able to judge whether the solutions they recommend, such as LDI, are
right for them.
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9 Feedback on other topics in the interim
report
Scope
9.1 Some respondents noted that our analysis did not focus on alternative asset classes
and our findings should therefore be seen in this context.
9.2 Several respondents were concerned that our analysis focused on larger asset
managers.
9.3 Some respondents said our analysis should have considered the wider long-term
savings market, particularly when considering the retail market.
Scope – our response
Our original scope as set out in our terms of reference did not include
alternative asset classes. We therefore did not focus our analysis on
these. However, we did receive some feedback on certain alternative
asset classes such as private equity and hedge funds as part of our
institutional analysis.
We agree that some parts of our analysis did focus on larger asset
managers, in particular our protability analysis. We were concerned
that we would otherwise place a disproportionate burden on smaller
rms as we requested a large amount of information. We also intended
to achieve the greatest possible coverage of the whole market and
focusing on the larger rms enabled us to do this. For the majority of
our pricing and performance analysis, we used a broader dataset which
included third party datasets and therefore includes a large proportion
of products available for sale in the UK. As part of our remedy design we
consider how our proposals may apply to and aect rms of dierent
sizes and business models.
While we accept that the savings market could be relevant to retail
investor decision-making, we did not include this within our scope as
we were focusing on how competition works in the asset management
market. We have previously assessed the effectiveness of competition
in the cash savings market.
32
32 www.fca.org.uk/publications/market-studies/cash-savings-market-study
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Regulatory context
9.4 Respondents generally wanted us to consider any remedies in the context of existing
initiatives, in particular MiFID II, the extension of the SM&CR to investment firms, and
PRIIPs. Respondents were keen to ensure that remedies left the UK with a regulatory
regime consistent with other parts of the EEA as we approach EU withdrawal. They said
that we had not examined the full effects of RDR, and generally want us to wait until we
have analysed the implications of all existing regulatory change. They also stated that
the costs of implementing regulatory change are ultimately borne by customers and
that we needed to consider the impact of the full suite of changes in this context.
Regulatory context – our response
We recognise that there are a number of recent and forthcoming
regulatory changes which will aect asset managers and the remedies
we have proposed sit within this wider policy context. These include
MiFID II, PRIIPs and the SM&CR. In considering the most appropriate
remedies, we have thought about whether the concerns we have
identied will be addressed by these regulatory changes.
Where we consider that forthcoming regulations are likely to address
our concerns, we are looking at ways in which we can complement
these changes. In some areas we are aware that there is likely to be
further clarification at a European level, and we intend to consult on
related proposals in light of this.
Competitiveness
9.5 Many respondents welcomed our intention to consider the impact that the proposed
remedies will have on the attractiveness of the UK as a place to do business. They
argued that the UK is entering a critically important political period and there is a
lot of uncertainty and many challenges around EU withdrawal which we should take
into account when considering the proposed remedies or any regulatory changes.
Respondents urged us to avoid adding additional layers of requirements on top of
existing regulations.
Competitiveness – our response
As we noted in the interim report, we have considered the impact our
proposed remedies will have on the attractiveness of the UK as a place to
do business and will continue to do so with the nal package of remedies.
Although we recognise that the proposed package of remedies will
probably increase costs for some rms, we expect that that the benets
will outweigh any costs. We also expect that any improvements to
outcomes for investors will lead to the UK asset management industry
being a more attractive place to invest and therefore improve the relative
competitiveness of the UK market.
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In most cases we are required to undertake a full impact assessment
and cost-benefit analysis when we introduce any regulatory or rule
changes.
Non-disclosure agreements and most favoured nation clauses
9.6 Broadly, respondents confirmed some use of non-disclosure agreements (NDAs) and
most favoured nation clauses (MFNs) in this market. They also agreed that there may
be competition consequences from these kinds of agreements.
9.7 Respondents commented on the infrequent use of NDAs. A respondent said that
the individual and specific nature of the agreements mean that if the details were
disclosed they would be of limited use to other market participants. An asset manager
was concerned that if confidential agreements were made publicly available third party
managers could be reluctant to enter into individually negotiated agreements and this
could lead to less beneficial outcomes for investors.
9.8 Several respondents said that MFNs can act as a barrier to fee reduction, though other
respondents noted that they were used infrequently. Respondents also said that these
were driven by clients, who saw them as a protection.
NDAs and MFNs – our response
Respondents appear to broadly agree with our analysis of the prevalence
of and the eects of both MFNs and NDAs.
Respondents appear to be more concerned about the likely effects of
MFNs in the asset management market, particularly where there are
few clients or few providers for a given product or service. However,
respondents did not agree on whether regulatory intervention would
help or hinder investors’ ability to negotiate. We have considered
whether there is any need for us to intervene immediately and we
do not see significant or specific evidence to suggest that this is
necessary.
Vehicles and structures
9.9 A few respondents provided comments on closed-ended vehicles. A trade body
suggested that certain closed ended-funds have had strong relative performance
driven by structural factors. They argued that this is because they do not have to worry
about liquidity constraints affecting fund redemptions and so have lower transaction
costs, which create less of a drag on performance. These respondents said that
segments of the intermediary market such as advisers have not been using closed-
ended investments despite their strong performance. They felt this is a market failure
and that we should consider intervening as this would improve competition.
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9.10 Respondents suggested that any remedies should be implemented equally across
investment vehicle structures to ensure the market is not distorted or give the
impression the FCA favours one structure over another.
Vehicles and structures – our response
Our work did not specically consider whether there are barriers to
advisers recommending certain investment vehicles over others. In the
Post-implementation review of RDR we noted that sales of investment
companies had increased signicantly since the RDR.
33
Investors can access retail investments through other products as
well as authorised funds. Insurance companies oer retail investment
products in the form of unit-linked or with-prots insurance products,
such as personal pensions, investment bonds or endowments.
Consumers can also invest in funds set up as closed-ended investment
companies, including investment trusts. The asset management market
study did not directly focus on unit-linked, with-prots business or
investment companies.
However, we are aware that concerns the market study highlights
around value for money and governance in authorised funds may also
exist for other types of investment products. Therefore, as set out
in CP17/18, we are seeking views from all relevant stakeholders on
whether we should consider extending similar remedies to other types
of retail investment products and, if so, whether these remedies would
require specific modification to be appropriate in each circumstance.
33 Pages 75 and 76 in www.fca.org.uk/publication/research/rdr-post-implementation-review-europe-economics.pdf
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10 The role of investment consultants
10.1 We looked at the role of investment consultants and their impact on outcomes for
institutional investors.
34
We found that:
• The investment consultant market is relatively concentrated and switching rates
appear low.
• On average, consultants are not able to identify managers that oer better returns
to investors. However, the manager selection process ensures that asset managers
meet minimum quality standards and reduces operational risk for investors.
• Consultants do not appear to drive signicant price competition between asset
managers. Consultants do not place a lot of weight on manager fees in their ratings,
although in some instances they can help investors in negotiations on price.
• Investment consultants’ advice on asset allocation and investment strategy is
signicantly more inuential in terms of outcomes than the advice on manager
selection. However, many institutional investors struggle to monitor and assess
the performance of the advice they receive. There is no standardised framework to
assess the quality of advice or to help investors assess whether they are achieving
value for money.
• For some investors, duciary management oers a way to pool their money to
achieve lower costs and get wider exposure to dierent managers and solutions.
However, we have concerns about conicts of interest in duciary management,
which is increasingly oered by investment consultants and fund managers. These
issues are exacerbated because investors cannot assess whether the advice they
receive is in their best interests.
• Fiduciary managers’ performance and fees appear to be among the most opaque
parts of the asset management value chain. A lack of publically available, comparable
performance information on duciary managers also makes it hard for investors to
assess value money.
Investment consultancy market
10.2 Responses to our findings on the overall structure and competitive dynamic of the
investment consultancy market primarily came from investment consultants. Other
respondents included asset managers, interest groups, pension schemes and trade
bodies.
10.3 A number of investment consultants said we had overstated some of the concerns
raised, including concentration levels in the market and the effectiveness of the
34 Investment consultancy services’ is defined in paragraphs 5.2-5.4 of the terms of reference in our published
provisional decision to make a market investigation reference
www.fca.org.uk/publication/market-studies/ms15-2-2-a-mir.pdf
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demand side. Other respondents mainly agreed with our concerns, especially about
the weak demand side where they consider information asymmetry is also a factor.
Some said that independent trustees are becoming more common in helping to
address the knowledge gap.
10.4 A small number of respondents disagreed that there is a weak demand side, in
particular that smaller clients are less likely to challenge than larger clients.
10.5 A few respondents disagreed with the concentration figures in our interim report.
They provided alternative figures suggesting that the market share of the largest three
investment consultants could be less than 50%.
10.6 A small number of respondents suggested that the scope of our work on investment
consultants was too narrow and focused too heavily on the effectiveness of advice on
manager selection.
10.7 One investment consultant challenged the switching figures we used saying these
were lower than they had seen in practice. They suggested that our sample size
was too small and over represented the smaller pension schemes. A number of
respondents also pointed out that clients will often carry out reviews and decide not to
switch. Generally there was agreement that switching is not difficult but that trustees
are often reluctant to do so.
General comments on our analysis of the investment consultancy
market – our response
We agree with respondents who pointed out that the market is not
homogenous and clients vary by size, type and behaviour. There are
also a variety of reasons why clients use investment consultants. We
highlighted this in our assessment of institutional investors. However, we
believe the issues we highlighted aect both a large proportion of the
market and the eective functioning of competition in the whole market,
even if they aect some market participants more than others.
There are a number of ways of measuring market share which lead to
dierent outputs. The interim report used rm revenue data and on this
basis, Aon Hewitt, Mercer and Willis Towers Watson combined, have
at least 56% of the revenues in the advisory market.
35
In response to
the feedback we received, we also looked at the proportion of assets
held by the clients each consultant advises. On this basis, the share
of the market held by the largest players increases.
36
On the other
hand, calculating the market share by the number of clients leads to
lower market share estimates for the larger consultants as the smaller
consultants will often have a higher number of small clients.
37
Overall
we think that looking across these measures still suggests the market
35 In 2015 the FCA collected revenue data on 12 of the biggest investment consultants; the largest three consultants represented 71%
of revenues. This data covers around 80% of mandates based on Mandatewire data. The size of mandates for the remaining 20% of
the market are likely to be smaller meaning that the share of revenues will fall within the range of 56% and 71%. Including fiduciary
management revenues we would estimate the market share to be between 54%-68%.
36 The largest three consultants clients represented almost 80% of the assets held in our sample meaning that an estimate of their
market share on this basis would be between 63% and 80%
37 Respondents suggested that the market share of the largest three consultants’ based on number of clients was around 50% based
on survey data from the PLSA, Mandatewire and Greenwich associates.
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is relatively concentrated. It is unclear whether the smaller rms will
continue to gain ground, as stated in their responses, or whether further
movement towards duciary management will benet the largest
investment consultants.
In our interim report we stated that there were low levels of switching
in the investment consultant market. We presented this with other
ndings, for example the lack of standardised and easily comparable
performance data to suggest that there could be barriers to eective
competition in the market.
In the interim report we provided the results from our survey of
institutional investors where around 90% of respondents had not
switched in the last five years. We also acknowledged the limitations
of the survey data. A respondent argued that, in practice, the
switching rate was higher. Based on the feedback provided, we took
a further look at the information provided by a sample of investment
consultants on the number of clients leaving them each year.The
data suggests that at least 74% of the investors in our sample did not
switch over a 5 year period.
38
While this confirms the switching rate
is relatively low, we acknowledge that the optimal level of switching
depends on the market and the level of switching costs involved. We
did not carry out a comprehensive analysis of this during the market
study. However, from the evidence we reviewed in the interim report
and the subsequent responses, we believe that competition in the
market could be improved if investors found it easier to compare
providers.
Conicts of interest in investment consultancy
10.8 Many respondents repeated the concerns in the interim report that potential conicts
of interest and misaligned incentives could aect the quality of advice provided by
investment consultants. The main concern raised by respondents related to investment
consultants’ ability to act independently when they also oer duciary management
services, and that they are potentially pushing existing advisory clients into using their
own duciary services.
10.9 Respondents also raised other aspects of investment consultants’ business models:
• Their remuneration model. Here a fee structure based on a retainer and fees for
manager selection might encourage manager churn rather than focusing on asset
allocation.
• That they might have an incentive to make their services more complex than
necessary in order to justify their advice. This concern was linked to a wider issue
that trustees may have limited ability to understand or challenge the advice that they
get.
38 This is a lower bound estimate as the data includes clients who switch multiple times and others who may have left the market.
They also focus on the larger investment consultants but may indicate that a higher proportion of investors switched investment
consultants between 2011 and 2015 than was suggested by our online survey.
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• Where they oer training seminars these often appear to be focused on selling more
services rather than educating trustees in a neutral way.
10.10 Investment consultants said that their long-term relationship with clients is much
more important than the short-term financial incentives that may be created by
churning portfolios.
10.11 Investment consultants also noted that the prevalence of complex strategies is due
to the wider economic environment and is consistent with acting in the best interests
of investors, and is not due to misaligned incentives. Other respondents reported
that they had experienced investment consultants recommending overly complex
solutions, which they then found created further opportunities for their provider to
offer them more services.
10.12 Investment consultants said that the fiduciary management offering can span a range
of services, from pure aggregation to a fully discretionary and delegated service.
They determined the specific type of fiduciary management service provided in full
consultation with the client. An investment consultant said that a separate contract
must be signed to enter a fiduciary arrangement, and that this measure would prevent
clients from ‘slipping’ into this service. Another investment consultant suggested
that the number of their existing clients moving to other providers for fiduciary
management was evidence that this conflict is not having an effect.
10.13 A respondent argued that vertical integration between advisory and fiduciary services
is the most serious potential conflict of interest. This is because the investment
consultant plays a central role in the institutional asset management market and their
advice is likely to be important in determining outcomes. This respondent argued that
vertical integration could therefore stop asset managers competing on a level playing
field.
10.14 We also raised a concern that gifts and hospitality from asset managers could create
conflicts of interest for investment consultants that provide asset manager ratings
and recommendations services to clients. Respondents raised a similar concern
about this where the investment consultant is providing these services while at the
same time providing consultancy services to asset management firms. Specifically,
they were concerned that any revenues investment consultants earned from asset
managers could create conflicts of interest. Some investment consultants reiterated
that they have processes in place to ensure asset managers’ gifts, hospitality or
revenue from providing services did not affect their advice.Others suggested that the
level of gifts and hospitality they received was insignificant and declining. However,
they also recognised that across the market policies to prevent conflicts could be
enhanced.Some noted that they had tightened their existing policies since our interim
report.
10.15 Some respondents also called for more clarity on what gifts and hospitality can and
cannot be accepted or provided. However, some respondents also thought MIFID II
would likely lead to a further fall in the level of gifts and hospitality. A small number of
asset managers were concerned that the regulatory focus on gifts and hospitality
would damage the ability to build trusting working relationships which they believe is
beneficial to clients. A trade body differentiated between hospitality which is beneficial
and hospitality which is not helpful to business discussions.
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10.16 Consultants highlighted that they have policies in place to prevent any revenues
received from asset management groups from impacting their ratings process. An
investment consultant demonstrated the independence of their ratings by providing
statistics showing that they had provided a higher number of negative ratings to asset
managers who had purchased services from them than positive ratings.
Conicts of interest in investment consultancy – our response
Although there are inherent conicts of interest in the investment
consulting business model, these must be properly managed to
prevent distortions in competition that disadvantage investors. Our
interim ndings suggested that there were dierences between rms
in how they were managing these conicts. We are encouraged that
a number of investment consultants’ responses suggested they are
improving their policies to manage conicts of interests. However, we
are still concerned about how eectively conicts are being managed,
particularly conicts that arise from oering both advice and duciary
management. In the interim report we proposed a market investigation
reference to the CMA to look at this issue in more depth, along with
other concerns we identied in investment consulting services. We
received UIL of the reference and are currently publically consulting on
our provisional view to reject the UIL before making a nal decision on
the market investigation reference. For further information please refer
to Chapter 15.
Since the interim report we have further examined whether there was
a link between asset managers providing gifts and/or hospitality to
investment consultants, or investment consultants selling services to
asset managers, and the likelihood of the asset managers’ products
being highly rated. This further analysis took into account additional
factors that could also explain positive ratings, such as the asset class
and an investment strategy’s past performance. For some consultants
in our sample we have found a significant positive association between
receiving gifts and/or hospitality and the likelihood of providing a high
rating, as well as significant positive association between revenues
received from asset managers and the likelihood of providing a
high rating. However, at this stage we have not been able to satisfy
ourselves that our data set is sufficiently reliable, or that there are
no other factors which could explain the statistical association.
Therefore, we cannot conclude that ratings were influenced by gifts
and/or hospitality or revenues received.
Fee focus
10.17 We received only a small number of responses on this topic. All of these responses
were from investment consultants and all argued that they place more focus on the
negotiation of fees than we suggested in the interim report. We found that investment
consultants did not appear to drive asset managers to complete on fees.
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10.18 Investment consultants have told us that:
• They conduct fee surveys which help them to assess whether the fee level is right
for the mandate.
• They consider fees when they give a rating (which strengthens their negotiating
position).
• They are able to negotiate fee discounts for clients both through bespoke
individualised negotiations and through pooling smaller clients’ assets together.
• The duciary management oering enables them to negotiate fees down on behalf
of clients.
• As we noted, they remove outliers during the ratings process, but the fee levels and
willingness to negotiate form part of the rating. They argue that this reects the full
value of the service (net of fees).
10.19 An investment consultant told us that they calculate the manager’s share of ‘value add’
and where asset classes do not meet their targets they would avoid them.
39
10.20 Consultants also told us about the stages at which fees are negotiated. A few
consultants focus on fees when reviewing/rating asset managers. Most consultants
negotiated fees at the point clients selected an asset manager. Fees are always
negotiated for fiduciary management.
Fee focus – our response
In the interim report, we identied that fees were considered as part of
the ratings, although this was typically not given signicant weight. This
was based on the responses rms gave us. We provisionally concluded
that the fee focus in the ratings was usually on removing outliers, rather
than driving down costs. Respondents have subsequently told us that
negotiation on fees is also part of their rating process. So it is clear that
there are dierences between investment consultants in the way they
focus on fees in the rating process.
For fee negotiations, we understand that some firms do negotiate
fees for clients. In particular, firms have told us that they negotiate
fees down for their fiduciary management offering. Notwithstanding
these differences between investment consultants, we believe that
more focus could be placed on fees. In particular we note that in
our analysis of segregated mandate pricing, on average the asset-
weighted annual management charge has been relatively stable from
2006-2015 (see Annex 3). Although this will cover mandates which
were and were not advised by investment consultants, it appears there
has not been significant fee pressure for institutional investments.
39 This investment consultant defined this as the manager’s fee taken as a percentage of the strategy’s targeting (ex-ante)
performance in excess of the relevant benchmark.
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Fiduciary management
10.21 We received many responses to the interim report that pointed to issues with the
selection process of fiduciary managers. They focused on a perceived conflict by
investment consultants when moving clients from an advisory relationship to a
fiduciary management arrangement, low tendering levels, and the lack of available
comparative information when selecting which consultant to use.
10.22 Respondents disagreed with our interpretation of some elements of our evidence
in the interim report. They also felt that some evidence we relied on was inaccurate.
A number of respondents had concerns that the research we referenced
understated the current level of competitive tendering of fiduciary management
appointments.
40
An investment consultant also pointed out that we had misinterpreted
a surveyregarding the use of existing advisors.
41
Another respondent noted that
tendering processes are more detailed and comprehensive that we had suggested.
10.23 Some investment consultants disagreed with what they perceived to be a suggestion
that they push advisory clients into purchasing fiduciary management services and
said this was typically a decision led by the client. However, many respondents were
concerned that trustees may not fully understand fiduciary services and could benefit
from improved guidance on this. For more information on this feedback, please see
Chapter 15.
10.24 Several respondents also said that fiduciary management should not be seen as a
distinct service, but rather an improved version of investment consultancy with the
level of service depending on client needs. A trade body suggested our definition
of fiduciary management was too narrow, and that delegating responsibility for all
investment decisions is just one variety of fiduciary management. This respondent
stated that manager-of-manager and fund-of-fund
42
products are also part of a
fiduciary management service.
10.25 Some respondents said that the interim report did not fully recognise the benefits
to clients from using fiduciary management. These included allowing pension fund
trustees to focus more on strategic decisions, and increasing negotiating power
through asset pooling. A few respondents stated we focused too heavily on costs and
that, while costs charged for fiduciary management would typically be higher than
for advisory services, the overall costs paid by trustees are often lower. We received
a number of suggestions on methods for improving the presentation of fiduciary
management fees, charges and performance. A few respondents suggested that
there was an increasing availability of fiduciary management providers and a number of
potential market entrants. They thought that this was generating competitive pressure
in the market.
Fiduciary management – our response
Our interim report highlighted that duciary management does bring
some advantages and can work well for some clients but that there are
also some issues which require addressing. We have not received any
40 KPMG Fiduciary Management Market Survey (2015).
41 Aon Hewitt Fiduciary Management Survey (2015).
42 In these funds, the asset manager will select underlying funds or managers (either in-house or third party) and allocate money to be
managed by them.
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evidence which has changed our view that the competitive process in
the market for duciary management could be improved.
For evidence on tendering levels for duciary management
appointments, we have subsequently looked at a more recent third
party survey. This nds the level of tendering when choosing a duciary
manager is still low.
43
While 63% of investors received third party advice,
only 13% ran a selection process when the investment consultant
proposed duciary management.This survey also suggests that 41% of
respondents had not considered more than one duciary manager.
We accept the point made about the survey data we used to illustrate
tendering levels in duciary management. The statistic used in the
interim report to show theproportion of clients appointing existing
advisors should have read that: ‘58% of respondents would appoint the
duciary business of their existing investment consultant or actuarial
adviser as their provider’.
We agree that the range of services provided by fiduciary managers
is broad and includes fund of fund and manager of manager in-house
products. We consider that many of our concerns about fiduciary
management apply equally to other in-house products. This includes
the conflicts of interest concerns about performance reporting.
Investment consultant performance
10.26 The majority of responses on our analysis of investment consultant recommendations
were from investment consultants. The bigger investment consultants strongly
disagreed with our finding that on average investment consultants are not able
to identify managers that outperform, although a couple of smaller investment
consultants agreed that consultants are not able to identify asset managers that
offer better returns to investors. Instead, these consultants see the ratings and
recommendation process as a form of quality control.
10.27 Currently, institutional investors face a set of thousands of investment products, which
can make it difficult to select the most appropriate. Given this range of products,
investment consultants’ due diligence can help narrow choices for clients, and
some investors told us they valued having a long or short list from which to choose
managers. We also received feedback that consultants could have artificially created
demand for an unnecessarily wide range of products, which reinforces demand for
their ratings and recommendations services.
10.28 A respondent disagreed that there is added value from the due diligence that
consultants provide. They suggested that the reason search costs were so high was
because consultants offered pension funds a choice of thousands of funds, and that
this spurious choice destroys value for clients in the long term.
43 LCP fiduciary management survey 2016.
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10.29 Investment consultants generally pointed to the fact that the interim report only
assessed performance against a benchmark. They did not believe this adequately
captured the benefits of their recommendations. In particular, they said that their
recommendations also reflect risk management considerations. These respondents
noted that risk is not just at fund level but also at scheme level, and the investment
products they recommend to clients would, for example, often aim to reduce funding
level volatility. Respondents also argued that the effects of asset allocation decisions
are difficult to assess against benchmarks.
10.30 We received detailed feedback from several respondents about the interim report’s
analysis of the predictive value of investment consultants’ ratings. Their key points
were that our preliminary results relied on the eVestment databases’ accuracy. Several
respondents felt that the database required adjustments to improve its accuracy
and correct for alleged biases. Specifically, respondents believed that the eVestment
database was subject to potential:
• backll bias
• bias related to the inclusion of simulated returns
• potential survivorship bias
• headline rather than actual fee data reporting issue
Investment consultant performance – our response
We consider that returns that have been backlled or simulated by asset
managers have the potential to be biased upwards. So, we have made
adjustments to the eVestment database to remove (i) time periods that
were backlled by asset managers, and (ii) time periods in which returns
were simulated by asset managers.
The eect of these two adjustments is to substantially reduce the
outperformance of both highly rated and non-highly rated products. The
preliminary results in the interim report showed quarterly non-highly
rated gross outperformance of 23 bps and highly rated quarterly gross
outperformance of 20 bps
The updated results show quarterly non-highly rated gross outperformance
of 0.08 percentage points and highly rated quarterly gross outperformance
of 0.10 percentage points. We nd that outperformance of non-highly rated
and highly rated products are not signicantly dierent from each other.
However, neither highly rated nor non-highly rated products generated
outperformance that was signicantly dierent from zero. The same
result holds net of fees. Therefore, we nd that as with our preliminary
analysis, consultants’ highly rated products aggregated together did not
outperform non-highly rated products. Further information can be found
in Annex 5.
We continue to agree that investment consultants’ due diligence
and short lists can be valuable to investors. However, we found
investment consultants’ recommendations drive fund flows, so their
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ratings are likely to impact the way competition works for institutional
investment products. Where these ratings do not deliver better
outcomes for investors compared to non-highly rated products, the
potential pool of asset managers which investors are likely to choose
from could be widened. This may improve the relative negotiating
power of investors. It is therefore important that clients are clear what
the ratings represent, and are able to assess whether the investment
consultant is effective at identifying managers that can outperform
the benchmark, where that is what the rating aims to achieve.
Performance monitoring
10.31 A few investment consultants gave us details of how they currently monitor both
qualitative and quantitative elements of their services in order to present this
information to their clients.
10.32 The majority of respondents supported the need for improvements in information
on investment advice given to clients, and agreed that asset allocation was an
important element. There was a general consensus across investment consultants
that creating reporting for the monitoring of investment advice is challenging for
reasons such as each client having different investment objectives and that clients
may or may not follow the advice they are given. However several respondents
suggested improvements to reporting on the impact of advice. A few respondents
considered that a template-style disclosure would not prove beneficial as it assumes
too greata level of standardisation. A respondent also pointed out that investment
consulting advice is only one factor in trustees’ decisions, so it is difficult to judge the
performance of advice by using only scheme outcomes.
10.33 A small number of investment consultants believed that our analysis had taken too
narrow a view of the benefits of investment consultants, and argued that the benefits
are not limited to fund performance alone.
10.34 Some respondents believe the value of advice should be measured against client-
or scheme-specific objectives and not against an ‘arbitrary benchmark’. A few firms
have developed their own benchmarks and feel they can demonstrate the value of
their advice. However, some cautioned against greater use of benchmarks across the
market for public peer-group analysis as they felt this can focus attention on the wrong
metrics and lead to poor or inaccurate comparisons. A firm also said that performance
monitoring should be structured to include monitoring of the scheme’s liabilities,
supported by a balanced scorecard of metrics to give a fuller picture of the value being
delivered to trustees.
Performance monitoring – our response
We recognise that performance monitoring is one of a range of factors
that trustees may use to select investment consultants. We still believe
that trustees would benet from better information to allow them
to compare investment consultants, and decide whether their asset
allocation advice is delivering good outcomes.
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We agree that it may be complex to provide this information and that
benchmarking could create unintended consequences. However, we
believe there is value in further exploring if there is a suitable solution.
In our provisional market investigation reference, we raised concerns
around the weak demand side in the investment advisory sector and
about investors’ ability to assess the quality of investment advice. In
response, the three largest investment consultants submitted UIL
designed to address these concerns. We reached a provisional view on
these proposals and are publically consulting to seek views on them
before making our final decision. For further information please refer
to Chapter 15.
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Part B: Our current thinking on a package of remedies
Feedback on our remedy proposals
Respondents broadly agreed with the overall aims of the remedy package proposed in the
interim report. However, we set out a number of different options within this package and
respondents gave detailed feedback on the following areas:
• Governance
• Objectives, benchmarks and performance
• Transparency of fees and charges
• Other remedies relating to retail investors and retail intermediaries
• Other remedies relating to institutional investors and investment consultants
We have taken the feedback from respondents into account and, whilst the overall objectives
that the remedies seek to achieve have remained the same, the comments received have
shaped the way in which we seek to achieve these.
In the interim report, we set out our proposals for remedies. In Part B of this report we
give an overview of the feedback we have received against each of the main remedy
proposals. Part B also outlines our final remedy proposals and what we intend to do
next.
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This section includes chapters covering our package of remedies.
For more information about the feedback we have received against each of the main
topics we analysed please refer to Part A of this report.
Asset Management Market Study:
Our package of remedies
For further information please see www.fca.org.uk/publications/market-studies/asset-management-market-study
Remedies to give
protection to investors who are less able
Strengthening the duty
on fund managers to
act in the best interests
of investors and
introduce independent
scrutiny of this
Proposing to reject the undertakings
in lieu of a market investigation
reference to the CMA on investment
consultancy services and seek
views on this proposal. Make a �nal
decision on making this market
investigation reference to the
CMA in September 2017
Recommending the
Treasury considers
bringing investment
consultants into the
FCA’s regulation,
depending on the
outcome of the provisional
market investigation
reference to the CMA
Launching a
market study into
investment
platforms
shortly
Supporting the
disclosure of a single
all-in fee to investors
Supporting consistent
and standardised
disclosure of costs and
charges to institutional
investors
Chairing a working group to
provide investors with clearer
and more useful objectives.
Consulting on how
benchmarks are used
and performance is
presented
Recommending that
the DWP remove
barriers to pension
scheme consolidation
and pooling
Requiring fund managers
to return risk-free box
and
disclose box management
practices to investors
Making it easier for
fund managers to
switch investors to
cheaper share classes
Remedies to drive competitive pressure on asset managers
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11 Governance
In this section we give a summary of the responses.
We are consulting on proposals to:
• clarify expectations around value for money
• ensure transparency of actions that governance bodies take to satisfy their consideration of
value for money
• introduce independence in governance structures
We provide our final recommendations on governance remedies for AFMs in the accompanying
CP17/18. We also consider the degree to which these rules should apply to other similar
investment products.
We are also setting out our intention to introduce a new Prescribed Responsibility under the
SM&CR
44
to act in the best interests of investors including a consideration of value for money.
45
A strengthened duty on asset managers to act in the best interests of investors
Governance
11.1 Existing FCA rules require AFMs to act in the best interests of their investors and to
prevent undue costs being charged to the scheme or unitholders. These obligations
should be overseen by the board of the AFM – the senior committee made up of the
Directors of the AFM. It is their role to set the overall direction of the firm, and to do so
in a way that complies with our rules and considers the best interests of the investors
in the funds.
44
45
11.2 As set out in the interim report, we found that:
• Fund governance bodies, whether in-house or outsourced, tend to lack
independence from the fund manager and do not appear to exert eective
challenge on value for money
• The AFMs of authorised funds do not generally robustly consider value for money for
fund investors
• In particular, AFMs often do not compare the asset manager’s fees for managing
a retail fund’s portfolio with the fees the asset manager charges comparable
institutional client accounts. This means they cannot assess if the dierence in fees
is reasonable, compared to the dierences in costs.
44 A set list of responsibilities under our and the PRA’s rules that must be allocated to firms’ Senior Managers with the intention to
ensure that every part of a firm’s business or activities has a Senior Manager with overall responsibility for it. The SM&CR is an
accountability framework.
45 We will formally consult on the introduction of the new prescribed responsibility as part of the wider consultation on the role out of
the SM&CR regime later this year.
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11.3 These issues are also likely to contribute to a number of our overall findings.
11.4 We found that asset management products and services are complicated, objectives
may not be clear, fees may not be transparent and investors often do not appear to
prioritise value for money effectively. They therefore need strong governance to
act on their behalf. This does not appear to be happening currently. This potentially
contributes to the limited price competition for actively managed funds, asset
managers being less effective at controlling more complex costs and some funds not
clearly communicating their investment strategy to investors. This can also result in
investors choosing funds that are less likely to meet their expectations.
11.5 We therefore set out a number of proposals to strengthen the duty for asset managers
to act in the best interests of investors. In particular, we set out the following options:
a. Keep existing governance structures but clarify their duties: the AFM Board could be
expected to demonstrate how it has complied with the strengthened duty to act in
investors’ best interests.
b. Strengthen the requirements on senior managers of the AFM: strengthening the
duties of the AFM board members by extending the SM&CR to some AFM board
members, which would apply to all rms authorised under FSMA from 2018. We
could seek to require that senior managers consider value for money as part of this
new regime’s introduction.
c. Change the composition of existing governance bodies to create more
independence: the existing AFM board structure could be reformed to mandate it to
have a majority of independent members and an independent chair.
d. Create an additional governance body: a separate independent body could be
introduced. This would be modelled on the Independent Governance Committees
(IGCs) for DC pension funds and would carry out the new duties, leaving the existing
AFM board with its current responsibilities. We could enforce the new body’s
obligations by extending the SM&CR to its members.
e. Replace existing governance structures with a new body: replace AFM Boards with
majority independent fund boards, similar to the US mutual fund structure, with their
responsibilities underpinned by the SM&CR.
f. Greater duties on trustees and depositaries: an alternative approach would be to
leave current AFM governance structures unchanged and impose greater duties on
trustees and depositaries to assess whether the fund manager is delivering value for
money.
11.6 Many respondents supported proposals to improve fund governance, with a large
number supporting the FCA being clearer on our expectations around value for money.
11.7 Only a small number of respondents felt that no change was necessary. These
respondents expressed the view that existing requirements and responsibilities on
governance bodies were sufficient to address our concerns. Some also pointed to the
forthcoming regulatory changes including, for example, MiFID II product governance
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and the SM&CR.
46
Other respondents were concerned about the additional complexity
and cost of potential new governance structures.
11.8 When thinking about defining value for money, a number of asset managers argued
that this should not focus solely on costs. They felt it should include wider measures
of value, such as performance, risk, service and other factors. Many stakeholders
recognised that value for money is not straightforward to define, but would welcome
a clear definition of what we mean by value for money and more clarity on our
expectations. Several respondents noted that any definition would need to be broad
to reflect potential dissimilar investor expectations such as different time horizons and
risk appetites. A respondent noted that some work has already been done to define
value for money in the workplace pension scheme context. Some argued that we
should also consider including a value for money requirement for distributors.
11.9 Many felt that FCA guidance alone would be less likely to address the concerns.
However, there was not a clear position on which of the proposed changes in the
interim report would be most likely to deliver better outcomes. Although some
respondents shared views on the likely effectiveness of the different options in light of
different profile of certain investor types and their relative negotiating power, such as
retail investors or smaller pension schemes.
11.10 Some asset managers and other stakeholders supported using the SM&CR to
reinforce governance changes. Some also suggested that we wait to see the impact of
SM&CR before we consider any further changes.
11.11 There was also support for some level of independence. Some respondents noted that
they already use independent representatives in their governance structures. There
were mixed views on the number of independent representatives, the roles or levels at
which independence would be required, the mechanisms for introducing it and whether
it would be effective. The majority of asset managers who supported independence
were in favour of minority independent representation. A small number of respondents
raised concerns about a potential shortage of suitably qualified independent people,
and others noted that it would be important for us to define what ‘independent’ meant
in this context.
11.12 Other respondents focussed on the skills and expertise of representatives in
governance structures, as well as their opinion that governance can be strengthened
by increasing the diversity of thought and experiences represented.
11.13 However, there was little support for a wholly new governance body (such as in the
US) or an IGC style model. Most felt that the costs for these new models would
outweigh any benefits, and noted that investors are likely to bear these costs. Some
respondents explained the differences they saw between existing UK and US models
which meant it would be inappropriate to adopt US rules in the UK. Some thought that
the IGC style model has not yet been proven to be effective.
11.14 Most respondents did not favour trustees and depositaries taking on a role in
assessing value for money. They suggested that they do not have the capability to do
this at present and that this would not address concerns around conflicts of interest.
46 We, along with the PRA, introduced a range of policy changes that aim to increase individual accountability within the banking sector.
The rules make it easier for firms and regulators to be clear about who is responsible for what. The Bank of England and Financial
Services Act 2016 includes the extension of the SM&CR to all FSMA authorised firms. We are developing our approach to the
extension of the SM&CR and our current plan is to consult during the Summer of 2017.
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11.15 Respondents also raised issues about the scope of governance requirements and how
these would work with existing different governance structures. Respondents also
asked us to consider potential unintended consequences and take a proportionate
approach in any governance remedies.
Governance – our response
We are proposing to strengthen the requirements for asset managers
to act in the best interests of investors. This is through a combination
of clarity of our expectations, introducing independence on
governance boards and introducing a prescribed responsibility under
the SM&CR. For information on our proposals on governance please
see the accompanying CP17/18.
Other suggestions to encourage asset managers to show they provide value
for money
11.16 We asked respondents if there were any alternative supply side remedies that would
encourage asset managers to demonstrate that they are providing value for money.
11.17 Several respondents said that competitive pressure either already does, or could,
result in asset managers working harder to demonstrate that they are providing value
for money. They noted intermediaries were vital to providing targeted demand-side
pressure on value for money.
11.18 Several respondents made suggestions that there should be greater transparency of
decision-making processes, procedures and discussions or disclosure of investment
outcomes could be directly linked to the decisions made. The format and mechanism
of these suggestions varied and included yearly reviews and disclosures in annual
reports as well as templates. A few respondents also referred to strengthening internal
management frameworks.
11.19 A few respondents said firms’ culture is key to decision-making and therefore an
important factor in asset managers being able to generate, as well as explain, value for
money for their investors.
11.20 Some respondents felt that comparison of value for money, including peer
benchmarking of fees and improving clarity and comparability of objectives would
enable asset managers to better demonstrate value for money.
11.21 A number of respondents suggested distribution ranking or a certification mark
verifying product and service quality to rate good value for money or requiring a kind of
annual fund ‘health’ check on value for money.
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Other suggestions to encourage asset managers to show they
provide value for money – our response
We agree that there is a role for intermediaries in holding asset managers
to account on value for money. However, for these to be eective, we
consider that competition for these service providers needs to work
well and in the interests of investors, conicts need to be managed
appropriately and information about investments need to be clear
and accessible. We are therefore proposing further work in the retail
distribution market and more information can be found in Chapter 14.
We agree that there may be benets for intermediaries to be able to
provide information to investors on value for money.
For more information on our proposals on governance please see the
accompanying CP17/18.
Fiduciary duty
11.22 In the interim report we said that we preferred a regulatory solution to strengthen the
duty on asset managers to act in the best interests of investors. However, we asked
respondents whether there are advantages to our recommending the Government
introduce a fiduciary duty by statute, which could not be achieved through regulatory
reforms.
11.23 A small number of respondents, particularly consumer representatives and some
asset managers, support the introduction of a fiduciary duty. This is typically described
by respondents as a requirement to ‘act in the best interests of investors’. Many of
these respondents support this alongside the regulatory governance proposal. Some
respondents had a preference for some kind of duty as they perceived that this would
be less likely to involve complex rules and would be more likely to have an effect on
firms' culture. Some respondents referred to the success of fiduciary duties in other
jurisdictions.
11.24 Many asset managers and trade bodies do not support the introduction of a fiduciary
duty. Reasons they gave include:
• Little perceived evidence of benet. This view is supported by referring to the Law
Commission’s report which did not support the introduction of a duciary duty.
47
• That existing rules are sucient and achieve the same outcome. However, many
respondents support further clarity on our expectations in this area.
• That this would lead to increased costs and legal uncertainty and would take longer
than a regulatory approach.
Fiduciary duty – our response
We still think that the most eective way to strengthen the requirements
for governance bodies to act in the best interest of investors is through
regulatory reform rather than a statutory duciary duty or duty of care.
47 www.lawcom.gov.uk/project/fiduciary-duties-of-investment-intermediaries/
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As part of our broader exercise on Our Mission we have considered the
issue of a Duty of Care.
48
We already have ‘client’s best interest’ rules
which have a similar eect to that of a duciary duty for some regulated
activities, including designated investment business, UCITS and some
AIF business. We also note the following:
• the FCA has a consumer protection objective of securing an
appropriate degree of protection for consumers
• we can and do use Principle 6 (treating customers fairly) as a supervisory
and enforcement tool to secure appropriate consumer protection
• a number of our rules oblige rms to take reasonable care for certain
activities
• FSMA provides for a private individual who has suered loss to sue an
authorised rm for breaching certain rules (but not Principles)
• consumers can use the Financial Ombudsman Service to get redress
which is less costly and complex than court proceedings
We note that the SM&CR was explicitly intended to improve the culture
of authorised rms. We are planning to consult on introducing a new
Prescribed Responsibility (under the SM&CR) to act in the best interests
of investors including consideration of value for money.
We also consider that some of the cited benets of a duciary duty can
be achieved through regulatory reform such as the requirement for
governance bodies to act in the best interests of investors.
We agree with respondents that a statutory duty would take longer to
come into effect and would not provide the necessary clarity around
our expectations.
48 www.fca.org.uk/publication/feedback/fs17-01.pdf
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12 Objectives, benchmarks and performance
In this section, we give a summary of the responses and our proposed approach on objectives,
performance and benchmarks.
We have considered how some of our concerns in this area may be addressed by forthcoming
regulation. We propose to undertake further work on options to improve the usefulness of
objectives for investors. We intend to chair a working group on this issue, and will make sure that
the consumer perspective is represented alongside that of the industry. This work could result in
new rules or guidance on how objectives should be written.
We also intend to consult on new rules, so that:
• Where an AFM has chosen a specic benchmark, comparator or numerical target for a fund it
should make the reasons for this clear to investors.
• If an AFM chooses not to use a specic benchmark, comparator or numerical target for a
fund it should make the reasons for this clear to investors and it would be prevented from
using any other benchmarks or comparators in marketing material for that fund.
• If AFMs choose to present their past performance, they must do so against the most
ambitious returns target they hold out to investors (if any).
Helping retail investors identify which fund is right for them
12.1 As explained in our interim report it is difficult for even engaged investors to know
what to expect from their fund. It is also difficult for them to assess whether or not
their fund is performing against relevant objectives, including those set by the fund
manager.
12.2 We asked:
• Would it be proportionate and eective to require fund managers to be more specic
with investors by clarifying objectives?
• Are there other metrics/indications/pieces of information that could give investors
better insight into likely future returns?
Clarity of objectives and the use of benchmarks and comparators
12.3 We asked respondents whether it would be proportionate and effective to require fund
managers to be more specific with investors by clarifying an upfront objective and
tracking performance against it over an appropriate time period.
12.4 In our interim report we considered whether we should clarify and strengthen the
appropriate use of benchmarks, including their use in objectives. This included
potentially requiring a benchmark or comparator to be set for all funds, against which
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performance could be tracked over time. We asked whether we should set out our
expectations on using benchmarks, particularly where benchmarks are used to trigger
performance fees.
12.5 Asset management respondents’ views varied. Some felt that current objectives
were fit for purpose, while others suggested that there is a need to improve the clarity
of some objectives. Most of those supporting additional work in this area felt that a
greater focus on investors’ understanding of objectives was more important than
greater technical accuracy. They felt that more detail would help investors scrutinise
performance against the objective.
12.6 Many noted the existing rules and guidance for objective setting in both UK and EU
law, and that any further work in this area would need to be consistent with these. For
example, asset managers referred to our existing fund supervision processes and
requirements, existing COLL rules and existing UCITS requirements on selecting
and using objectives.
49
Respondents also referred to our previous thematic work
on objectives, such as Meeting Investors’ Expectations.
50
Some respondents also
said these existing requirements were a constraint on making objectives more
comprehensible and accessible. They pointed out that they were generally technical
disclosures and were not designed with a customer focus. Some managers thought
this therefore placed a greater responsibility on intermediaries to ensure that investors
understood objectives.
12.7 Respondents were keen to emphasise that the ‘looseness’ of objectives gave
managers the flexibility they needed when trying to achieve the greatest return for
investors. They said that tightening these objectives much further could reduce the
managers’ ability to achieve the best return for their investors.
12.8 Many respondents felt that there are situations where it is not appropriate, and may
actually be misleading, to assign a benchmark to a fund. Specific examples included
multi-asset funds and some illiquid asset classes. Several respondents suggested that
it is difficult to select appropriate benchmarks for absolute return funds.
12.9 Generally, there was quite a lot of support for the existing framework (FCA
authorisation, guidance on usage, previous Meeting Investors’ Expectations work)
being fit for purpose and not needing any further tweaking.
12.10 However, respondents felt that further FCA guidance on the use of benchmarks would
be helpful, such as requirements about:
• whether a benchmark is being used for comparison or management
• when and how benchmark information should be disclosed to investors
• describing the degree to which a fund’s strategy is linked to a benchmark
12.11 Some respondents raised concerns about the cost and lack of choice from benchmark
(index) providers.
49 Collective Investment Schemes sourcebook – part of the FCA handbook.
50 www.fca.org.uk/publications/thematic-reviews/tr16-3-meeting-investors%E2%80%99-expectations
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12.12 Some felt that investors may not understand both index and non-index sector or
category benchmarks, or that they may potentially misrepresent performance, and
more should be done to clarify their use. This included being clearer about the purpose
which the benchmark is being used, for example, for comparison or management.
12.13 Several respondents felt that investors will probably always find measuring against
their own personal goals and targets more useful than comparison against a fund
objective. Therefore, they considered that any kind of fund objective, no matter how
well articulated, will be of varying use to different investors. Several respondents
suggested that time horizons over which an objective was expected to be met would
be an important feature.
Clarity of objectives and the use of benchmarks and comparators –
our response
We continue to believe that investors could benet from greater clarity
as well as being better able to compare objectives between similar
funds. We welcome suggestions from industry about improving investor
understanding of current objective wording. We will look at whether we
can improve the language used and clarity of objectives to make them
more useful for investors at the point of sale and on an ongoing basis.
We propose to carry out further work on options to improve the
usefulness of objectives for investors and we intend to chair a working
group on this issue. This work could result in new rules or guidance. In the
meantime we encourage industry participants to consider the language
and naming conventions they use and how investors may interpret them
to avoid misleading them. For example, the IA (then the Investment
Management Association) changed their sector’s name to the ‘Targeted
Absolute Return fund sector’ in order ‘to emphasise that there is no explicit
or implicit guarantee associated with this sector’.
51
We also expect rms
to continue their work to ensure that all client communications and fund
documentations are fair, clear and not misleading.
We agree that the objective setting process needs to stay exible. We
agree that requirements for clear objectives should not place undue
constraints on managers and so potentially negatively aect returns.
As we described in our interim report we agree with respondents that
more explicit objectives might give the impression of some kind of
‘guarantee’ of future returns.
Many respondents noted that other existing or future disclosure rules
including, for example, the PRIIPs KID, are already enough to ensure
that investors are informed. We agree with respondents that it would be
helpful if funds set out a suggested investment timeframe for all funds
and the introduction of the PRIIPs KID will deliver a recommended holding
period.
52
The working group may consider alternative methods by which
51 www.theinvestmentassociation.org/assets/files/press/2013/20130227-01.pdf
52 Changes have been made to the FCA Handbook as a result of this Regulation, which will apply from 1 January 2018. Although UCITS
schemes are PRIIPs, the requirements in the PRIIPs Regulation will not apply to such schemes until 31 December 2019, due to an
exemption provided by the PRIIPs Regulation Article 32.
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this information is communicated in light of mixed evidence on investor
engagement with similar types of documents.
We do not currently think that all funds should have a benchmark,
comparator or numerical target return. Where an AFM chooses not to
set or indicate a benchmark, comparator or numerical target for a fund,
we currently intend to consult on an approach that requires the AFM
to explain their reasons for this to investors. We are also considering
consulting on an approach that prevents AFMs who have chosen a
benchmark, comparator or numerical target return using any other
comparator in marketing materials.
53
We recognise respondents’ view that investors may not understand
benchmarks well in the form of both indices and sector or category
comparisons. Respondents also felt that benchmarks could potentially
misrepresent performance. We agree with respondents that investor
understanding is likely to be low in this area. In our view this makes
it all the more important to ensure that performance is reported
appropriately.
We will continue to consider appropriate supervisory action in order
that funds are managed in accordance with applicable rules and investor
expectations. Where we see breaches of our rules we will continue
to investigate them and, if necessary, take enforcement action. We
also continue to review funds, including absolute return funds, at fund
authorisation stage so they comply with relevant rules.
We are also proposing further work on performance fees. For more
information please refer to Chapter 13.
Improving the usefulness and comparability of performance information
used by investors
12.14 At interim report stage we found that it is difficult, even for more engaged and
institutional investors, to assess whether or not a fund is performing against relevant
objectives, including those set by the asset manager. Therefore, as well as proposals to
take forward work on clarity of objectives, we also considered:
• how fund managers and other market players should communicate to allow
investors to judge success over an appropriate time period
• in what circumstances it would be appropriate to provide comparators, for example,
performance of passive funds in the relevant market
• whether we should require managers to explain the performance of funds that have
merged/closed
53 In addition, under the new rules we intend to consult on, where an AFM has chosen a specific benchmark, comparator or numerical
target for a fund it would have to make the reasons for this clear to investors, ant use it consistently across regulatory and
marketing materials.
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• whether managers should be required to take action when funds are persistently
underperforming and, if so, what form should this action take
• whether there is a role for the regulator in ‘shining a light’ on poorly performing funds
and, if so, what form this could take
Performance disclosure and communication
12.15 Many respondents felt that existing or upcoming requirements are already sufficient.
Examples provided included UCITS requirements such as the KIID, listing requirements
for investment companies and the forthcoming PRIIPs requirements. These
respondents often felt that investors could do with greater education from their
intermediary rather than more disclosure.
12.16 Several respondents noted that a lot of information is already available to investors,
and that the press or league tables can use this to make third party comparisons.
12.17 However, there was widespread support for clarity and transparency in communicating
performance and, where relevant, benchmarks and objectives. Respondents preferred
simple documentation, with some discussion of disclosure that is diagrammatic,
shorter or otherwise easier to understand. Some respondents felt that a plain
language text explanation should supplement other disclosures.
12.18 A trade body felt that it was ‘reasonable’ that there should be more precise reporting
of returns against appropriate timelines. They felt that investors should be able to
compare actual performance with target performance.
12.19 Respondents provided suggestions for greater client-focus in performance reporting
where possible, for example, tailoring disclosure of performance to client-relevant
targets.
12.20 Several respondents made distinctions between the timeframes over which
performance is reported, the disclosure of a time horizon or holding period and
the frequency of reporting. Preferences for different options varied according to
appropriateness for each strategy. The main message was that changes should not
reinforce tendencies to chase performance and instead should support decision-
making in line with individual investors’ personal targets.
12.21 Templates and league tables were discussed in relation to institutional investors,
particularly their potential usefulness for trustees.
12.22 A few respondents suggested that additional factors should be routinely reported
by asset managers to aid investors’ understanding of long-term performance.
Suggestions included active share, tracking error, total historical performance –
which would reduce the effects of survivorship bias on performance reporting - and
environmental, social and governance (ESG) indicators.
12.23 Some respondents were very strongly against using passives as comparators for
active funds. Others felt that this was only appropriate where there was a passive fund
that aimed to achieve the same objectives or was highly comparable. A very small
number of respondents supported the idea of mandating a comparison with passive
funds.
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12.24 Respondents also discussed the use of past performance in disclosure. Several
respondents felt that instead of providing more metrics we should be focusing on
getting investors to better understand what past performance means or improving
the past performance disclosure. A respondent felt that we should ban the use of past
performance in marketing materials entirely because it was so misleading.
Performance disclosure and communication – our response
We currently intend to consult on new requirements to clarify
that, wherever AFMs choose or are required to present their past
performance, they must do so against the most ambitious target
they set out to investors. For example, an absolute return fund’s most
ambitious target may be LIBOR +4%. If we bring in such rules, their eect
would be to make clear that, where the AFM chooses or is required to
display the fund’s past performance, it must show the past performance
against LIBOR +4%, and not against LIBOR alone.
As set out above we also intend to consult on rules such that where an
AFM does not set a specic benchmark, comparator or numerical target
return for a fund the AFM must not present past performance against
benchmark, comparator or target across regulatory and marketing
materials.
We intend to consult on such a rule and/or guidance in due course
subject to further consideration and analysis. This will include considering
the compatibility with European legislation, such as UCITS and PRIIPs.
We note that respondents have provided suggestions for improving
long-term measures of performance. However, in most cases there is
little to suggest that disclosing this kind of information to investors is
not already possible. We also agree that additional metrics could add
complexity, as well as there being cases where they have a more limited
applicability for a number of reasons. Therefore we do not intend to
mandate the inclusion of any of these additional metrics. However, we
encourage providers to continue to consider which communications
might be helpful for their investors.
We appreciate that mandating individual client-focused performance
would place a signicant burden on providers but we also see the
potential benets of doing so. Firms are not prevented from providing
information on performance in this way and we are not proposing to
mandate this. We continue to see that there may be merits of both the
up front and ongoing disclosure of performance against objectives and
benchmarks, and this is an area that the working group on objectives
could consider.
We continue to believe that it is important that investors receive the
message that ‘past performance is not a reliable indicator of future
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results’
54
and our ndings support that this caveat continues to be the
case.
55
We will also continue to consider how past performance disclosure and
communication at other points in the consumer journey may aect
consumer decision-making and outcomes as part of our work on
performance.
For further information on our proposals on performance fees please
see Chapter 13.
Other useful metrics that could give investors better insight into future
returns
12.25 To find measures to help retail investors identify which fund is right for them we
asked respondents to consider whether there were any other metrics, indicators or
information that could give investors a better insight into likely future returns.
12.26 Respondents suggested using new metrics including ESG-related disclosures,
stewardship and costs associated with portfolio turnover.
12.27 Several respondents felt that greater use of technology, or a new way of comparing
and presenting current information would assist investors.
12.28 Some respondents cautioned against adding additional metrics as this may confuse
the average investor.
12.29 Respondents also commented on the effectiveness of disclosure and marketing more
generally. They also discussed upcoming PRIIPs requirements to show performance
scenario projections.
12.30 Several respondents said they used or knew of other metrics that helped assess
performance. However, they felt these were unproven, too complicated for retail
investors or potentially misleading and so should not be used.
Other useful metrics that could give investors better insight into
future returns – our response
Our working group on objectives could consider whether rms should
provide investors with more information to help them better understand
the returns in relation to objectives. For example, if the rm promotes
their ESG ability then they could provide investors with the information
necessary to assess this. Our Working Group could consider the
usefulness of these kinds of metrics.
54 See COBS 4.6
55 For more information please refer to the interim report. We found that past performance is not a good indicator of future risk-
adjusted returns (for example see paragraph 6.46-6.50 of the interim report).
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We agree with respondents that, in some cases, additional information is
likely to be counterproductive because it could be confusing, especially
for less sophisticated investors. Our analysis also supports this. We tend
to agree with respondents that focusing on investor understanding of
current metrics including objectives and costs is important.
As part of our wider work on rm communications we are consulting
on new guidance
56
to clarify to rms that they can provide investors
with additional information as well as the information they must
provide in standardised disclosure documents.
57
We take on board and
welcome references to additional metrics and methods of representing
information that forthcoming regulatory initiatives will introduce.
We agree with the respondents who noted that technology may oer
new opportunities for both presenting and comparing information.
Investors are likely to benet from this, even in cases where this
information is covered in current metrics.
We have considered respondents’ points about current performance
metrics, including past performance disclaimers, in our proposed
remedies on performance disclosure.
Persistent underperformance
12.31 During the interim report we analysed academic studies which suggest many investors
do not switch away from funds with long term underperformance. Our analysis of UK
equity data showed some persistent poor performance and that a large number of
poorly performing funds are merged or closed.
12.32 We asked whether managers should be required to take action when funds are
persistently underperforming and what form this action should take. We also asked
whether there was a role for the regulator in ‘shining a light’ on poorly performing funds
and what form this should take. We asked respondents to consider any unintended
consequences of these options and how they could be overcome.
12.33 A few respondents believed that we should play a role in highlighting funds which are
performing badly. However, most asset managers and their representatives were
against this. They argued:
• there is currently sucient competitive pressure on asset managers to identify and
address poorly performing funds
• enhanced disclosure remedies, alongside remedies on governance and setting
clearer objectives would also help this
• it is dicult to develop a denition of underperformance which would be suitable for
all funds and such a denition would be backwards looking
56 COBS 14.2.1R www.fca.org.uk/publication/consultation/cp17-6.pdf
57 While complying with current rules at all times.
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12.34 Several respondents saw our role as ensuring that asset managers have appropriate
governance in place to effectively review and challenge the performance of funds. An
asset manager argued that the role of the FCA should be to challenge fund managers
on what action they are taking to address persistent underperformance.
12.35 Where respondents believed we should take action on persistent underperformance
they argued that our focus should be on enabling investors to identify poorly
performing funds through enhanced disclosure. However, they also recognised that
that this information should be presented as clearly as possible, as investors might
struggle to interpret it.
12.36 A few asset managers noted the importance of making sure that funds have clear
objectives and that performance against it is measureable to enable investors to
identify poor performance.
12.37 A legal firm suggested that we should issue guidance on what asset managers should
do with poorly performing funds. They argue that it would be impractical to issue rules
as the reasons for underperformance vary hugely.
12.38 A platform believed that advisors and platforms should be given the freedom to
identify poorly performing funds and to suggest alternatives to investors without this
constituting a recommendation to them.
Persistent underperformance – our response
Our interim ndings showed some evidence of persistent poor
performance, but that there is also some self-correction occurring in
the marketplace, with asset managers more likely to close or merge
funds that perform badly than those which perform well. We have carried
out further analysis to understand how eective this self-correction
mechanism is. We found that while this self-correction mechanism
exists, it does not cover all poorly performing funds and can take a
long time to happen. We believe that this evidence suggests that
while the market is already addressing this issue to an extent, as some
respondents have suggested, this alone is not sucient for all investors.
See Annex 2 for further information.
We acknowledge respondents’ concerns about the practical diculties
of the FCA dening poorly performing funds, and the unintended
consequences which could occur if we were to directly ‘shine a light’ on
funds with long-term underperformance. We also recognise that some
of the other remedies we are introducing might address some of these
concerns. In particular, the proposed remedies to improve the clarity of
objectives and ongoing disclosure requirements.
We believe that our proposals on clarity of objectives and the use of
benchmarks and comparators, along with increasing transparency
of cost and charges will enable investors to better understand what
their fund is trying to achieve, and monitor performance against any
targets. These combined are expected to better equip investors to
understand instances of persistent underperformance.
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13 Transparency of fees and charges
In this section we provide a summary of the responses and our final recommendations on the
single all-in fee and alternative solutions, disclosure of fees and charges for investors and risk-
free box profits.
We have considered how some of our concerns in this area may be addressed by upcoming
regulation. We propose to:
• improve the way rms communicate fund charges and their impact, particularly in ongoing
communications to retail investors, including supporting the single all-in fee being brought in
by MiFID II
• encourage increased transparency and standardisation of costs and charges information for
institutional investors
• consult on requiring rms to return any risk-free box prots to the fund
• consult on rules so that performance fees are only permitted above the fund’s most
ambitious target and consider whether further policy action on performance fees is
appropriate
Requiring clearer communication of fund charges, including a single all-in
fee, and the impact at the point of sale in ongoing communication to retail
investors
13.1 In the interim report we expressed concern that charges might not always be visible to
investors, that investors might not pay sufficient attention to charges or understand
what they represent. Charges can be difficult for investors to understand, particularly
when they are expressed in percentage terms. The majority of respondents to the
interim report agreed that increased transparency and comparability of fees and
charges might encourage investors to be more price-sensitive.
13.2 We received a number of suggestions from respondents about how we could
proactively encourage retail investors to focus on the impact which charges have on
their investments and encourage price competition. These included, for example,
using an obligatory risk warning about the impact of charges and representing the
charge graphically. There was also some support for expressing the charge in terms of
pounds and pence, rather than a percentage.
13.3 In discussing whether there are alternative remedies or pricing models that would
encourage asset managers to control charges the majority of responses focused on
the disclosure of charges. Respondents said they would welcome additional work to
establish what methods would be most effective.
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13.4 A number of respondents suggested that more detailed information should be
made available to retail investors. However, some felt that one single all-in fee would
help improve clarity of information, which they argue is more important than full
transparency.
A single all-in-fee
13.5 We found that firms do not disclose some charges, particularly transaction costs, to
investors before they make their investment decisions. Additionally, as charges are
estimated in advance, investors bear the risk of the actual charges being different
from the fund manager’s advance estimate. Investors currently bear this risk, despite
having no ability to control any differences between the estimated and actual charges
taken from the fund. We consider that these issues are likely to contribute to limited
price competition for actively managed funds and to asset managers being weaker at
controlling more complex costs.
13.6 To address these concerns, we proposed introducing a single all-in fee to increase the
visibility of all charges taken from the fund and impose more discipline on overspend
relative to charging estimates. We proposed four ways that this single all-in fee could
work:
a. the current OCF becomes the actual charge that is taken from the fund
b. the current OCF becomes the actual charge, with the managers providing an
estimate of any implicit and explicit transaction costs
58
c. there is a single charge which includes all charges taken from the fund, including both
implicit and explicit transaction costs, but with an option for ‘overspend’
d. there is a single charge which includes all charges taken from the fund, with no
option for overspend
13.7 We asked for views on:
• the likely eectiveness and proportionality of the four ways that the single all-in fee
could work, as well as any unintended consequences of any of them
• whether the scope of a single all-in fee should be limited to retail investors or be
extended to other types of investor
• whether there are better alternative remedies or pricing models that would
encourage asset managers to control the charges taken from funds
13.8 Most respondents agreed that more transparency about charges, including
transaction costs, could help investors compare prices and access information about
the true cost of their investments.
13.9 However, 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. Several
respondents stated that any change to fee structures and disclosures should include a
58 The cost to trade, which can be explicit (e.g. taken as a fee or commission) or implicit (e.g. the difference between the bid and offer
prices of a security)
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careful education process to ensure investors understand what the charge represents
and how to interpret it. Respondents noted that, where they applied, exit fees,
performance fees and tiered fee structures would all need to be included in true single
all-in fee representations.
13.10 Several respondents raised the high cost and practical complexity of providing
transaction costs as part of a single all-in fee. They also pointed out the importance
of standardising how transaction costs are measured to ensure that these are
comparable. Many asset managers argued that transaction costs are very different to
management charges in nature and also cannot be predicted accurately ahead of time.
Respondents raised questions about whether providing the level of transaction costs
in isolation would be meaningful to investors and raised concerns about the impact this
could have on asset managers’ incentives.
13.11 Respondents also raised concerns that subsuming transaction fees into a single all-in
fee could create perverse incentives for asset managers. They felt this could lead to a
conflict of interest as asset managers might not be incentivised to trade even where
this would be in the best interests of investors.
13.12 Several respondents said that bundling all the charges and costs into one figure might
make it harder to compare funds, unless a breakdown of the component costs is also
provided. Respondents also raised concerns that including all costs and charges in
one figure could harm UK fund competitiveness where headline fund charges are
compared with headline charges in other jurisdictions, as UK fund fees would appear
more expensive.
13.13 Several respondents suggested that a single all-in fee should include all the costs
through the investment chain, including distribution costs.
13.14 Other respondents thought this remedy was unnecessary. Several asset managers
said that a single all-in fee is not required as the manager has an adequate incentive
to keep costs under control, because investors already consider net performance and
incurring these costs would act as a drag on performance.
13.15 Some respondents argued that better governance would control costs more
effectively.
13.16 Of those who expressed a preference, most asset managers and their representatives
preferred option B. This option makes the OCF the actual charge and provides
investors with an estimated transaction cost. Although some respondents argued that
there was not sufficient justification for requiring the current OCF to be an actual cost
rather than an estimate and suggested that this could lead to higher overall costs.
13.17 We asked respondents whether there are alternative remedies or pricing models
that would encourage asset managers to control the charges taken from funds.
The majority of the responses highlighted metrics that are currently undisclosed, or
metrics that are currently disclosed but could be presented in a more accessible way.
59
We also received specific suggestions about disclosing of transaction costs including
requiring providers to self-impose a fee cap and disclosing portfolio turnover rates.
59 The metrics suggested were similar to those included in Chapter 12.
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Requiring clearer communication of fund charges, including a
single all-in fee, and the impact at the point of sale in ongoing
communication to retail investors – our response
There are changes due to come into place at the start of 2018 under
PRIIPs and MiFID II. The new provisions under MiFID II go beyond what
is currently required and will introduce new requirements for rms to
provide aggregated and on-going information on all costs. The new
provisions require that all costs and charges must be shown as a single
disclosure, including asset management charges, indirect costs such as
transaction costs, and intermediary charges.
Firms will, where applicable, need to provide the aggregated information
to the client on a regular basis, at least annually, for the lifetime of the
investment. Firms must also provide an itemised breakdown of costs
when the client requests it. These changes will give consumers greater
understanding of the full costs and charges of the investment products
and services that they are buying. Both PRIIPs and MiFID II will require
rms to calculate and disclose indirect costs such as transaction costs
and to present charges as a cash amount in cost disclosure documents.
This will allow the client to understand the overall cost as well as the
cumulative eect on the return of the investment.
Whilst we consider that these changes will provide investors with
greater clarity about the charges they are likely to face, we think that
the way in which this information is presented to investors will have
an impact on how the information is used. As part of the Smarter
Consumer Communications initiative, we have undertaken work to
improve consumer communications and enable informed consumer
engagement with nancial services products more generally.
60
Therefore
we are testing ways to improve the eectiveness of any forthcoming
disclosure in order to understand the role of the prominence and
formatting of charges information in encouraging investors to focus on
the impact charges have on their investments and enabling eective
price comparison. This will inform the development of any future
remedies in this area.
To supplement existing and incoming legislation we are also considering
whether to consult on guidance in areas such as the wider use of pounds
and pence disclosure on other information sources. As part of this work
we will also consider the benets to consumers of consistency between
point-of-sale and on-going disclosures.
Reforms under MiFID II also mean that there will be greater obligations
around best execution. The new, more comprehensive best execution
provisions in MiFID II will also strengthen the content and quality of
disclosure to clients. Asset managers will be expected to step up their
eorts to obtain the best possible result for their clients when placing
orders with brokers on behalf of their clients. They will also be required
to provide greater transparency on execution quality including the top
ve entities to which they sent orders for execution in the preceding
60 www.fca.org.uk/publications/discussion-papers/smarter-consumer-communications-further-step-journey
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year.
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We expect that the introduction of these new reporting and
disclosure requirements will provide investors and other third parties with
valuable tools that will reduce information asymmetries by facilitating
better scrutiny of execution quality and order routing decisions. There
is also an expectation that these requirements will increase rms’
monitoring of their own execution quality.
Additionally, the governance reforms we are proposing are intended to
ensure that governance bodies act in the best interests of investors,
including by considering value for money. We will continue to monitor
the effectiveness of the remedies in this space.
Performance fees
13.18 A small number of respondents said there were potentially positive effects of
performance fees as these can help to better align investor and asset manager
incentives.
13.19 A small number of respondents discussed the differences between incentive
structures in symmetric and asymmetric performance fee models. Some respondents
proposed symmetric performance fees, as they argue this aligns incentives between
the manager and the investor.
62
One respondent suggested a new kind of symmetric
performance fee where AFMs would owe investors a penalty payment when they
underperform their target.
Performance fees – our response
Although we have specic rules for the introduction and disclosure of
fund performance fees, and guidance on how they are calculated, we do
not currently prescribe exactly which operating models the AFM may or
may not use. We say only that the fee must not be unfair to unitholders
or materially prejudice their interests. As we described in our interim
report we have identied that some AFMs charge performance fees for
achieving a level of return below the most ambitious target they hold out
to investors, for example in absolute return funds. We are considering
consulting on rules so that performance fees are only permitted above
the fund’s most ambitious target (consistent with our proposals on
performance reporting set out in Chapter 12). We also found some
performance fees were charged on gross returns (before ongoing
charges) and therefore we intend to consider whether performance fees
should only be permitted above the fund’s most ambitious target after
ongoing fees.
A 2016 IOSCO Report indicated that some jurisdictions have
specific rules to prevent inequitable charging with regard to fund
performance fees. The report suggests that rules that require losses
are offset before further performance fees can be charged could be
61 More details on the MiFID II best execution provisions and our implementation of them in the UK, including our extension of them to
collective portfolio management by UCITS firms, are contained in CP16/29.
62 A symmetric performance fee is where the manager shares some proportion of both the up and downside of fund performance.
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appropriate.
63
We are supportive of fee structures that align incentives
between investors and asset managers. We will further consider
whether additional policy action is required to make UK domiciled
funds’ performance fee structures more equitable and as part of this
we may consider those asymmetric fees which do not align investor
and manager incentives.
Requiring increased transparency and standardisation of costs and charges
information for institutional investors
13.20 As set out in the interim report:
• It has been dicult for pension trustees to get information on transaction costs. As
we are currently consulting on a standard methodology for how transaction costs
should be calculated for disclosure to trustees and IGCs, we do not consider further
remedies are needed to make transaction costs transparent to trustees.
• For segregated mandates there is no consistent denition of the annual
management charge with managers including dierent items within this charge.
However, trustees could request for charges to be disclosed in a comparable format
as part of the tendering process.
• Information about charges is often unclear for those investing through more
complex fund structures such as hedge funds and private equity funds. While our
market study did not include private equity funds we heard comments that this is a
particularly opaque part of the asset management sector. We will consider whether
any remedies should apply in this part of the sector.
These issues are likely to contribute to asset managers being less effective at
controlling complex costs, as well as limiting institutional investors’ ability to drive
competition and get value for money.
13.21 Disclosure of charges is regulated and standardised for retail investors, but is currently
less so for institutional investors. Institutional investors would like better information
on costs and charges, though the ability to negotiate discounts means publically
available information has limited value. A small number of respondents cited examples
of poor practices in invoicing and there were general concerns raised that asset
owners are either not scrutinising invoices properly or not able to do so due to a lack of
appropriate information.
13.22 The vast majority of respondents were in favour of greater transparency of costs and
broadly felt that investors would benefit from increased disclosure. We found two
themes in responses. First, that trustees, especially of large funds, have not requested
any further disclosure and already receive all of the data they require. Second, that
while cost disclosure is desirable, smaller investors may not have the expertise of
bargaining power to use it to drive down cost. Several respondents said that the
sophistication of institutional investors is often overstated.
63 IOSCO FR09/16 Good Practice For Fees and Expenses of CIS, August 2016, paragraph 35.
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13.23 Regarding the type of disclosure, many respondents referred to existing standards
(MiFID, GIPS, PRIIPs) or to standardised templates created by various bodies
(Investment Association, the Local Government Pension Scheme, the Transparency
Taskforce and the Institutional Limited Partners Association). Responses tended to
distinguish between charges for management, third party charges, transaction costs
and performance fees, arguing they have distinguishing characteristics that call for
different treatment.
13.24 Respondents generally thought that all costs need to be included in a template to
make it worthwhile. However, many respondents raised concerns over how to balance
consistency and transparency with simplicity and the ability to deliver more complex
pricing structures to funds where this is appropriate. Some asked us to either create
our own template or issue guidance on how to comply with another template.
13.25 Responses on the likely cost of any disclosure varied significantly. Many claimed
that cost is likely to be minimal since asset managers already have this information.
However, other respondents suggested that there could be a material cost and that
this must be balanced against the requirements of any disclosure remedy. At least one
respondent suggested that further disclosure could lead to further price clustering,
though they acknowledged that this could lead to prices falling.
13.26 All responses on the scope of disclosure felt that the remedy should cover all funds,
including private equity and hedge funds.
Institutional disclosure – our response
We agree with the large number of responses that said the level of
disclosure of costs and charges could be improved. Responses from
institutional asset owners indicated that they did not always have access
to a detailed breakdown of costs incurred.
MiFID II is introducing signicant changes in the area of costs and
charges disclosure for institutional investors who appoint an asset
manager to manage a segregated mandate. It requires information on
all costs and associated charges to be provided to clients in good time
before the client enters into a contract, and an account of the actual
costs to be provided on at least an annual basis. In response to this new
regulatory requirement, there are industry-led attempts to develop
greater cost transparency for institutional investors.
We consider that the information required by MiFID II will give institutional
investors a clear understanding of the costs and charges that they are
incurring. If this information is delivered within a well-designed template,
it could facilitate more eective competition. We agree with respondents
that design principles for any template should ensure that templates
are free from jargon, accessible and easy to understand and that any
denitions used in the templates should be clear and consistently used.
We also agree that it is unlikely to be helpful if most costs are disclosed
under headings such as ‘other.’ A well-designed template should allow
investors to compare charges between providers and have a standard
set of information which they might expect to receive from any provider
or potential provider.
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Given the concerns raised previously about the resource constraints
on some institutional investors, and smaller pension funds in particular,
we think in order for this disclosure to be eective there needs to be a
balance between simplicity and transparency. However, we would expect
that in some cases, this will lead institutional investors to ask questions
and seek further information from their asset managers. Where this is
the case, we would expect that asset managers would respond to these
queries in a timely manner.
While we consider that there would be benets to asset managers in
having a single disclosure template to complete, we do not see any
standardised disclosure as a maximum level of disclosure. Where
investors want to agree bespoke disclosure arrangements or additional
pieces of disclosure with their asset managers as part of the investment
management agreement or as part of their ongoing relationship, we do
not consider that any standardised template available should prohibit
this.
Nevertheless, irrespective of the use of any standardised template,
the requirements of MiFID II mean that rms should provide accurate
information on costs and charges, and inaccurate information, whether
or not provided within a template, would be a breach of the MiFID II
rules
64
, against which we could take supervisory or enforcement action.
Most respondents suggested that compliance with one of several
templates would help solve the problems we identied. They noted the
use of the LGPS voluntary Code of Practice which was developed by
the LGPS Board to comply with the revised Chartered Institute of Public
Finance and Accountancy accounting guidance on fee transparency.
We are also aware that the IA is consulting on a standard template
that uses a similar design structure. Respondents also referred to the
development of a more detailed disclosure by the Transparency Task
Force.
We welcome the work that has been done on developing templates
and recommend that both industry and investor representatives agree
a standardised template of costs and charges. We propose to ask
an independent person to convene a group of relevant stakeholders
to develop this further, for both mainstream and alternative asset
classes, where appropriate. Following this, we will work with these
stakeholders to consider whether any other action is necessary to
ensure that institutional investors get the information they need to
make effective decisions.
64 See Article 24(3) of MiFID II which provides that “[a]ll information addressed by the investment firm to clients…shall be fair, clear and
not misleading…”.
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Box management practices
13.27 We found that some sources of revenues for the asset manager are associated with
buying and selling funds and are not transparent to investors. This included where
risk-free box profits are made. We found that while most firms do not retain them, for
those that do, risk-free box profit revenues can be significant.
13.28 At interim report stage we noted that we were considering changing our rules to
ensure that any risk-free box profits from the matching of flows in and out of dual
priced funds are used solely for the benefit of the fund, and cannot accrue to the asset
manager.
13.29 A number of respondents commented that it was not fair that fund managers could
profit from the matching of buyers and sellers in fund units, and investors did not
know that this practice was occurring. Some respondents thought that box profits
contravened the principle of treating customers fairly.
13.30 Respondents agreed that investors are unable to scrutinise box profits. This is because
it is not possible to tell, either from forecasts or after the event, whether the price any
one customer has paid for their units covered the cost of transactions or contributed
to the manager’s box profit.
13.31 Some respondents thought that box management should be an issue considered by
fund governance bodies.
13.32 Most respondents said that the box profits should be passed on to the fund rather
than to the fund manager. A small number of respondents noted that this on its own
would not solve the issue of some investors paying a spread that was not being used to
cover the cost of the associated trading motivated by their purchase or sale. However,
respondents noted practical issues with alternative solutions.
13.33 A small number of respondents stated that the matching of units in the box occurs
outside the fund and does not damage the fund’s performance since investors would
pay the same price regardless of where the risk free profits went. They said that
passing the profits on to the fund would artificially inflate the fund’s performance.
13.34 Some respondents also discussed box profits (those that are as a result of positions
held ‘at risk’) in their submissions and said that dual priced funds which use a manager’s
box with a stock of units to actively buy, sell and hold units can provide benefits to
investors by offering a narrower spread. This reduces the costs of entry and exit while
still protecting existing unitholders from dilution. This methodology also means that,
unlike a single swinging-price fund, the fund manager does not have to switch the
pricing basis of the fund, so reducing price volatility. In exchange for these services
they said that the manager bears liquidity risk and market risk on the stock of units.
Respondents also stated that there was a cost to administering flows which could be
met by the fund, rather than the manager if risk-free box profits were to be banned.
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Box management practices – our response
We agree that dual pricing can benefit existing investors, and do not
propose to stop firms from operating dual priced funds. We agree with
the majority of respondents who suggest that risk-free box profits
should not accrue to the manager. We therefore propose to prohibit
retention of these profits. We think that the benefit of any risk-free
box profits should accrue to the fund as the most pragmatic means
to end the practice. We set out the proposal in CP17/18, published
alongside this report.
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14 Other remedies relating to retail
investors and retail intermediaries
In this section we provide a summary of the responses and our recommendations on share class
switching and retail distribution.
We are proposing to:
• consult on removing barriers for rms to move investors to cheaper share classes without
express consent where this is in investors’ best interest
• launch the Investment Platforms Market Study
Making it easier for retail investors to move into better value share classes
14.1 Firms told us that where they create new share classes (typically in response to the
RDR) they find it difficult to switch investors to these new, cheaper share classes even
if this would be in the best interests of investors. We identified a number of reasons
why investors may remain in a share class despite a cheaper alternative being available
and we considered the scenarios in which remedies would enable investors to move to
cheaper share classes. We focused proposed remedies on scenarios where investors
remain in more expensive pre-RDR share classes, but where commission payments
have been turned off, and where those share classes continue to pay trail commission.
14.2 We therefore asked:
• which scenarios our remedies should be focused on
• what the most proportionate and eective way of moving investors into cheaper
share classes would be
• what the estimated cost of moving investors to cheaper share classes would be and
how these costs would arise
• any potential unintended consequences of remedies in this area
14.3 Respondents had various suggestions for making share class switching easier:
• Several respondents suggested removing the opt-in requirement to seek consent
from investors before moving them into a dierent share class where they would
be better o. 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 dicult to obtain, and make it cheaper for asset managers
to implement bulk switching. They noted that transfers would have to be managed
in a way that did not orphan customers from any advice or service they were still
receiving.
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• Several respondents requested the FCA reconsider the option of introducing a
sunset clause to end all trail commission that is still being paid on advised share
classes bought before 31 December 2012, on the basis that they do not think these
customers are in receipt of on-going advice. They also cited the lower costs to rms
from running smaller ranges of funds. A respondent noted that they had a desire to
unilaterally turn o all trail commission across its fund range, as some competitors
had previously done, which would put all customers in the cheapest share class.
Although respondents stated that there was no legal impediment to reducing fees
without consent provided the prospectus allowed this, rms indicated that there was
appetite for clarity from the regulator that unilateral cessation of trail commission
payments in this way was an acceptable course of action.
• Several respondents were in favour of investors being given more information when
cheaper share classes were available, either from distributors or directly from the
asset manager. Respondents noted that in itself this was not likely to be sucient to
drive signicant numbers of customers to switch share classes.
14.4 A small number of respondents noted that if investors were in effect forced to redeem
their funds in order for their manager to move them from one share class to another
then the tax implications should be considered, particularly for overseas investors.
A respondent suggested that share class consolidation (keeping the monies within
the same fund) would prevent crystallising a tax liability. A respondent suggested
engagement with HMRC to prevent crystallising tax liabilities in these cases.
Share class switching – our response
In response to concerns raised by respondents we propose to
modify and re-issue our previous guidance (FG14/4) on dealing with
unresponsive unitholders as part of CP17/18. We will clarify that the AFM
can undertake a mandatory conversion, if the required conditions are
met.
In response to respondents’ requests to reconsider our approach to
trail commission, we are asking for any information that firms have
about trail commission payments to advisers on share classes sold
prior to 31 December 2012, with the view to feeding any findings into
future work. Further information can be found in CP17/18.
Further FCA work on distribution in the retail market
14.5 During the interim report we considered the following questions:
• What impact do platforms have on fund charges?
• What impact do platforms have on the total cost of investment?
• Do platforms create barriers to asset managers gaining routes to market?
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• What impact does the nancial advice market have on competition between asset
managers?
• Do fund governance bodies consider value for money on behalf of investors?
14.6 At interim report stage we found that:
• Investors are not always readily presented with a choice of passive funds through
platforms and rating providers
• There are some barriers to switching platforms
• Platforms can secure discounts on fund charges but this practice is not widespread.
It is not clear that retail investors benet fully from the buyer power and economies
of scale available to platforms.
• Investors can incur a range of dierent platform charges and incentive payments,
potentially making it dicult to understand the full cost of investment
• Platforms represent an important route to market for new funds and managers, and
perform useful due diligence
• Within the advice market, vertical integration of advice, platform and fund
management in some rms, the growth of model portfolios and the role of third
party rating providers all raise questions about competition dynamics and value for
money.
Our analysis was based on a small number of execution only platforms.
14.7 Respondents were generally supportive of further work to examine competition in
retail distribution. Respondents stated that:
• we should consider the entire value chain when considering the asset management
market and value for money in particular
• distribution costs and intermediary fees are often in excess of fund manager fees,
and that these fees have gone up after the introduction of RDR
• several vertically integrated groups have prot margins in excess of fund managers’
prot margins
• conicts of interest in the adviser business model, especially when increasingly
integrated with platforms and asset managers, were potentially creating distortions
in the retail distribution
• regulation including the RDR and the denition of regulated advice may result in
suboptimal outcomes for investors
65
14.8 Respondents also raised issues with model portfolios including what they perceived as
poor value for money as a result of additional layers of fees, tax implications that are
not made clear to investors and poor transparency and comparability for investors.
65 We continue to work on the FAMR recommendations, for example see www.fca.org.uk/publication/guidance-consultation/gc17-04.pdf
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Respondents also raised concerns about asset managers paying a third party rating
firm in order to obtain allocation into a model portfolio, and suggested that this is a
conflict of interest which potentially leads to poor outcomes for consumers.
14.9 Although there were some arguments stating that the platform market is competitive,
the majority of respondents appear to have concerns regarding:
• complexity of fees and charging information available on the platform and the
usefulness of this information
• the eect of potential conicts of interest on the promotion of products and the
design of solutions
• competitive pressure, particularly:
–
economies of scale and the overall cost of platforms
–
barriers to switching
14.10 We received several comments about the effectiveness of platforms in helping
investors make informed choices. Several respondents expressed concerns regarding
the complexity of costs and charges and therefore the potential for a lack of investor
understanding of these. Respondents also raised concerns about how platforms
are presenting information which is important to investors for decision-making
such as the relative cost of in-house funds. Respondents suggested that further
investigation is warranted into the extent to which platforms promote different funds
and particularly those that are developed in-house and any differences between active
and passive fund promotion.
14.11 Some respondents expressed concerns that consumers may face barriers to switching
platforms. This is due to the cost and delay of moving from one platform to another
and where platforms do not offer access to all the same funds. Some called for a full
standardisation of the switching process.
14.12 Respondents suggested that platforms do attempt to use their buyer power when
negotiating with fund managers and are successful to some extent successful.
Respondents highlighted the lower prices available for the same products across
different platforms. However respondents also raised concerns about whether the
benefits of discounts achieved by platforms were partially offset by the high platform
fees incurred by investors. Whilst some respondents argued that platform pricing
is very competitive, others argued that total pricing levels are too high and that
economies of scale were not passed onto investors.
14.13 Some respondents questioned whether platforms offer value for money. Respondents
raised concerns on adviser platforms in particular as they are used by advisers but paid
for by investors. However, due to the way the end investors pay, the constituent costs
may not be clear.
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Distribution in the retail market – our response
The responses conrmed our view that further work is warranted to
ensure that investment platforms demonstrate and promote eective
competition in the interests of consumers. To consider whether the
issues apply across the market, we will be undertaking the Investment
Platforms Market Study.
The study will consider how ‘direct to consumer’ and intermediated
investment platforms compete to win new and retain existing
customers. The study will explore whether platforms enable retail
investors to access investment products that oer value for money.
The Investment Platforms Market Study will allow us to understand the
causes of any competition problems in this market and assess what
we can do to improve competition between platforms and improve
consumer outcomes.
Advisers are being considered as part of the wider ongoing
work on the package of remedies from the FAMR. The FAMR
recommendations update was published in April 2017 and the review
of the outcomes from FAMR is expected in 2019.
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15 Other remedies relating to institutional
investors and investment consultants
In this section we provide a summary of the responses and our recommendations on pension
pooling, pensions and trustee-related issues, and investment consultants.
We are proposing to:
• recommend that DWP remove barriers to pension scheme consolidation and pooling
• consult publically on our provisional view to reject the proposed undertakings in lieu received
from rms to address the concerns we raised previously
• recommend that the Treasury extend the regulatory perimeter to include all aspects of
investment consultancy services
Exploring the potential benets of greater pooling of pension scheme
assets
15.1 We found that smaller occupational pension schemes are less likely to be able to exert
pressure on asset managers because:
• there is some relationship between size and investment expertise and resources,
with smaller pension schemes generally having fewer resources for governance and
monitoring the performance of their asset managers and advisers.
• larger pension schemes are typically more attractive to asset managers, allowing
trustees to negotiate lower fees per pound under administration
15.2 We asked for feedback on:
• whether there are ways parts of the institutional demand side (DB trust, DC trust
and DC contract-based schemes) could more eectively pool assets
• to what extent pooling would result in better outcomes for investors
• whether there are logistical challenges involved in pooling assets and how we could
overcome these.
15.3 Many respondents supported pooling in principle, citing many potential benefits,
including:
• increased buyer power
• more professionalised decision making and/or improved governance structures
• increased ability for trustees to focus on strategic/asset allocation decisions
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• greater access to investments which would otherwise not be available to smaller
schemes
• greater access to a broader range of skills
15.4 Several respondents noted initiatives in pensions and in other jurisdictions from which
lessons may be learned. According to respondents significant barriers to pooling
appear to exist, particularly for DB pension schemes. These include, for example,
existing complex requirements about pensionable salaries and responsibilities of
trustees and sponsors. Respondents also highlighted that pooling of (particularly) DB
schemes may not always be desirable for some members and there are a number of
challenges to overcome before this can work effectively in practice, including different
liability profiles and funding ratios.
15.5 Moreover, respondents have also stressed that there are existing ways to effectively
pool assets, including fiduciary management, and this offers some of the main
benefits of asset pooling. Other methods respondents referred to that effectively
pool assets include master trusts, group personal pensions, institutional platforms and
Authorised Contractual Schemes.
66
15.6 Respondents felt that our work had not distinguished clearly between merged
schemes, shared governance, aggregated vehicles and comingling assets.
Respondents felt that the merits and demerits of each of these methods of asset
pooling should be considered separately, particularly when considering whether the
benefits of pooling outweigh the costs.
Pension pooling – our response
As previously outlined in the interim report, we have found that smaller
pension schemes generally have fewer resources for governance and
monitoring the performance of their asset managers. We have received
many responses corroborating this point and suggesting that there
would be a variety of benets to asset pooling through considerable
economies of scale. For further information on our ndings as a result of
additional work on segregated mandate pricing specically, please see
Annex 3.
Nonetheless, although size can be a determinant of outcomes, it is not
the only factor and small schemes with expertise and good governance
can secure positive outcomes.
For DB schemes, we agree that some schemes might be able to
benet from pooling through lower fees and wider choice. However,
there are barriers to DB pension scheme pooling, in relation to complex
rules concerning changes to existing benet structures as well as the
responsibilities on trustees and sponsors and certication requirements.
Some stakeholders also told us that greater transparency and reporting,
for example, explaining in their annual scheme report why they didn’t
consolidate could be an eective measure. We have found that removing
66 An Authorised Contractual Scheme is an umbrella fund that offers a range of sub-funds, which provide participating
authorities with access to a range of asset classes that they require to implement their investment strategies.
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some of these barriers could encourage the practice of asset pooling,
allowing smaller pension schemes to benet from economies of scale
and exert greater pressure on asset managers. This would require
changes to legislation and the issuing of further guidance to trustees.
For DC schemes there remain some benets from pooling through
merging schemes, as bigger schemes can often negotiate lower
management charges.
In December 2016, DWP published a Call for Evidence which sought
views on how processes for DC scheme bulk transfers without member
consent might be simplied, to remove a key barrier to DC scheme
consolidation. The Department continues to consider ways that it
can simply scheme consolidation and allow pension scheme scale to
develop.
Moreover, despite members already buying units in contracts linked to
pooled funds, we have found that economies of scale from pooled funds
are not passed on to investors in the same way that asset pooling might
enable.
We also agree that there are dierent ways of pooling assets including
more structural solutions such as merging schemes and comingling
assets, as well as solutions such as sharing governance or pooling
instruments or vehicles. We agree with respondents that the advantages
and disadvantages of these options should be considered separately.
Addressing some of the identied concerns we have in the area of
duciary management could also be an eective way of bringing about
the associated benets of asset pooling.
Overall, we agree with some respondents who stated that there are
existing opportunities for asset pooling and, while we recognise the
potential benets of asset pooling, we do not think it’s necessary to
make asset pooling mandatory for DC or DB schemes, especially in light
of the upcoming changes.
We therefore recommend that the DWP continues to explore the
possibility of removing some of the barriers to pension scheme
consolidation and pooling. We will work with DWP to explore the
feasibility of this further.
Measures to improve the usefulness and comparability of information used
by trustees
15.7 We found that information presented to trustees about the performance of their
investments is often presented in a format that is difficult for investors to understand
and engage with. In the interim report we encouraged stakeholders to consider the
best format for presenting performance information to trustees and IGCs, noting that
these consist of a mix of lay and expert members.
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15.8 We asked respondents whether there were better ways for information to be
presented to trustees, particularly member nominated trustees, in order for them
to assess the performance of their scheme and how this could be achieved. We also
asked what format should any simplified and comparable disclosure take and who
should be responsible for providing the information.
Usefulness and comparability of information provided by trustees
15.9 Respondents were generally supportive of improved transparency and comparability
where possible. A small number of respondents referred to existing standards or
principles in other parts of the pensions market that could be mirrored to improve
outcomes for trustees. For example, one noted templates used for reporting
statements for trustee boards and IGCs created as an aid to focus on the key
information that should be reported to members. Several respondents felt that
guidance or communication of ‘best practices’ would help trustees more effectively
compare, assess and select fiduciary managers. Respondents emphasised that any
initiative would have to be based on sound principles and help trustees to implement
a robust governance framework to support their decision-making, monitoring and
oversight mechanisms.
15.10 Respondents generally supported measures to improve trustee experience, expertise,
skill and professionalism. This could include some kind of guidance. Respondents
also referenced ongoing work by the The Pensions Regulator (TPR) as part of the 21
st
Century Trusteeship project.
15.11 Some respondents felt that the interim report unduly focused on the fact the trustees
rely too heavily on the advice given by investment consultants. Respondents agreed
that issues with expertise could leave trustees exposed to potential exploitation
when dealing with investment consultants, although they also noted that investment
consultant input could be part of the solution to a lack of trustee expertise.
15.12 Generally there was support for improvements in governance, which respondents felt
improved outcomes. This also included monitoring and reviewing decisions, potentially
with independent advice or support.
The usefulness and comparability of information provided by
trustees – our response
We agree with respondents that lack of information is an issue and
increased transparency for trustees would be benecial. We deal with
these issues in our initiatives to improve institutional disclosure in
Chapter 13.
We agree with respondents and support measures to improve trustee
experience, expertise, skill and professionalism. TPR produces guidance
for trustees of occupational pension schemes. This gives practical
information and examples of approaches trustees can take to meet the
standards set out in its codes of practice. For example, it has recently
published new investment guidance for trustees of both DB and DC
schemes.
67
TPR also provides a free, online learning programme to help
67 DB investment guidance can be found at www.thepensionsregulator.gov.uk/guidance/db-investment.aspx and DC investment
guidance can be found at www.thepensionsregulator.gov.uk/trustees/investment-management-in-your-dc-scheme.aspx
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trustees meet the legal requirements for knowledge and understanding.
This includes training on DB and DC scheme investment.
68
At the interim report stage, we suggested that it may be the case that
trustees rely too heavily on advice given by investment consultants
in some circumstances. While investment consultants play an
important role in this market, we still consider that some trustees
are heavily reliant on the advice provided by investment consultants
and frequently feel unable or unwilling to challenge that advice. We
consider that improvements in the ability of clients to assess the
effectiveness of the advice provided by investment consultants will
improve competition for investment consultancy services, to the
benefit of end clients.
Trustee disclosure of costs and charges
15.13 As part of the interim report we asked whether there would be unintended
consequences if trustees were required to publish costs and charges. Both trustees
and IGCs are currently encouraged to report cost information in as full a way as
possible to scheme members. We could build on these requirements so that trustees
and IGCs have to publicly report on an annual basis using a prescribed template. We
could also recommend requiring DB schemes to include this information as part
of their annual report. We welcomed views on the merits and feasibility of such an
approach.
15.14 There was some support for disclosing cost and charges information at a scheme
aggregated level as this could aid comparison. However some respondents felt it is
unclear how this disclosure would differ from the pound and pence disclosure that is
already required.
15.15 Reservations raised mainly related to the nature of the information to be disclosed
including its potential confidentiality or commercial sensitivity status, as well as the
inadvertent effects that this disclosure might have on the status of the fund in other
jurisdictions.
15.16 A number of respondents raised concerns that if trustees were required to publish
costs and charges, this would cause trustees to focus disproportionately on costs to
the detriment of other relevant metrics.
15.17 Finally, respondents were also concerned that this could lead to asset managers being
reticent to offer special deals, discounts or rebates in the knowledge that they might
be disclosed and forced down to this price level by other clients, and this could harm
negotiating power for some investors.
Trustee disclosure of costs and charges – our response
In October 2016, we published a consultation proposing rules and
guidance to improve the disclosure and standardisation of transaction
costs in workplace pensions. We are proposing to place a duty on
asset managers to disclose aggregate transaction costs to pension
68 trusteetoolkit.thepensionsregulator.gov.uk/
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schemes that, directly or indirectly, invest in their funds. We have also
proposed that asset managers provide a breakdown of transaction costs
on request with the total broken down into categories of identiable
costs (which could include specic costs such as taxes and securities
lending costs). For further information on our proposals on institutional
disclosure please see Chapter 13.
Section 44 of the Pensions Act 2014 will place a duty on us and the
DWP to require the disclosure and publication of information about
transaction costs in DC workplace pensions. We will, in due course,
consider the legal measures needed to meet the duties.
69
As part of
its work on the Green Paper, DWP will also work with us to explore the
benets of extending these requirements to DB schemes.
The aim of requiring trustees to publish costs and charges data was
to empower pension schemes to access the information they need to
make effective choices. We have considered this proposal in light of
our other remedies, including increasing asset manager disclosure and
DWP’s proposed disclosure to DC scheme members. We believe that
these will deal with the issues of comparison and transparency that
we identified. As a result, we feel that any additional general disclosure
by trustees is probably unmerited at this stage, given the burden on
trustees and the potential unintended consequences of such public
disclosure.
Requiring greater and clearer disclosure of duciary management fees and
performance
15.18 We found that pension trustees find it difficult to scrutinise the performance of their
fiduciary manager because:
• there is very little public reporting and scrutiny of duciary management fees and
performance, making it dicult for investors to assess the performance of duciary
managers and compare them, both at the point of sale and on an ongoing basis
• fees and charges disclosure by duciary managers is not consistent and comparable.
The lack of transparency is likely to make it dicult for pension trustees to
manage conicts of interest when investment consultants also provide duciary
management, leading to poor outcomes
15.19 We asked for views on:
• ways to provide trustees with clearer information about the charges and
performance of duciary management
• what information on fees and performance information should be made public and
how to benchmark the performance of duciary managers
69 www.fca.org.uk/publication/consultation/cp16-30.pdf
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• what the unintended consequences of enhanced disclosure are and how can we
overcome them
• what the likely eectiveness and proportionality is of guidance to trustees on these
issues
• whether there are better alternative remedies that we can put in place to empower
trustees in their decision making
• what any guidance from TPR/FCA to trustees could usefully cover
15.20 Our interim report considered fiduciary management fees and performance to be
one of the most unclear parts of the asset management industry. Many respondents
agreed with our view, and that improvements in this area are required to help trustees
understand the services and the associated fees and performance.
15.21 A number of investment consultants felt that the presentation of fiduciary fees
and charges could be improved. Suggestions included unbundling of fiduciary
management fees so that the proportion of fees going to the asset manager, the
fiduciary manager and any other components are clear to investors. Additionally,
respondents noted that there was a lack of consistency between different fiduciary
management offerings and that consistent disclosure would be helpful for investors to
compare providers.
15.22 A number of respondents, including investment consultants, had a wide range of
views on how fiduciary performance information should be presented to investors.
Respondents suggested various methods for presenting information to investors,
though several cautioned against the creation of a public performance composite
as they felt that benchmarking in this way may begin to drive poor behaviours within
firms or may lead to inappropriate comparisons being made. Several respondents
referenced industry-led initiatives to promote a standardised performance
methodology. Some trade bodies believe a similar standard to GIPS could be
beneficial. Many respondents considered improved scheme specific information would
better serve trustees
15.23 Several respondents considered that trustee knowledge and/or experience was an
issue. To help trustees understanding, some respondents considered that TPR is best
placed to deliver guidance in this area.
15.24 Several respondents stated that the role of adviser and fiduciary manager should
be separated. Some respondents argued that advice should be taken from an
independent party before appointing a fiduciary manager to prevent suffering the
effects of conflicts of interest. Respondents also provided suggestions more generally
to improve and formalise a tendering processes.
Requiring greater and clearer disclosure of duciary management
fees and performance – our response
We agree that more can be done to improve duciary management
reporting and welcome suggestions raised by respondents. As part
of the UIL received (see the UIL consultation) published alongside
this report), parties suggested reporting templates covering duciary
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management fees and performance. We are consulting on our
provisional view to reject these. If we make a market investigation
reference to the CMA, this is something which we would expect them to
consider.
We agree with respondents and support measures to improve
trustee skills and expertise. As referenced earlier, the TPR produces
investment guidance or occupational pension schemes and has
an online learning programme to help trustees meet the legal
requirements for knowledge and understanding.
Consultation on whether to make a market investigation reference to the
Competition and Markets Authority on Investment Consultancy Services
15.25 Alongside our interim report we made a provisional decision to make a market
investigation reference to the CMA in relation to the provision of investment
consultancy services.
70
We consider using this regulatory tool when we have
reasonable grounds to suspect any feature or combination of features of a market or
markets for the supply or acquisition of financial services distorts competition. In this
case we considered those features were:
• A weak demand side:
–
trustees of pension schemes have limited or variable experience together with
limited resources, resulting in a higher dependency on investment consultants
–
trustees are not able to assess the quality of advice provided by consultants
–
switching rates are low
• Relatively high levels of concentration and relatively stable market shares among
investment consultants, which indicate that competition may not be working
eectively in this sector.
• High barriers to entry and expansion. This particularly restricts smaller, newer
consultants from developing their business outside of niche, specialist areas.
• Vertically integrated business models (where rms are oering both advisory and
duciary management services) creating conicts of interest.
15.26 We received responses from a diverse range of respondents on the market
investigation reference including from investment consultants, asset managers,
interest groups, trade bodies and think tanks. The majority agreed with our provisional
decision to make a referral to the CMA, however many investment consultants did
not consider there was a need for a market investigation reference. The three largest
investment consultants submitted UIL designed to address these concerns. We have
reached a provisional view to reject these proposals for the following reasons.
70 Investment consultancy services’ is defined in paragraphs 5.2-5.4 of the terms of reference in our published provisional decision to
make a market investigation reference www.fca.org.uk/publication/market-studies/ms15-2-2-a-mir.pdf
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• Without having carried out a full market study we are unable to conrm our
understanding of the competition issues in this sector. A full investigation of the
sector by the CMA would enable them to identify all the relevant issues and put
appropriate remedies in place.
• In particular, the CMA would be able to fully investigate the most eective
disclosures for trustees/investors ensuring the information provided was
appropriate across the range of products and services provided by the sector.
• The UIL package only covers approximately 56% of the market, which leaves the
possibility of competition issues for a large segment of the market unaddressed.
71
In particular, some rms oering advisory and duciary management services would
still face conicts of interest.
• Finally, given the conicts of interest we have raised with the vertically integrated
business models in this market, we cannot reasonably be condent, at this stage,
that structural remedies are not necessary.
15.27 We are publically consulting to seek views on these proposals before making our final
decision. For further information please refer to the letter to the UIL parties published
alongside this final report.
Consultation of whether to bring the provision of asset allocation advice
and advice provided by employee benet consultants within the FCA’s
regulatory perimeter
15.28 In addition to our provisional decision to make a market investigation reference, we
considered recommending that the Treasury brings the provision of investment
consultant and employee benefit consultant asset allocation advice within the
regulatory perimeter.
15.29 The majority of respondents agreed that the regulatory perimeter should be extended
to include, for example:
• employee benet consultants advising employers who want to set up contract-
based occupational schemes on choice of provider and how to set up their pension
schemes, and then managing it on an on-going basis
• strategic asset allocation advice provided by investment consultants and manager
research selection
15.30 The majority in favour of increased regulation considered asset allocation an important
driver of outcomes. Several respondents also noted the key role that investment
consultants play in trustee decision-making was an important reason to consider
regulating them. It was also considered that regulation would provide a level playing
field across the sector, as in other areas of investment advice.In addition, a trade body
believed investment consultants should have individual accountability and likened this
to our existing CF30 roles.
72
71 Page 142 of the interim report www.fca.org.uk/publication/market-studies/ms15-2-2-interim-report.pdf
72 These are Approved Person roles required for individuals undertaking various regulated advice activities.
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15.31 Of the few respondents who were against an increase in regulation some felt that
previous reviews of these services had considered the appropriate issues. Others
considered the professional standards within this sector were sufficient. Specifically
respondents raised the existing high standards for the industry through the Institute
and Faculty of Actuaries Actuaries’ Code and the professional bodies. Some of these
respondents were also Designated Professional Bodies under the current regulatory
regime.
15.32 Some respondents had concerns that additional regulation could result in unintended
consequences, including higher costs and increased barriers to entry and that these
factors could impact on outcomes for clients.
15.33 Finally, a few respondents highlighted that the FAMR was looking to reduce the scope
of regulation and proposals to widen the regulatory perimeter to include advice on
asset allocation may be inconsistent with the intention of this
Extending the regulatory perimeter to include institutional advice
– our response
In the interim report we identied that asset allocation is likely to be a
crucial determining factor in long term investment performance and
is an important way in which consultants can add value to their clients.
Bringing this within our regulatory scope would not only improve
regulatory oversight of this activity, it would also mean we would be in
a position to take forward any recommendations put forward by any
potential CMA market investigation reference.
We are recommending that the Treasury consider, subject to the
provisional market investigation reference, an extension of our
regulatory perimeter to include asset allocation advice. If the Treasury
made this legislation, we would consult on how to implement this in
to our handbook and carry out a cost benefit analysis to facilitate a
proportionate regime.
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Appendix 1
Glossary of terms used in this document
used in this paper
Absolute return
funds
These funds aim to deliver a positive return in any market condition, but
returns are not guaranteed. Usually the target return is expressed with
reference to a cash benchmark (e.g. LIBOR) over a specific time period.
Active
management
The manager aims to achieve a specific result, such as beating the
performance of a benchmark index, by actively making decisions when
investing in particular markets, sectors or securities. When we refer to
active funds in this document this includes all investment strategies which
are not following a passive investment strategy.
Ad Valorem fee
A fee structured as a fixed percentage of the assessed value of the assets
being managed. It means ‘according to value’.
Adviser
platforms
Online services used mainly by intermediaries to view and administer
investments on behalf of advised retail customers.
Ancillary service
providers
Third party firms which provide services to help operate a fund or support
an investment mandate.
Asset allocation
Allocating different proportions of an investment portfolio to a mix of
different asset classes (e.g. equities, fixed income, cash). These allocations
are intended to help investors achieve their investment objectives in line
with their risk tolerance and over a certain time period.
Asset class
A group of securities which share similar characteristics and are subject to
similar laws and regulatory requirements. Asset classes include equities,
fixed income and cash.
Barrier to entry
A specific feature of a market that gives incumbent firms advantages over
potential competitors.
Benchmark
A standard against which the performance of an investment product can
be compared. For example, a benchmark could be the performance of the
market index, or the performance of a peer group of products.
Best buy lists
A list of funds which Direct-to-Consumer platforms offer as their view of the
'best' funds available to investors in a particular sector and/or asset class.
Bid-oer spread
The difference between the bid (the highest price a buyer is willing to pay)
and offer (the lowest price the seller is willing to accept).
Box prots
In some funds there is a difference between the price to buy units in the
fund and the price to sell them. This is used to cover the cost of buying
or selling the underlying securities. When the asset manager can match
up investors to buy and sell units they do not incur a cost of trading the
underlying securities, but the manager can still keep the difference, which is
called a (risk-free) box profit.
Bundle
Buying more than one product or service from the same provider and
paying one combined, sometimes discounted, fee for the whole package.
Churn
Unnecessary trading which is largely undertaken to generate commissions
or fees, rather than produce a return for the client.
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Contract-based
scheme
A pension scheme bought by an individual, often through their employer,
and managed by a third party pension provider. It is owned entirely by
the individual and the contract is between the individual and the pension
provider.
Dened Benet
scheme
A trust-based pension scheme in which the benefits are defined in the
scheme rules and accrue regardless of the contributions that are paid
and the investment returns. The benefits are usually a proportion of the
member’s salary when they retired and are related to the length of their
pensionable employment.
Dened
Contribution
scheme
A scheme in which a member’s benefits depend on the value of their total
pot. The pot, in turn, depends on the amount of contributions the member
paid into it, and any investment returns net of charges.
Economies of
scale
A cost advantage that occurs as output levels increase.
Execution quality
How well an asset manager trades on behalf of their investors, taking into
account where and when they trade.
Fiduciary
management
This is an industry term with no set definition. Usually taken to describe
cases where a service provider advises clients on how to invest their assets
and then makes investments on behalf of the client for all or some of their
assets as well. These delegated responsibilities can include selecting asset
manager and strategic asset allocation. This is sometimes also called
implemented consulting.
Financial advisers Those who offer personal investment advice to retail investors.
Fund of funds
A fund which holds a portfolio of other investment funds rather than
investing directly in stocks, bonds or other securities.
Fund operator
This could be the Authorised Fund Manager, Authorised Corporate Director
or the person appointed or responsible for managing of the property
held for, or within, a scheme. For the full regulatory definition see the FCA
Handbook.
Host Authorised
Corporate
Director
An independent third party (i.e. non-group entity) appointed to act as an
Authorised Corporate Director for an Open-ended Investment Company
(OEIC).
Implicit
and explicit
transaction cost
The cost to buy and sell securities. These costs could be a direct charge
(‘explicit’ cost) or could be reflected in the price of the security (‘implicit’
cost).
Index tracker See 'Passive'.
Institutional
investor
An investing legal entity which pools money from various sources to make
investments.
Investment
Solutions
A combination of products and/or services delivered as part of one package
to investors, often to achieve a pre-defined investment outcome.
Manager-of-
manager
A type of multi-manager strategy which selects different investment
managers to manage different portions or aspects of the overall portfolio.
Mandate
A list of restrictions or permissions from the investor about how assets can
be invested.
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Master trust
A single occupational trust-based pension scheme established by a trust
agreement. This is set up to provide benefits to members from different
employers (no individual employer group has a separate section with its’
own trustees).
Model portfolio
A selection of investments designed by firms as ‘off the shelf’ solutions to
meet different risk profiles and investment objectives.
Most Favoured
Nation clause
A ‘Most Favoured Nation’ clause entitles a customer to obtain the most-
favourable terms that a supplier offers to any other customer.
Multi-asset fund
A fund that includes several asset classes, for example bonds and equity,
rather than just one asset class. This kind of fund is often created with the
intention of adding diversification. They have also been known as balanced
or diversified growth funds.
Multi-manager
funds
An investment portfolio's assets are allocated among several fund
managers.
Outliers An observation point or result that is distant from other observations.
Net ow / into
funds
Net flow of funds is the value of all cash flows into a fund minus all cash flows
leaving it, measured over a specific time period.
Net performance Investment return after fees.
Passive
management
Strategies which seek to mimic the performance of an index using a
systematic process to replicate it.
Pension
freedoms
A package of reforms to the retirement market announced in the Budget
2014 and introduced in April 2015. These reforms give consumers greater
freedom over how to generate a retirement income from their pension
savings.
Platform
A service that gives investors access to a range of funds managed by
different asset managers, typically online.
Pooled funds
Funds where money from different investors is pooled and managed
together.
Prescribed
Responsibility
Responsibilities that must be assigned to the individuals who hold Senior
Management Functions.
Replicate the
market
Where a portfolio is constructed either in full or using sampling techniques
to generate returns equivalent to those of the market.
Retail investors
For the purpose of this document this includes all non-institutional
investors.
Risk-adjusted net
returns
A correction to the return (after fees) which reflects how much risk has been
taken in order to produce that return.
Segregated
mandate
A fund that is run exclusively for one (institutional) investor.
Stewardship
An asset managers’ activities which work to improve the performance of
underlying assets by acting on behalf of clients to, for example, manage
emerging risks or take account of social impacts of business decisions.
Tiered pricing
Pricing that applies discounts and so reduces the cost per unit at stepped
intervals as the volume bought increases.
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Appendix 2
Abbreviations used in this paper
AFM Authorised Fund Manager
AIF Alternative Investment Fund
AMC Annual Management Charge
ARF Absolute Return Fund
AUM Assets Under Management
bps Basis points (equal to one hundredth of one percentage point)
CMA Competition and Markets Authority
COBS Conduct of Business Sourcebook
COLL Collective Investment Schemes
CP Consultation Paper
DB Defined Benefit (pension)
DC Defined Contribution (pension)
DWP The Department for Work and Pensions
ESG Environmental, Social and Governance
EU European Union
FAMR Financial Advice Market Review
FSMA Financial Services and Markets Act
GIPS Global Investment Performance Standards
IA The Investment Association
IGC Independent Governance Committee
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IMA Investment Management Agreement
IOSCO International Organization of Securities Commissions
ISA Individual Savings Account
KID Key Investor Document
KIID Key Investor Information Document
LDI Liability Driven Investment
LGPS The Local Government Pension Scheme
LIBOR London Interbank Offered Rate
MFN Most Favoured Nation Clause
MiFID Markets in Financial Instruments Directive
MiFID II Markets in Financial Instruments Directive II
NDA Non-Disclosure Agreement
OCF Ongoing Charges Figure
PRIIPs Packaged Retail and Insurance-based Investment Products
RDR Retail Distribution Review
ROCE Return on Capital Employed
SM&CR Senior Managers and Certification Regime
TPR The Pensions Regulator
TTF The Transparency Task Force
UCITS Undertakings for Collective Investment Transferable Securities
UIL Undertaking(s) in Lieu
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We have developed this work in the context of the existing UK and EU regulatory framework. The
Government has made clear that it will continue to implement and apply EU law until the UK has left the
EU. We will keep the proposals under review to assess whether any amendments may be required in
the event of changes in the UK regulatory framework in the future.
You can download this Market Study from our website: www.fca.org.uk.
All our publications are available to download from www.fca.org.uk. If you would like to receive this
paper in an alternative format, please call 020 7066 9644 or email: publications_graphics@fca.org.uk
or write to: Editorial and Digital team, Financial Conduct Authority, 25 The North Colonnade, Canary
Wharf, London E14 5HS
© Financial Conduct Authority 2017
25 The North Colonnade Canary Wharf London E14 5HS
Telephone: +44 (0)20 7066 1000
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