The 200-page interim report on the Asset Management Market Study by the Competition Division of the FCA lays down a significant milestone in the wider European debate on fund costs and charges.
It contains a number of significant findings and some potentially far-reaching proposals for “remedies”, covering both retail investment funds and investment management services to institutional investors (see IM Regulatory Insights, November). The industry has until 20 February 2017 to comment on the report, following which the FCA will publish its final findings and remedies.
Some aspects of the FCA report are specific to the UK market, but investment and fund managers around Europe will wish to reflect on the FCA’s interim findings and recommendations, and the influence they may have on the European-wide debates, the more so given recent comments by the Commission and ESMA.
The report includes a detailed analysis of fund performance relative to benchmarks and relative to fund charges. It is scattered with references that retail funds on average return less than their benchmark. The main thrust of the report’s analysis and statements appears to be founded on the presumption that achieving less than benchmark returns is a negative outcome. There is no acknowledgement that a return above cash is the benefit of investing, or that if individuals invest direct they will pay much higher transaction costs and not secure the same degree of diversification of market risk.
Most of the report’s criticism is levelled at the difference between charges for institutional and retail investors and at actively-managed funds. It is suggested that active funds should be used by retail investors only where there is no passive option. It is said to be difficult for investors to assess the value for money of money market funds, protected funds and targeted absolute return funds. External fund ratings are said to be biased towards actively-managed funds.
The report acknowledges the new requirements in train under the PRIIP KID and MiFID II. Some of the proposed “remedies” are in line with the thrust of these regulations, but some indicate that the FCA is prepared to consider more detailed or, perhaps, different requirements where it deems necessary. One particular area of focus is the proposal for an “all-in fee approach” to quoting fund costs and charges.
The next important contribution to the EU costs and charges debate may be in the form of the Central Bank of Ireland’s conclusions to its investigation into costs and charges in Irish funds, but the timeframe for that is not certain. We may first see something from the Commission as a result of its review of fund performance relative to fund charges.
In the meantime, it is timely for funds managers around Europe to review their governance structure for setting fund management and other charges, and how costs are managed within the fund.