Following its 20-month long Asset Management Market Study (AMMS), a further nine months of consultation with industry, and its claim that ‘…there is a significant amount of harm to be addressed’, the FCA’s proposed remedies published in its policy statement (PS) last week resemble less the big stick and more a light touch.
But rather than beat your breasts at the FCA’s lack of gumption, given its poor understanding of the asset management business demonstrated in its own analysis, this outcome should be welcomed with a sigh of relief.
The PS applies to UK authorised fund managers (AFMs) in respect of their management of authorised open-ended collective investment schemes. It is here that the FCA believes that it has found evidence of weak price competition and poor value for money (VfM).
The solutions comprise a mix of governance remedies and technical improvements which, to say the least, are not ground breaking, are long overdue and certainly did not require two and a half years of analysis and consultation to be identified and addressed. Whether they will achieve what the FCA is looking for I seriously doubt.
The governance proposals aim to strengthen and clarify the duty of AFMs to act in the best interests of their investors. This is to be achieved by:
* Providing for greater scrutiny of how AFMs are fulfilling this requirement through their own VfM self-assessment in an annual report
* Increasing the level of scrutiny at AFM board level by mandating a minimum number of two independent directors comprising a minimum 25% of the board
* Clarifying accountability through the designation of a senior manager (probably the chairman) with prescribed responsibility in relation to these proposals
The annual report essentially allows AFMs to self-police how they are delivering VfM.
The FCA is not prescriptive in how this should be done and leaves open significant discretion for AFMs to determine their own criteria for their judgement, including qualitative factors.
The best that can be said for this is that the FCA has veered away from its ‘cheapest is best’ predilection in its analysis of VfM, conceding after much exhortation that other factors such as performance, risk management, customer service, product quality etc. may also be drivers.
The problem is that the interpretation is now so wide open and subjective that we are unlikely to see AFMs self-flagellating in public through their annual VfM reports.
What of the other governance measures?
The requirement for two independent directors, although welcome, remains way behind what has come to be regarded as best practice - too little too late?
As for the prescribed responsibility designation, this will be a footnote to the Senior Manager and Certification Regime to be rolled out later in the year.
The technical measures - comprising an easier process for transferring shares to cheaper equivalent funds and reimbursing box profits to the fund where the AFM does not act as principal (essentially matched trades) - are in the interests of consumers.
However, they are anomalies that have existed for years for which the FCA finally takes belated action and certainly did not require years of analysis or consultation to identify.
Whether they are anomalies that justify the claim of a ‘significant amount of harm’ I rather doubt as the FCA has had the visibility and power to deal with these for some time.
As for other measures in the consultative paper, for example on trail commission or extending these remedies to insurance linked products and investment trusts, the PS has kicked these down the road.
The FCA's concern with protecting the well-being of consumers of financial products is to be applauded – it is key to its regulatory duties.
However, its AMMS and now its PS continue to concern me.
The whole FCA approach is based on the premise that the lay investor cannot look after themselves, so fund managers must do so. On the surface this may seem a reasonable approach. However, in my view, it is fundamentally flawed.
Disappointingly the FCA fails to draw the right conclusion from its own analysis.
It states a problem: ‘We have identified several drivers of weak competition in a number of areas of the asset management sector.'
It identifies obstacles to its solution - ‘investors … are less able to exert demand side pressure and find value themselves’ and that ‘retail investors do not usually negotiate with asset managers’.
Yet instead of asking questions of those who could act on behalf of consumers, the FCA instead concludes that it is the responsibility of the fund managers to do so.
A lay person needing surgery or to defend themselves in court would be encouraged to seek out specialist doctors or lawyers to deliver a service based on an understanding of their specific requirements and needs.
In the savings industry neither is this the job of the AFM nor do they have the proximity to or knowledge of the ultimate consumer to be able to do so. They are product manufacturers not financial advisers.
Of course they have a duty to be transparent about their products and charges. But they are not able, in the absence of proximity, to determine whether they are suitable or the best products available or deliver value for money in terms of what an individual investor requires. And therefore they are not in the best position to self-regulate themselves to do so.
Even with greater transparency and disclosure, under the FCA model the lay investor will still be left with the task of analysing and assessing the information and whether they are receiving VfM or if the product is suitable for them etc... - exactly the situation the FCA decries! Back to where we started from I am afraid after more than two years of analysis and broad consultation.
The adviser's role
It should be the role of a professional, specialist intermediary/ adviser to help allocate savings to products that offer the value and outcomes that the consumer requires.
This would be the best way for the FCA to address its VfM and competition concerns. If, in the opinion of the FCA, they are not doing so then this is where it should look for remedies.
We are promised more in the future – unfortunately in the same vein. Firstly, whether to extend these ‘remedies’ beyond the funds market. And secondly, through a consultation paper published at the same time as the PS, greater disclosures including fund benchmarks and how they are used in the investment process.
Again, the FCA believes that the mere act of more information will make the lay investor fit and proper to evaluate what is in their best interest – or, as with the annual VfM paper, may only succeed in confusing them further.
At a time of generous freedoms to determine what to do with one’s life savings; at a time when planning for a lifetime of savings needs has never been so important; and at a time when the consumer has never been faced with so many investment and savings choices, I look forward to the day when the FCA puts as much energy into the quality and capability of the intermediary/advisory industry, both serving institutions and individuals, charged with securing the best interests of the consumer.
Only if they are fit and proper, available and accessible will consumers be able to feel that competition among asset managers is effective, that they are receiving VfM and that the investment products and outcomes are suitable for their specific needs.