British asset management firms have been using inappropriate benchmarks, setting opaque fee structures, and outlining vague fund objectives to investors while making it difficult for them to get the best deal, according to a scathing new report from the British financial regulator that oversees these firms.
The Financial Conduct Authority’s Asset Management Market Study, released Wednesday, unveils the regulator’s conclusions following its investigation into bad practices in the British fund management market, which it says is the second-largest in the world with a collective £6.9 trillion ($8.9 trillion) under management. The regulator launched its investigation in November 2015 and issued a damning interim report in November 2016.
In its final report, the FCA outlines plans for sweeping reforms in the sector after finding that fund managers are not operating in investors’ interests and that investment consultants are in need of regulation. Numerous additional consultations will now be launched in related areas, including a comprehensive market study into investment platforms and a further investigation on benchmarking and performance reporting.
Dan Brocklebank, head of Orbis Investments U.K., urges the FCA to pursue fund managers that were not operating in the interests of investors, rather than setting blanket new rules for all firms.
“The FCA should focus on enforcement rather than rules,” Brocklebank tells Institutional Investor. “Smart people can always find a way around any rules or regulations. There are already significant sticks available to the FCA to regulate fund managers.”
Today’s report includes plans for fund firms to move to an all-inclusive fee and for the U.K. government to make it easier for pension funds to pool assets so they can command lower fees.
The FCA has now asked the Department of Work and Pensions to remove regulatory barriers to make it easier for pension funds to consolidate and pool assets, because scale often commands a cheaper price from asset managers.
In a written response to today’s report, Graham Vidler, director of public affairs at the Pensions and Lifetime Savings Association, which represents British pension funds, said members have long been concerned about the fees being charged by asset managers.
“These issues ultimately impact the value of people’s retirement savings,” he wrote. “The PLSA has been calling for greater cost transparency for some time.”
Investment consultants also came in for particularly harsh criticism in the report, with the FCA concluding that “on average, consultants are not able to identify managers to offer better returns to investors.”
The FCA states that there is no evidence that consultants are able to drive significant price competition between asset managers and that consultants do not place any weight on manager fees in their ratings.
Things may yet get tougher for investment consultants in the U.K., with the FCA saying it will decide whether to refer the sector for another regulatory review under the auspices of the Competition and Markets Authority later in the year.
U.K. investment consultant Redington released a statement saying it did not believe that referral to the Competition and Markets Authority was necessary.
“Given recent competitive trends in the industry, we did not believe a referral to the CMA was warranted for investment consulting,” said Dan Mikulskis, head of defined benefit pensions at U.K. investment consultant Redington, in a statement.
