The Financial Conduct Authority wants the fund sector to explore the potential benefits of greater pooling of pension scheme assets in an effort to cut costs as part of its review of the asset management sector.

The regulator found price competition in some areas of asset management to be “weak” and called today for an all-in-one fee to help investors evaluate the true cost of investing. The all-in one fee would help investors “easily see what is being taken from the fund.”

In its interim findings of its asset management market study published today it suggested that there was weak price competition in a number of areas of the asset management sector and more transparency was needed. It also said that investment consultants were “not effective at identifying outperforming fund managers.”

The FCA has also pledged to undertake further competition work on the retail distribution of funds, particularly in relation to the impact financial advisers and platforms have on value for money.

The watchdog’s comments will be seen as a criticism of several parts of the fund management sector for not doing more to explain costs to investors and to make charges easily comparable and for failing to compete effectively in some areas. The regulator said that that there was some good practice in the area of investment consultants undertaking due diligence for pension funds but they were “not effective” in identifying outperforming fund managers.

The FCA launched the market study in November 2015 to assess whether competition was working effectively. It looked at whether institutional and retail investors received “good value for money” when purchasing asset management services.

The FCA says the UK’s asset management industry is the second largest in the world, managing almost £7 trillion of assets. Over three quarters of UK households with occupation or personal pensions use the services asset managers offer.

Andrew Bailey, chief executive at the FCA said: “In today's world of persistently low interest rates, it is vital that we do everything possible to enable people to accumulate and earn a return on their savings which can meet their lifetime needs. To achieve this, we need to ensure that competition in asset management works effectively to minimise the cost of investment.

“We want to see greater transparency so that investors can be clear about what they are paying and the impact charges have on their returns. We want asset managers to ensure investors receive value for money through pursuing energetically their duty to act in their customers’ best interests. The remedies that we are proposing today aim to achieve these outcomes.”
The FCA found that:
- there is limited price competition for actively managed funds, meaning that investors often pay high charges. On average, these costs are not justified by higher returns;
- there is stronger competition on price for passively managed funds, though the FCA did find some examples of poor value for money in this segment;
- fund objectives were not always clear, and performance was not always reported against an appropriate benchmark;
- despite a large number of firms operating in the market the asset management sector as a whole has enjoyed sustained, high profits over a number of years with significant price clustering;
- investment consultants undertake valuable due diligence for pension funds but are not effective at identifying outperforming fund managers. There are also conflicts of interest in the investment consulting business model which require further scrutiny.
The FCA has proposed a significant package of remedies that seek to make competition work better in this market. These include a strengthened duty on asset managers to act in the best interests of investors, reforms to hold asset managers to account for how they deliver value for money and introducing an all-in fee so that investors in funds can easily see what is being taken from the fund.

Fund managers should also make it easier for retail investors to move into better value share classes, clearly communicate fund charges and their impact at the point of sale and in ongoing communication to retail investors and increase transparency and standardisation of costs and charges information for institutional investors, said the FCA. The regulator also wants the fund sector to explore the potential benefits of greater pooling of pension scheme assets; and introduce greater and clearer disclosure of fiduciary management fees and performance.

The FCA is also consulting on whether to make a market investigation reference to the Competition and Markets Authority (CMA) on the investment consultancy market and has recommended that HM Treasury considers bringing the provision of institutional investment advice within the FCA’s regulatory perimeter.

The FCA is now seeking views about its interim findings.

• Commenting on the FCA’s interim report Joanne Segars, chief executive, Pensions and Lifetime Savings Association, said: "The Pensions and Lifetime Savings Association welcomes the FCA’s report highlighting concerns around cost levels, transparency and alignment of interests within the asset management market. These issues are of longstanding concern to our members.

“The report’s findings on institutional investors mirror those of our Defined Benefit Taskforce. We look forward to working with the FCA and government to find solutions which address the fragmented nature of the demand side, including exploring the potential benefits of greater pooling of pension scheme assets.”