Old Mutual Global Investors respond to FCA Asset Management Market Study interim findings
In November 2016 the FCA issued the interim findings of its asset management market study, looking at competition within the UK asset management industry. Among other criticisms of the industry, the report suggested that there are areas of weak pricing competition and that investors are not always clear about fund objectives and charges.
Old Mutual Global Investors (OMGI), the asset management arm of Old Mutual Wealth, welcomes the FCA's report and the important issues it addresses. OMGI recognises the regulator’s desire to ensure customers' best interests remain at the heart of the UK asset management industry and has made a number of recommendations in its response.
However, in contrast to the findings, OMGI believes that competition is already present in the industry, both in terms of pricing (the introduction of cheaper share classes due to the implementation of RDR) and ‘closet trackers’ increasingly being squeezed out of the marketplace.
OMGI’s headline recommendations are:
- The introduction of enhanced fund governance, requiring greater independence on the boards of authorised fund managers – aligned with established frameworks in other international jurisdictions;
- The adoption of a single fund charge inclusive of fees associated with the management and ancillary services of funds, but excluding transaction costs;
- A push for greater clarity with respect to investment objectives, while preserving the flexibility of asset managers to make changes;
- The creation of a mechanism allowing asset managers to switch investors into cheaper share classes;
- The avoidance of excessive focus on past performance and ‘shining a light’ on poor-performing funds.
Greater detail on each of these recommendations can be found below.
Richard Buxton, chief executive of OMGI comments:
“Driving good customer outcomes and providing genuine market-beating returns, with a focus on value for money, is an integral part of OMGI's vision and practice. We are supportive of the FCA highlighting areas of weakness within the industry, but want to stress that the reputation of all active fund managers should not be damaged by the small number of firms running so-called ‘closet trackers’.
“A clear trend over the last five years has emerged showing partially active funds being squeezed between passives and high active alpha funds. This has occurred due to the greater availability and transparency of data enabling comparison of measures such as tracking error, active share and charges. Intervention by the FCA to reinforce these pressures is not required.
“Further, we believe the asset management industry is already competitive on price. Certainly at OMGI, we have passed on savings achieved because of asset growth to investors, and worked with large-scale distributors on the introduction of preferentially priced share classes. However, despite initiatives to reduce fees, it is our strong belief that consideration of value for money, rather than purely cost, should drive investor decisions.
“We encourage the FCA to take on board the industry’s feedback, ensuring we collectively continue to build a customer-focused regulatory environment, one that will help preserve the UK asset management industry’s strong position post-Brexit. We believe our suggested approach will help the FCA achieve its aim of creating a stronger, more robust sector.”
OMGI’s recommendations in response to the FCA’s findings include:
- 1. The introduction of enhanced fund governance, requiring greater independence on the boards of authorised fund managers (AFM) – aligned with established frameworks in other international jurisdictions
OMGI states “we agree that certain governance reforms could help firms ensure compliance with their responsibility to act in the best interests of unitholders, specifically in regard to assessing value for money.”
OMGI specifically suggests the regulator looks to align its model with other international fund jurisdictions where greater independence of fund boards has already been recognised. In particular OMGI highlights the Irish system as an effective operating model that promotes independence of boards and clear guidance on how governing bodies of fund management companies should ensure investors’ interests are protected.
- 2. The adoption of a single fund charge inclusive of fees associated with the management and ancillary services of funds, but excluding transaction fees
OMGI suggests that a single charge, inclusive of transactions costs "could pose an unintended conflict of interest between asset managers and the investors for whom they manage money by providing an incentive to reduce the level of trading for reasons unrelated to market events."
Additionally, it points out “a constraint on transaction costs may also limit the viability of higher turnover investment strategies, even when they lead to demonstrably superior investment outcomes.”
OMGI goes on to point out that with Brexit uncertainty, it is important that the structure of European legislation, most recently MIFID II, be maintained to ensure competition within the European fund market remains post Brexit.
3. A push for greater clarity with respect to investment objectives, while preserving the flexibility of asset managers to make changes
OMGI states that “the current practice of widely drafting investment objectives and investment policies should be enhanced to give greater clarity to investors on what they can reasonably expect from a fund.”
However, it adds that “any amendments to the requirements already set out in COLL 4.2.5R should be balanced to prevent an increased risk of asset managers being exposed to potential mis-selling claims in the event that investors misinterpret investment objectives as offers of certainty or guarantees”.
Additionally, OMGI has also advised against making the rules too prescriptive, stressing that the “flexibility asset managers have to modify investment policies to meet the overall investment objective is necessary to allow them to adjust to changing market conditions and volatility.”
- 4. The creation of a mechanism allowing asset managers to switch investors into cheaper share classes
OMGI propose that the FCA create a mechanism in COLL to allow AFMs to provide compulsory switches into cheaper share classes where investors’ rights are not prejudiced. This is an accepted model currently employed by Irish-domiciled UCITS funds. It is OMGI’s belief that this set up helps achieve a better investor outcome.
- 5. The avoidance of excessive focus on past performance and ‘shining a light’ on poor-performing funds
OMGI has advised the FCA against 'shining a light' on poorly performing funds stating “asset managers should have sufficiently robust governance processes to ensure effective oversight of the investment performance of the funds they manage and that management remains in line with the expectations of the investors.”
OMGI points out that an excessive focus on past performance, which seems the only means of singling out 'underperforming funds’, may be “irrelevant if the asset manager has already taken steps to address poor performance”. Furthermore, OMGI has pointed out that given the FCA's role as a supervisory body of the UK asset management industry, any funds not ‘named and shamed’ may be interpreted by investors as investment recommendations.